How to take profits from your cryptocurrency gains is always a hot topic it seems. I hold an in-person class in Long Beach, CA and I get a ton of questions about the best way to take profits from your crypto gains. While I really try not to give investment advice I can at least help clarify for beginners why you should probably be measuring your profits in satoshis instead of USD value. Follow along with The 'Stache as I break down when you should value profits in satoshis and when you should value against USD.
What Is A Satoshi Anyways?
The satoshi, or sometimes referred to as "sats", is the name given to the smallest divisible amount of Bitcoin and represents 0.00000001 of 1 Bitcoin (or 100,000,000th of 1 Bitcoin). The smallest unit of BTC measurement is named in homage to the mysterious creator of Bitcoin, Satoshi Nakamoto (see my article about Who Is Satoshi?). While the satoshi value is typically displayed in most transactions you might not have paid much attention to it. It is most often seen when calculating fees for bitcoin as they are measured in sats/byte.
Bitcoin Is King (& ETH, LTC Are Pretty Good Too)
I will let you in on a little secret, that Altcoin you really love... you will probably have to buy Bitcoin first. This is the realization that beginners often come to when it may be too late. While playing in the Alt market can be fun, you typically have to buy Bitcoin or Ethereum first before you can snatch up that hot new ICO that just hit Binance.
This is one of the main reasons that BTC has remained the king. It goes the other way too, you can only sell a small handful of cryptos for your native fiat currency like USD. Bitcoin is the biggest of these, but exchanges offer USD pairs for Ethereum, Litecoin, Monero, and a few more. It is because of THIS very fact that you should be measuring your profits in satoshis. I could go into Ethereum and it's smallest unit the "wei" (0.000000000000000001 ETH), but for this beginners guide I will stick with Bitcoin as my example.
When To Measure Profits Against USD Or Satoshis
There is a lot of advice out there and of course conflicting opinions. I can only really give my reasoning and logic behind how and why I measure my profits the way I do. Personally, I am always trying to acquire more Bitcoin. I rarely use fresh USD to buy new coins, but if I was to buy Bitcoin and just decide to hold it and not use it for trading I would measure those profits over time in USD value because that is what I originally purchased my Bitcoin with. My rule of thumb is:
"Value your profits against the currency you purchased the asset with".
Once you get into the Alt market and want to trade your Bitcoin for anything else, you should then start measuring your profits in satoshis instead of USD. The reason for this is that while it could look like you are gaining USD value on a coin, but against the Bitcoin you purchased it with you are actually LOSING profits. Here is a hypothetical example to illustrate this issue.
Lets say that today I bought 1,000 "Stachecoins" for $1 each or 0.0001 BTC each (or REALLY 10,000 satoshis/sats each) where Bitcoin is priced at $10,000 USD. In one week Bitcoin goes to the moon and doubles in price to $20,000, while the price of Stachecoin has remained stable at $1.
Now, my Stachecoins are still worth $1 USD each, but since Bitcoin has gone up each Stachecoin is now worth half as much BTC at just 0.00005 each. This is where the critics come in and say "Well you still have $1000 of XLM then so you have not lost any USD value and if USD value is all you care about then you break even".
See, the problem with this is, you typically can't cash out an Altcoin directly for fiat currency like USD directly. You must first trade that Altcoin to Bitcoin (or maybe Ethereum or Litecoin, something you can sell on Coinbase or Kraken directly for USD).
In our example, if I left this trade selling my Stachecoins for Bitcoin first would translate into a 50% loss in Bitcoin which in turn translates to a 50% loss when you sell your Bitcoin for USD to "cash out". If your altcoin trade does not out perform just hodling your Bitcoin, then that is a losing trade (no matter what it's USD value is). This is given that you can't trade that Altcoin for USD directly. That is really the catch.
Measuring your profits all comes down to (in my opinion) what you originally purchased that asset with. If you purchased your Bitcoin with USD then YES you would value that Bitcoin against USD, but if you purchased NEO with Bitcoin then you should value that against Bitcoin (satoshis). The reason to use satoshis is because it is the smallest divisible unit of bitcoin and as the value of BTC goes up we will have to get more comfortable talking and thinking in satoshis when it comes to trading and measuring profits.