Hodling
Hodling is not a unique phenomenon in the world of finance – many traders follow this path. The “Buy and hold” strategy has long been known to the stock market as being based on an investor’s belief in the value of an asset and profitability over the long term. Why sell an asset if it will steadily increase in value?
In the world of cryptocurrencies, the holding strategy is primarily applied to Bitcoin, one of the most conservative assets, as its current position and potential deflationary nature (BTC mining will end after the last of its 21 million coins are mined, and many BTC have or will be lost forever for one reason or another) lends itself to a belief in a stable rise in the price of BTC in the long term;
Cryptocurrency vs. the stock market
Many of those who practice holding believe it is the best strategy.
There is an interesting example related to the U.S. S&P 500 stock index. Let’s imagine someone invested $10,000 in this index in 2006. Holders would have $41,100 by the beginning of 2021. If we leave the ten most successful days for the index out of the equation, the balance is already only $18,829. This suggests that if you miss at least a few important price spikes (which you can’t always predict consistently) while actively trading, your total return can be significantly reduced.
Of course, there is no guarantee that an asset will be able to steadily increase in price – and this is the main problem. And the problem is often psychological – the crypto market can make significant fluctuations both up and down in a matter of hours (usually this class of financial assets is referred to highly volatile). Panic selling crypto for fear of a larger drawdown is a dangerous strategy.
Holding and hodling
Holding strategy in crypto trading is often referred to as hodling. The misspelled word became a meme when, on one dramatic day for Bitocoin’s price a few years ago, a Reddit user under the nickname Gamekyuubi created a thread titled “I AM HODLING” (instead of the correct “I am holding”). The blogger attributed the mistake to the whiskey he had drunk earlier, and explained his investment strategy by the desire to save money by investing it in a reliable asset. Since then, the word hodl instead of hold is often used in reference to cryptocurrency.
Later, the cryptocommunity even came up with a transcription of the term hodl – “Hold On For Dear Life” – cling to precious life. However, this interpretation seems far from always correct – instead of panic holding Bitcoin at all costs many holders are driven by a cold conviction in the long-term prospects of the first cryptocurrency. In other words, there is nothing panicky or convulsive about their strategy, as the word “hodl” might seem to imply. On the contrary, they are driven by a calm (fanatical?) certainty: no matter what, Bitcoin will rise in value. So short-term rate fluctuations, cryptozymes and other such bearish sentiments do not interest such investors.
The word “hodl” has become commonplace, but the investment strategy it describes should not be disregarded. After all, there are hodlers who bought Bitcoin year in, say, 2017 for $4,000 and have had it in their wallet ever since – and can their strategy be called a failure?
Strategies and features
What’s worth keeping in mind when hodling? Perhaps the most important thing is not to panic. If you are sure that cryptocurrency will make you a lot of money in the long run, it is useful to develop a reasonable immunity to unfavorable signals. If many are selling on nerves, you should think hard before joining them.
Bitcoin has plunged in value many times before and has more than recovered afterward. If you’re a hodler, you can take comfort in that. Of course, a pattern is always capable of breaking, but if your long-term strategy is based on faith in an asset, it’s worth feeding it in. The hodler’s creed: the unbelievers lose, the hodlers win in the end. Therefore patience, calmness, and reasonable faith are the chief resources of all who walk.
Important common sense measure: don’t hold bitcoins in an exchange. First, you will add unnecessary risk related not to the bitcoin itself, but to the reliability of the exchange. Second, you’ll be extra tempted to let the crypto circulate, and that’s already cheating on the hodler strategy. Therefore, the best option is a cold wallet.
Theoretically, you can consider the option of steaking – in this case, the very fact of possessing cryptocurrency will allow you to earn some income.
Of course, opponents of hodling (more specifically, traders and scalpers) may object: active speculation on crypto exchanges is potentially more profitable. This may be true, but the more transactions, the higher the risks. Yes, of course, those who see and do not miss opportunities are able to earn a lot more. But for this you need to understand technical analysis, develop your own trading methodology and actively follow market signals, news. Not everyone has time and opportunities for this. Of course, active trading is a great way to earn money. The problem is that it is associated with additional dangers. Hodling, on the other hand, is a much more conservative strategy. Of course, it has its risks, but it is still much less adventurous. Moreover, you should not think that active trading and hodling are two mutually exclusive strategies. It can be useful to diversify not only your portfolio but also your strategies.
This material and the information in it does not constitute personalized or other investment advice. The opinions of the editorial staff may not reflect those of the author, analytical portals and experts.