Is Selling Bitcoin for Fiat a bad idea?

by Anthony Allen

It’s impossible to say when is the best time to buy Bitcoin, but what about selling it? Most bitcoiners will say never: Bitcoin is a long-term investment with radical economic mechanisms that promise greater value over time, but we must account for situations where you may have to go through the unfortunate process of exchanging your coins for dollars, euros, liras, rubles or won. The world still runs on fiat, so being able to exchange bitcoin for these currencies is an essential use case.

The ideal way of either getting money into or out of one’s cryptocurrency portfolios will vary greatly depending on you as an individual. To make sure you know what is best for you, it’s crucial to ask yourself some questions before starting the process:

1. For what purpose are you interested in doing this? Are you saving for retirement, day trading, or hedging against the traditional financial systems? Depending on your answer, your time preferences could be very different from another holder.
2. Are you familiar with the legal framework of holding and trading cryptocurrencies in your region/country? This is important as regulation is relatively young and not always well-communicated, so you don’t want to get yourself in trouble over it.

Answering these should help to calibrate your path and find the right approach, with regards to the level of convenience or privacy you prefer.

Easy ways to buy and sell Bitcoin

Buying Bitcoin has become very easy for the average consumer, and regulation has started to catch up. It is difficult to buy bitcoin without identification but, for some, the convenience of buying bitcoin with a credit card makes up for it. Thousands of fiat on-ramps exist, from physical ATMs where you can buy with cash to app integrations which place regular buy orders automatically. It is recommended that you reveal as little information about yourself as possible when buying bitcoin, as with anything else you buy online.

Depending on the level of privacy you want to retain, the best on-ramp for buying bitcoin will vary. In your Trezor Wallet, we connect you to the best price across a number of exchanges, but no matter where you buy from, the most important thing to note is that the process only ends once you have transferred your bitcoins to a wallet which only you hold the keys to.

Selling bitcoin seems like it should work in parallel with buying it, but there are some regulatory trapdoors which can make it more complicated. In many places, you are only eligible to pay tax on your crypto if you profit from it; this can mean you will owe a portion in tax whenever you convert your coins to your local currency.

It also has broader implications, given the hostility of many governments and banking authorities towards cryptocurrencies. You may find a way to get bitcoins, but if it is a traceable method then, as soon as you trade and deposit them in your bank you may see your assets frozen or some unwarranted interest from your government. Make sure you consider this before thinking about selling. Bitcoin has shown itself to be a dependable store of value with a fixed limit, so make sure you understand that fiat loses purchasing power over time.

There are a huge number of ways to exchange your bitcoin for fiat, but the problem is trying to do it privately. Once again, peer-to-peer is king, but there are some exchanges where smaller amounts can be withdrawn without the need for identity checks. Using a decentralized exchange like Bisq allows you to trade without any need for an account, meaning you can mask your identity completely, while others like HodlHodl are non-custodial solutions with a strong privacy leaning.

If you happen to have very large amounts of bitcoin, you can consider using an exchange’s over-the-counter (OTC) service, which are marketed heavily towards privacy and security. These exist on Kraken, Binance, Coinbase, and many other large exchanges. For most investors, however, this service will be too exclusive, as it’s generally reserved for sums of money which would otherwise destabilize the market.

Why withdraw Bitcoin into fiat?

As stated at the beginning, you may find yourself in a situation where there’s no choice but to cash out some of your crypto for cash. Ideally, you will do so in order of the currency’s particular worth. The more stable and proven the coin is, the more protective you might want to be. Bitcoin, for example, is the most decentralized, censorship-resistant of all coins. Try and hang on to your bitcoins as long as you can.

If you’ve been lucky and your holdings have increased in value, you may need to cover tax liabilities for that increase. This usually applies only when you realize any profits, but you must check with your local authorities to confirm. The best way to address this is to keep a reserve of cash in savings so that you cover your regular tax and any additional liabilities (dependent on where you live). Economically, your fiat is more likely to be worth less in future so you should spend it while it retains its current value.

In cases where you need liquidity in a hurry, your bitcoin may be your only emergency fund. The quickest way to use it is to transfer it directly to whomever you need to pay, though you may need a middleman service to help. If there is no way to spend your crypto, you may be looking at a wait time of several days as the funds get moved to your account. Shop around for a service with low fees that offers quick transfer methods such as SEPA or SWIFT.

Unfortunately, the most convenient way to cash out your bitcoin is to use an exchange. Depending on which currency you wish to withdraw to, you may have limited options. Note that there are many stablecoins such as USDT, BUSD, USDC, and more, which are not dollars but tokens that tether themselves to the price of a dollar — if you want to withdraw your money as fiat you must make sure you are exchanging for a legitimate fiat currency. Large exchanges have greatly widened their offerings of fiat off-ramps so do some research before making your decision.

Unless you are pressed to, it is recommended that you keep your bitcoin balance secured and untouched in a hardware wallet. Each time you cash out bitcoin you are exposing yourself to more inflation and potentially reducing your future purchasing power. If you believe in Bitcoin’s benefits, you should spend fiat first.

Cashing out Bitcoin for fiat

All major exchanges are interested in making it as easy as possible to take in fiat, but until recently it’s been quite difficult to cash out Bitcoin for conventional money. Trading bitcoin for cash can be a good idea if the market is particularly unstable and you wish to secure some profits, but you will need to make commitments to pay any due tax.

Bitcoin is now widely accepted as a relatively robust store of value, rather than a medium of fast exchange. You should think about your needs before you commit to trading for fiat, as there are many situations where an alternative may be preferable.

Do you need the money right away?

If not, your Bitcoin is likely to appreciate in value over a longer timeframe as opposed to your fiat, which will depreciate in value relative to what you can buy with it. If you do, try and do so in a way that doesn’t require revealing too much of your private information.

