April 11, 2023

How to Cash Out Bitcoin

dYdX
How to Cash Out BitcoinHow to Cash Out Bitcoin

Bitcoin (BTC) was launched in 2009, and its demand has been rising ever since. It’s the world’s most popular crypto today, with a market cap of around $462 billion at the time of writing. 

The day businesses and governments accept BTC transactions may be close, although paying bills with BTC is still slightly inconvenient. That’s because only a handful of companies and local legislatures accept digital currency for products, services, or taxes, and only a few countries, such as El Salvador, recognize BTC as legal tender. People can't rely solely on crypto for daily expenses, so even the biggest Bitcoin bulls need to transfer crypto to cash occasionally. 

Thankfully, exchanging Bitcoin for dollar bills is generally easy to accomplish. Investors and traders have many ways to exchange their crypto holdings into dozens of fiat currencies. Anyone involved in crypto investing should understand how to cash out Bitcoin to preserve or grow their purchasing power. 

What Does It Mean to Cash Out Bitcoin?

Cashing out Bitcoin means exchanging BTC for a fiat currency such as the U.S. dollar, euro, or pound sterling. This is also called off-ramping. Depending on which crypto off-ramp a BTC holder uses, the new funds may go into an exchange wallet or a bank account. There are also crypto-friendly ATMs that handle Bitcoin conversions and provide users with physical cash.

Why Do People Cash Out Bitcoin?

HODL, a strategy to buy and hold investments for the long term, is popular in the crypto community, but plenty of traders cash out Bitcoin regularly. While they often convert BTC into fiat currencies due to the latter’s relative stability and ease of use, here are a few other reasons: 

  • Take profits: The profits in crypto investors’ accounts are only theoretical gains until they sell their BTC for cash. The crypto market may fall, and the value of investors’ BTC holdings might dip into the red. 
  • Cut losses: Sometimes, crypto traders sell BTC at a loss to preserve their purchasing power in a plummeting market. This happens when BTC’s price falls significantly more than the price at which an investor bought it. 
  • Reduce market volatility: Bitcoin's price movements are often steep, quick, and unpredictable. If a trader wants to decrease their portfolio's volatility and risk profile, they may consider cashing out BTC to reduce their crypto exposure. 
  • Purchase: Although services such as crypto debit cards help people spend their BTC, consumers often prefer the convenience of fiat currencies to pay for their expenses. Crypto investors may sell their BTC holdings to buy goods and services.

How to Cash Out Bitcoin

In Bitcoin's early history, finding secure payment gateways to transfer between cash and cryptocurrencies was a challenge. As crypto technologies improve and Bitcoin adoption grows, BTC investors have more options to exchange their crypto for fiat currency.  

  • Centralized exchanges: The most popular crypto-to-fiat exchange method is a centralized crypto exchange (CEX), such as Coinbase or Kraken. To cash out Bitcoin on a CEX, deposit your BTC on your exchange account and sell it on the open market. Most CEXs link directly to your bank account, making a request for an ACH or wire transfer easy.
  • Bitcoin ATMs: A Bitcoin ATM is a physical kiosk that handles crypto-to-fiat conversions. People looking to off-ramp BTC send the Bitcoin in their crypto wallet to the ATM's BTC wallet address via a QR code. Once the ATM receives the BTC transaction, it pays out cash, similar to a traditional bank ATM. 
  • Crypto debit cards: A few crypto companies––such as Coinbase, Binance, and Crypto.com––offer crypto debit cards, which link to each user's exchange account. Investors use the Bitcoin or altcoins attached to their cards to purchase goods without worrying about price conversions. Often, these debit cards handle all the currency conversions on the backend, so vendors only receive a fiat equivalent of the BTC cardholders spend. 

How to Cash Out of Your Bitcoin Wallet

A self-custodial Bitcoin wallet gives users access to a secret passcode called a private key. With this key, crypto holders enjoy full ownership over the Bitcoin they store in their wallets. Although these digital wallets remove the counterparty risk associated with leaving crypto on a CEX, there's no way for people to cash out Bitcoin directly through their wallets. 

