" Every bitcoin I sell now (without topping back up, as I would normally do for my spending bitcoins) represents a potentially massive amount of future wealth. The downside is limited to the amount I put in to begin with."
Lets say you purchased 10 BTC at 40 bucks. Losing 400 won't break the bank. Now it crossed 120. If you sold 4 BTC you'd still have 6 BTC and make 80 bucks in the process. The $80 isn't as important as the fact that you've already effectively reduced the cost basis of the 6 BTC to zero, in which case you literally could just sit there and wait. If the price did crash to zero, you would still be net ahead.
You're making the sunk cost fallacy. The amount you paid for an asset is irrelevant to its present value, and equally irrelevant to whether and how much of it to sell.
It does not imply anything about reversibility. It applies just as well to a liquid asset like bitcoin or stock as to an illiquid asset such as a house.
Two people each have 1 BTC. One paid $5 for it, the other paid $10 for it. Their present situations are identical, therefore the rational behavior is the same for both of them, despite their different purchase prices.
How is this a sunk cost fallacy? As an investment, selling off a portion locks in gains, rather than leaving it all at risk should BTC lose significant value.
Selling off a portion of your investment to protect yourself from excessive risk is perfectly rational. Doing it partially as a function of the price you originally paid is not.
You may have reduced your effective book cost basis in the remaining 6 BTC to zero, but for tax purposes their (cost) basis should remain unaltered. This is important, because the foreign exchange gain (or loss) you recognize on the conversion of BTC depends on the exchange rate at the time of conversion and your cost basis in the currency units converted.
"but for tax purposes their (cost) basis should remain unaltered."
You can elect (at least in the US) to use average basis (which is what you are talking about), FIFO (IIRC LIFO is not permitted), maximum capital gains or minimum capital gains. You can elect to minimize capital gains this year, but that comes at the expense of reducing the tax basis of the residual to 0
For stock, at least, you can exactly pick and choose which individual shares you are selling, UNLESS you are also buying at a similar time. That would be a "wash sale" and LIFO is Required in that case.
Comments
" Every bitcoin I sell now (without topping back up, as I would normally do for my spending bitcoins) represents a potentially massive amount of future wealth. The downside is limited to the amount I put in to begin with."
Lets say you purchased 10 BTC at 40 bucks. Losing 400 won't break the bank. Now it crossed 120. If you sold 4 BTC you'd still have 6 BTC and make 80 bucks in the process. The $80 isn't as important as the fact that you've already effectively reduced the cost basis of the 6 BTC to zero, in which case you literally could just sit there and wait. If the price did crash to zero, you would still be net ahead.
You're making the sunk cost fallacy. The amount you paid for an asset is irrelevant to its present value, and equally irrelevant to whether and how much of it to sell.
'Sunk cost' implies an irreversible transaction. Bitcoins are highly liquid. Nothing fallacious about this logic.
It does not imply anything about reversibility. It applies just as well to a liquid asset like bitcoin or stock as to an illiquid asset such as a house.
Two people each have 1 BTC. One paid $5 for it, the other paid $10 for it. Their present situations are identical, therefore the rational behavior is the same for both of them, despite their different purchase prices.
How is this a sunk cost fallacy? As an investment, selling off a portion locks in gains, rather than leaving it all at risk should BTC lose significant value.
Selling off a portion of your investment to protect yourself from excessive risk is perfectly rational. Doing it partially as a function of the price you originally paid is not.
You may have reduced your effective book cost basis in the remaining 6 BTC to zero, but for tax purposes their (cost) basis should remain unaltered. This is important, because the foreign exchange gain (or loss) you recognize on the conversion of BTC depends on the exchange rate at the time of conversion and your cost basis in the currency units converted.
"but for tax purposes their (cost) basis should remain unaltered."
You can elect (at least in the US) to use average basis (which is what you are talking about), FIFO (IIRC LIFO is not permitted), maximum capital gains or minimum capital gains. You can elect to minimize capital gains this year, but that comes at the expense of reducing the tax basis of the residual to 0
For stock, at least, you can exactly pick and choose which individual shares you are selling, UNLESS you are also buying at a similar time. That would be a "wash sale" and LIFO is Required in that case.