Cryptocurrency investing: Why cashing out is so difficult

12 April, 2019

Your average cryptocurrency owner is not a millionaire who purchased Bitcoin at $1 and sold it for $20,000. Rather, it is someone who simply purchased coins in order to buy something, or play online.

But what about those millionaires? What about those people who invested just a small amount in Bitcoin during its infancy and now find themselves millionaires, at least on paper? How do they convert their coins into usable cash? For starters, they have to convert digital coins into fiat. That is not as easy as it sounds.

You would think that cashing out your digital coins would be as easy as purchasing them. It is when you are dealing in small amounts. But when you're talking large volumes, it's an entirely different matter. There are significant obstacles purposely put in the way to prevent cryptocurrencies from being a vehicle for fraud.

Cashing out through a bank

Your first obstacle is the fact that everyone's favorite vehicle for cash - the bank - is unlikely to convert bitcoins into fiat. There are very few banks that will even look at cryptocurrency let alone convert large volumes into fiat. The truth of the matter is that banks are afraid of cryptocurrency. Many of the largest banks in the world have gone so far as to classify cryptocurrencies as fraudulent. To put it mildly, crypto is kryptonite for bankers.

Among those that are willing to transact in crypto, caution is the word of the day. Remember that banks the world over are required to adhere to anti-money laundering and know-your-customer (KYC) regulations. Some of the finer details of those regulations may differ from one country to the next, but they are pretty stringent across-the-board.

Anti-money laundering regulations are intended to prevent people from using the financial system to conceal profits. Back in the 1940s and 50s, Las Vegas casinos were prime targets for all sorts of "money launderers" who would use profits from various activities to wash through the casinos. As seen in the Casino film, profits from the casinos would be funneled back to the crime syndicates who sent the original cash to Las Vegas.

Money-laundering in Las Vegas led to the establishment of the first anti-money laundering rules. In the decades since, anti-money laundering rules have expanded significantly to cover almost every kind of financial transaction.

KYC rules were birthed out of the terrorist attacks of 2001. It was discovered shortly after those attacks that terrorists were taking advantage of critical loopholes in the financial system to fund their operations. Today's KYC rules go above and beyond terrorism to also affect the activities of normal people.

As you can see, there is a lot of regulatory red tape that banks have to pay attention to under normal circumstances. Trying to adapt compliance to cryptocurrency is not easy, so most banks just avoid crypto altogether.

Verifying clean money

On the outside chance an investor can find a bank willing to help him/her cash-out ICO investments, the process will still not be easy. It will not be quick either. More often than not, banks require investors to verify that their money is indeed clean. That means having to document each and every transaction.

In cases where an investor received a sizable investment from a single organization or person, the bank might require the investor to verify the wealth of that source. That would involve the investor to getting documentation from the organization or individual showing that their money is clean as well.

Cashing out through an exchange

So we now know that banks make it difficult to convert large volumes of crypto. What about crypto exchanges? After all, exchanges exist for this very purpose. It should be fairly easy to sell large volumes of crypto on the open market through a centralized exchange, right? Well, not so fast.

To begin with, exchanges need a way to get you the funds realized from your sale. They are not about to send bills and coins via carrier pigeon, and they don't like the hassle of writing paper checks. So most exchanges require that an exchange account be linked to a verifiable bank account.

Now you're back to square one. If the bank has any inkling whatsoever that your business is cryptocurrency, you might not be able to establish an account. There is a fine line between making your money as a crypto investor and having a full-time job while merely dabbling in crypto. The good news is that it is easier to get a bank account if you establish it before attempting to cash out.

Next, cashing out isn't a mere matter of exchanging your coins for fiat. You actually have to sell them to others. So you make your offer on the exchange and then wait. It could be that a buyer comes along in a couple of hours. It is also possible you could wait for weeks or months. You just never know.

When your coins do eventually sell, there is usually a waiting period before you can access that money in your bank account. And then there are fees to worry about. The exchange will charge a fee for selling your coins and, depending on where the deposit is coming from, your bank may charge a fee once your funds arrive.

The small amounts strategy

Cashing out large volumes of cryptocurrency is complicated by design. All the roadblocks put in your way are there purposely to prevent tax evasion. As much of a hassle as it is, the obstacles are there "for your protection" says the people who implement these rules. But take heart, there is a workaround. It takes a lot more time and effort, but it does work.

The workaround is to cash out your earnings in much smaller amounts. How you would do this depends on your position. Smaller amounts will sell more easily on exchange. They will also raise fewer red flags when the revenues are deposited into your bank account as fiat.

If you are a regular investor rather than an ICO owner, you can cash out smaller amounts on a daily basis. For example, you can use a payment system like Skrill that instantly converts digital coins into fiat. You can use multiple services like Coinbase that allow you to buy and sell small amounts on demand.

The more these of smaller services utilized, the more you can cash out on a daily basis. You still need to be careful with this strategy though. Too many transactions in a single day, even small ones, could raise suspicions.

You could also use P2P crypto sites to sell your coins, or try Bitcoin ATMs that will buy your coins. There are also "listing" websites similar to where you might find people who will buy your coins. Note that was actually just a week ago seized by the US Department of Justice for such activity - but there may be others that you can find.

Patience is the key

Key to cashing out large volumes of cryptocurrency without generating suspicion and/or scrutiny is patience. Unfortunately, that is just the way it is. It's great that you made millions by investing in a red-hot ICO, but don't expect to get your hands on it all at once. A one-time cash out is just not feasible. It is also not wise.

As long as you are exercising patience, you can put your coins to work for you. Rather than keeping all of your earnings tied up in the same cryptocurrency, convert those coins into others in order to diversify your holdings. Your wealth will be a lot more stable and you will have more opportunities to make more as time passes.

One last thing to remember is taxation. Most jurisdictions count the profits from cryptocurrency investments as capital gains. Exactly how and when you pay those taxes depends on where you live.

Now you know why cashing out large volumes of cryptocurrency assets is so challenging. All the hassles are definitely worth it if your investments have made a handsome return. Just realize that it's best to follow the procedures without question. There is no need to jeopardize your financial return by bucking the system. Follow the rules and go on to enjoy the profits you made from your investments.