Currently, self-custodial wallets don't support fiat currencies such as USD or the euro, making it impossible to swap out BTC directly on one of these apps. If someone wants to receive cash for the Bitcoin stored in a self-custodial wallet, they need to transfer their BTC to an exchange, Bitcoin ATM, or another reputable fiat-to-crypto service to take care of the transaction. 

Before sending Bitcoin from a self-custodial wallet to a crypto offramp, double-check the recipient's address is for BTC. Since each blockchain is on a separate network, sending Bitcoin to a non-Bitcoin wallet won't work, and you might lose money. Many competing cryptocurrencies exist with similar names to Bitcoin, most notably Bitcoin Cash (BCH). Since BCH has a similar history with BTC, some BCH wallets start with the same numbers (e.g., 1 and 3) on many Bitcoin addresses. However, only BCH wallets have a "q" or "p" at the start of their address. 

If you want to find out if you have Bitcoin Cash rather than Bitcoin, look for visual differences. For instance, the "₿" symbol for Bitcoin tilts to the right, while the "₿" for Bitcoin Cash slants to the left. Plus, BCH's primary color is green, whereas BTC's is orange. Looking for these signs helps distinguish BTC from BCH before you send Bitcoin from a self-custodial wallet.

How Much Does it Cost to Cash Out Bitcoin?

Many factors influence the cost to cash out Bitcoin. Here are a few: 

  • Transaction fees: It costs extra BTC to transfer Bitcoin on its blockchain due to transaction fees. Although BTC transaction fees have gone up to $60 per transfer, they tend to be within the $1–$5 range if there’s low or moderate network activity. 
  • Commission fees: People using a CEX to cash out Bitcoin may need to pay commission fees depending on their exchange platform. There's also a chance a Bitcoin transaction will close slightly above or below the quoted USD price during a daily trading session––this phenomenon is commonly called slippage. 
  • Taxes: There are also tax implications for cashing out Bitcoin. Depending on how long a trader holds BTC and buying price, they may have to pay capital gains taxes for this transaction at the end of the financial year, which vary from country to country.

Are There Downsides to Cashing Out Bitcoin?

Transferring Bitcoin is similar to sending e-cash on banking websites and fintech apps, such as PayPal, but there are unique costs associated with sending crypto. Investors need to evaluate the drawbacks of cashing out of BTC before deciding.  

  • Loss in potential long-term profits: There are dozens of stories of early Bitcoin investors who sold thousands of BTC and lost out on millions of dollars. While it's impossible to say whether BTC will continue rising in value, it is potentially a lucrative long-term investment. People who sell off their BTC may lose out on potential profits in the future. 
  • Tax implications: Each nation has unique laws for crypto taxation, but many treat profits from Bitcoin like gains in the stock market. Investors must review local crypto tax policies to calculate how much they'll pay for a BTC transaction. 
  • Slippage: Slippage happens when a trade’s quoted and final price are significantly different. Because Bitcoin fluctuates in price throughout the day, there's a chance it will close above or below the price a trader intended, potentially resulting in losses. 
  • Extra fees: It usually costs a few dollars to send a BTC transaction across its blockchain, and most cryptocurrency exchanges charge commission fees for trading cryptocurrencies and withdrawing cash. These fees further drain a trader's full profit potential when selling BTC. 

Trade Fee-Free Bitcoin Perpetuals on dYdX

Some Bitcoin traders prefer investing in crypto perpetuals (aka perps) rather than buying BTC directly. A BTC perp is an expiration-free contract speculating on the future value of Bitcoin's price. Traders who buy and sell BTC perps can place bets on BTC's price movements without worrying about transferring coins or paying crypto network fees. 

At dYdX, we offer fee-free Bitcoin and altcoin perpetuals with up to 20x leverage on our decentralized crypto exchange. Start trading on dYdX today! 

For more details on our product, visit dYdX's blog. Also, head to our academy to learn more about cryptocurrencies.

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