6 strategies for dealing with bitcoin volatility

Written By

Jessy Gilger

1. Start with a "why"

Do you own enough bitcoin? Too much? To answer that for yourself, I suggest you start with your end goals. Consider Maslow’s famous hierarchy of needs and imagine all the different reasons you and others could be adopting bitcoin.

Nobody is crazy; they just have different goals. It is best to know exactly why you own bitcoin so you can match your allocation to your goals. You’ll also sometimes discover that for some purposes, maybe bitcoin is not the best tool for the job (gasp!).

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2. education and community

Just as important as the “why” question is the “what” question. When you allocate to bitcoin, what exactly are you saving in? Education is powerful, and seeing bitcoin from a different perspective can help you regain conviction and remain committed to a long-term view.

Talking to like-minded individuals is my highest recommendation. Bounce your ideas off of other people on the same journey. They’ll see bitcoin from a different point of view and give you feedback about your perspective. Attend local meetups, Twitter spaces, or webinars and ask questions.

3. Regular savings plan

By selecting a predetermined savings amount on a regular schedule, you’ll automatically buy bitcoin during every bull run and stack even more sats when it’s on sale.

Assuming the asset in question is on a long-term upward trajectory, a dollar-cost averaging plan will cause you to buy fewer units of your target asset when the price is high and more units when the price is low.

4. Have an Emergency fund

The best way to never sell bitcoin when it’s down is never to need to. Knowing that your short-term needs are covered can provide peace of mind to ride out the storms. Until adoption permeates, dollars will continue to serve a role in medium-of-exchange functions.

Sizing your emergency fund or cash buffer to handle the majority of life’s little curveballs dampens the need to sell bitcoin unexpectedly. A common rule of thumb is to keep three to six months of expenses as an emergency fund. A little bit of short-term pessimism can help sustain your long-term optimism.

5. Close your tab with the IRS

You could perform a Roth conversion involving a move of some or all of your bitcoin into a Roth IRA. The upfront cost is paying the taxes associated with adding  income, but the payoff is that all of the future gains in the Roth will be tax-free upon qualified distribution.

The higher you expect bitcoin to grow, the higher the potential tax savings from a Roth conversion. This strategy only applies to pre-tax retirement accounts and can have substantial tax implications, so please consult your tax advisor.

6. tax loss harvesting

If you purchased non-retirement bitcoin for more than its current value, you could sell that bitcoin for a capital loss. At tax time, capital losses are used to offset capital gains and can also be a deduction against other income

If you bought bitcoin for $25,000 and sold it for $22,000, your $3,000 loss could be used as a write-off. At a 33% marginal tax rate, this would save you about $1,000 in tax. But you’ve sold your bitcoin. To maintain your long-term exposure and continue holding, you need to buy it back.

This article is provided for educational purposes only, and cannot be relied upon as tax or investment advice. Unchained makes no representations regarding the tax consequences or investment suitability of any structure described herein, and all such questions should be directed to a tax or financial advisor of your choice.