For smaller amounts, use an exchange that does not need to impose KYC practices under a certain threshold, or for larger amounts try to conduct the transaction peer-to-peer with a friend. Never agree to trade with a stranger unless everything is conducted with principle regard to your safety, ideally you would conduct any such transaction using an impartial escrow service.

Do you want quicker transaction times?

Bitcoin actually confirms most transactions faster than a bank. Your funds will usually be moved within an hour if you set an appropriate fee, while your funds would go into holding for a few days if you used a bank. There are also many cryptocurrencies which offer almost instantaneous transfers, though these should be used cautiously and only with proper research into their trustworthiness, as these are often centralized and could see your funds under someone else’s control while using their network.

Do you want to buy something and not have enough fiat?

Ideally, you should look to keep a balanced portfolio, but if a lot of your money is in bitcoin and you need to buy something, it is better to simply use a bitcoin payment portal. We wrote about some of our favorite ways to spend bitcoin, even in places it’s not directly accepted, so why not take a look at these options before going through the hassle of cashing out?

A number of crypto credit cards also exist, which promise cashback (or cryptoback) on your everyday purchases. While this could potentially be a great way to speed up adoption, the services themselves are untested and could prove too centralized to effectively retain your self-sovereignty. Until such a product emerges which gives you full control over your keys, the promised rewards are not worth the risks of trusting a third party.

Exchanging Crypto into fiat

Some people prefer to trade in alternate cryptocurrencies, where volatility is higher. This is risky and could result in loss of your funds, but the strategy itself should be contemplated: what is the end goal? A greater fiat balance or earning more bitcoin? In the short term, it makes sense to withdraw large profits to fiat, if you will have an immediate use for them. In doing so, you may avoid any correlated move that affects bitcoin as well as altcoins. Maybe the time will come when you can convert them directly into other assets like real estate or stocks, but for now, if your strategy is more long-term, consider exchanging your altcoin profits directly into bitcoin, so they are more insulated from wild movements and also not subject to fiat inflation.

In countries with extreme inflation, investing in Bitcoin or less-volatile altcoins can serve as a way to preserve wealth where it would otherwise rapidly devalue. In these cases, the quickest way to cash out funds, other than peer-to-peer, would be to convert your crypto to Bitcoin or Ethereum and use a major exchange that supports your local currency to withdraw it. In this case, receiving your money quicker will outweigh some of the disadvantages, but more privacy is surrendered.

Many cryptocurrencies devalue themselves, by minting more tokens. This means any funds you hold will be worth relatively less over time and therefore you may want to move to a coin with a fixed supply, like Bitcoin. In recent months, we’ve also seen a spike in the number of projects which ‘pull the rug’ on their investors, dumping their coins on the market and causing them to plummet in value. These, and projects which are able to ‘freeze’ their tokens, should be avoided as they put you at the mercy of the development team.

A lot of altcoins are only traded on relatively minor exchanges. If you have significant holdings and want to withdraw them, you will often need to first trade for Bitcoin or Ethereum and then transfer those to an exchange with the appropriate fiat gateway. It may benefit you in the future to keep as much of them in Bitcoin as you can and transfer them to your Trezor, rather than to cash out the whole amount as fiat. Again, if it’s not urgently needed as fiat you should try and keep a balanced portfolio and use profits to increase your bitcoin holdings as well as fiat.

Fiat is for spending, Bitcoin is for saving

Consumers are becoming more comfortable with investments across the board, whether it’s stocks, bitcoin or bonds. Apps offering quick, easy access to stocks have exploded in popularity as the future of the monetary system grows more uncertain. The interest in these kinds of assets primarily stems from people wanting to ensure any value held today is worth as much or more in the future. Of course, no asset can guarantee this, but holding fiat is seen by many to be even more risky.

The average modern investor should be looking to spread their money across a number of asset types, so as not to have too many eggs in one basket. While stocks may seem like a sensible safe haven, investors should know that they are at the mercy of the central authority managing any particular stock, therefore exposing yourself to changes in supply or internal decisions which may negatively affect the value of the company. This should be contrasted with bitcoin, where supply is fixed and only widespread consensus will allow any changes in how the tokens are governed.

If you are interested in investing in bitcoin, you should not do so with money you can’t afford to lose, as with any asset, and consider holding it for the long term. Make sure you are clear in understanding the types of assets you invest in, and what the best strategy is if you wish to profit from them. Fiat is for spending, so budget for your day-to-day life before setting aside money for investments, so you can be sure that you will not be cashing out other assets before they have the time to properly appreciate.

Over time, bitcoin could see less volatility as more investors enter and bitcoin holdings are more widely distributed. We have seen recently that many stock prices pumped in the face of a depreciated dollar. Assets like bitcoin can outpace inflation, securing more of your savings for the future. As bitcoin decouples more from dollar and stock movements, it will be a more desirable haven for value, as its future price will not be so dependent on other markets and it can be used to hedge potential losses in other sectors.

Withdraw to your hardware wallet, not to your bank

SatoshiLabs was founded with the sole mission of stopping people from losing their bitcoins. While our Trezor hardware wallet can prevent theft and other losses, we can’t stop you from voluntarily giving up your coins for fiat. It will take a change of mindset to make sure people understand the value of their bitcoins, and that should be aided by the above guidelines.

Cryptocurrency is an escape from central banks, but only if you use it. The advantages of bitcoin are quickly eroded if the final outcome is simply increasing your fiat balance. Consider creating a hierarchy of your assets in terms of which is most precious. What will be more difficult or more expensive to acquire in future? Ask this question across different timeframes and you’ll get a sense of where to start when the time comes that you need more liquidity. In most cases, it probably won’t be Bitcoin that you cash out first.