Bitcoin Crests at More Than $124,000, Then Drops 10%. Should Investors Buy, Sell, or Hold?

Key Points

• Bitcoin set a new high in August before erasing a lot of its gains.

• Don't buy or sell just because prices are rising -- think about how it fits into your portfolio.

• Look at Bitcoin's long-term potential and whether it could hold its own as a form of digital gold.

• 10 stocks we like better than Bitcoin ›

Bitcoin (CRYPTO: BTC) is having a record-breaking year. It has set several new all-time highs since it broke the $100,000 barrier at the end of last year. Optimism about shifting government attitudes, institutional buying, and wider economic factors have all spurred it on. But it has struggled in recent weeks as investor sentiment becomes more cautious.

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The lead crypto topped $124,000 on Aug. 13, before falling almost 10% in the following two weeks. This type of price action raises a number of questions for investors. If you don't hold Bitcoin, you may be wondering if the pullback is a buying opportunity. If you own Bitcoin, you may question whether to hold or take profits while prices are relatively high.

Deciding whether to buy Bitcoin

If you're thinking about buying Bitcoin, it's important to be clear about why. Bitcoin is still a relatively new asset, and it can be volatile. Moreover, while it has performed extremely well in the past decade, there are no guarantees this will continue.

Looking to the long term, there are a few ways Bitcoin could continue its upward trend. One is as a form of digital gold -- a store of value that's more transportable and easier to store than physical gold bars.

Another is through institutional investment and corporate treasury holdings. As the regulatory environment and accounting rules become clearer, there are fewer roadblocks for businesses and institutions that want to hold Bitcoin.

Crypto holdings may act as a hedge against inflation and can also help to diversify portfolios. Both may be worthwhile at a time when there's concern about the potential devaluation of traditional currencies. Bitcoin's eye-watering gains certainly also add to its appeal.

Bitcoin may not achieve its potential

On the flip side, Bitcoin is still an extremely risky, speculative investment. It may continue to deliver outsized returns, and it may prove itself as a form of digital gold. But it still has technological, usability, and security hurdles to cross if it is to reach its potential. Its recent price performance shows it continues to be volatile -- investors need to be comfortable with price swings like the 10% drop we've seen in recent weeks.

Unlike stocks, it is difficult to analyze cryptocurrency fundamentals. Crypto projects don't have to publish regular earnings information or follow other public reporting requirements. You can't calculate price-to-earnings (P/E) ratios or work out the earnings per share for cryptocurrencies.

Sure, you can learn a lot from the project's white paper, tokenomics, and developer activity. But it isn't the same. And that lack of fundamentals means investor sentiment is a significant price driver.

It can be daunting to buy any asset after an all-time high, especially Bitcoin, which experienced significant price drops after its highs in 2017 and 2021. One way to mitigate this risk and take some of the sting out of the volatility is to use dollar-cost averaging. Rather than buying a lump sum of Bitcoin in one go, you might spread it out and buy a smaller amount at regular intervals. For example, you might buy $100 of Bitcoin at the start of every month.

Deciding whether to hold or sell Bitcoin

Even as a buy-and-hold investor, Bitcoin's repeated highs this year may make you wonder about the merits of selling your crypto.

Think about why you bought Bitcoin in the first place. If your investment thesis still stands, it may well have a place in your portfolio for the coming 10 years or more. Bear in mind that if you'd sold Bitcoin at an all-time high in 2021, you'd have missed out on gains of over 65% since then.

Even so, there can be solid reasons to sell. Bitcoin doesn't always work in the same way as traditional investments like stocks, so it doesn't always make sense to hold on no matter what. It is a volatile asset, and if your holdings have, say, doubled in value, you might lock in profits by selling a percentage of your holdings.

Another reason for selling could be to rebalance your portfolio. When an asset outperforms, it can start to knock your portfolio out of whack. If you'd planned that crypto make up no more than 3% to 5% of your overall investments, its recent performance may have skewed the balance.

If you have serious Bitcoin gains, you may decide to sell some of your holdings so you can put that money toward something else. Perhaps you've identified better investment opportunities out there -- whether in other cryptocurrencies or different sectors. You may be approaching a new phase of life and want to de-risk your portfolio. Or it might be that you're buying a house and those profits would help you foot the bill.

Don't make decisions based on price action alone

It can be hard to decide whether to buy, sell, or hold Bitcoin, especially when experts are predicting even further gains. Ultimately, a lot depends on your investment goals and your reasons for investing in cryptocurrency.

For example, stronger cryptocurrency regulation may reassure some investors. But for those who bought it because of its decentralized, antiestablishment nature, increased political involvement may go against the grain.

Focus on maintaining a diversified portfolio with the amount of risk you are comfortable with. If you decide to sell, make sure you understand any tax implications, and keep records of those transactions. There's never a right or wrong time to buy or sell -- what matters is where we are now and what you think might happen in the future.

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Emma Newbery has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.