HODL — A short story about the biggest meme of 2018 and how to treat it going forward.
And here we are.
This isn’t going to be another article on how HODLing destroyed thousands of portfolios with a hindsight moral of taking profits the next time it happens. In this article, I am diving deep into the assumptions behind HODLing and how it doesn’t fit with cryptocurrency market profile and what is the opportunity cost of not trading it actively. I will be covering here false assumptions about fundamentals, what is the nature of the space and I will explain Hype Cycles + why are they so important.
If you want to have a giggle before we start, you can check the current price of $XGOX which I once bought for 200 sats, that I still own. Don’t ask why.
Let’s begin 🐵
I don’t think there is a need for me to explain what HODL is — the biggest meme of the last 2 years that became especially viral during huge 2017 run as people were constantly mocking those taking profits from alts. That laughter now, at the end of 2018, sounds more like a cry as the chances of reaching break even on these long-term holdings are diminishing daily, in most cases probably forever. My point in this article is not to kick those already on the ground, but to give a small explanation on why this “trading method” is not a viable strategy going into 2019/2020, even if we would manage to repeat sick runs of 2017.
First things first — I understand that there are traders and investors. This post is not targeted at those who buy crypto to forget about it for a couple of years because they don’t have time to actively trade. This post is for everyone who does it despite having the time to trade/learn how to trade or even worse — to those who believe this is a valuable strategy. Let me start with a short example of ETH which is the most commonly brought-up case of successful HODLing.
Let’s say you bought ETH at the end of 2015 around the bottom (the trade will be measured in BTC pair). You held it without touching a single coin till June 2017 and sold it around the peak. With this one single trade, you did 59x. From 1 BTC of input (~250$), you got 59 BTC (147k$ with BTC at ~2500$). Pretty good result, right? Hell, I would kill to transform 250$ into 147 000$ in 1.5 year just by sitting on my ass. Some did.
Now let’s say you bought the same amount of ETH at the end of 2015 at the same spot. This time, however, you decide to sell it after a parabolic run and rebuy it when the price finds the bottom. Not a perfect top/bottom trades but close to it. You close the second trade in the same spot as in the previous scenario. From 1 BTC of input, you got 196 BTC which translates into almost 500 000$. From 250$. The difference is not enough to justify learning how to trade and all that? Well besides additional 350k$ you would also have almost a full year to trade that money and reinvest it in something else instead of watching it die (in this case over 70%) as so many did in 2018.
Still not enough to justify all the headaches connected with active trading? How about not getting profit at all and simply wasting those months spent on holding? This is the reality of many people who never sold their ICO investment despite going 80x or more, because “in the future, those prices won’t matter once adoption comes to crypto”. The people that wouldn’t be able to spot and react to a downtrend even if the chart was signed as such because they never really traded before. More on that a bit later.
Now, ETH is a very special example — not every day you get to hold a currency that will completely change the ecosystem and become the 2nd most important coin on the market with enormous liquidity. Other coins after the first cycle tend to act like LBC or in better cases like XCP or DOGE which just regularly pumps in cycles.
The benefits of being more active in a trade are undeniable — more profits, more free funds to trade with, less risk of experiencing a loss of unrealized profits or simply being stuck in a position, waiting for a rebound after a bad entry. HODLing as a justification for not cutting a bag at a loss because “in the future, it will be worth much more” is one of the most harmful approaches I’ve seen on Twitter. You do not suffer the loss the moment you sell — you suffer it the moment it starts being underwater. Your value is the same as the price you would be able to sell your position for in this exact moment. This way, it’s also not a profit until you realize it.
I am pretty sure most of you know this table:
There is a weird assumption that to make up for your losses, it’s the coin that you are stuck with needs to do the recovery. In reality, it doesn’t matter what way you are going to do it — if there is an opportunity on a different coin to profit from it quicker, then there is nothing wrong with selling your current underwater position and entering something with a much better potential. There is a huge opportunity cost of not managing your funds actively that is often ignored because most look only at the end result and not the process:
· Holding the whole position on the way up without taking profits doesn’t maximize the gains. The potential of the coin to go another 10x after it already did 10x is a lot smaller than finding the same gains but on a different, yet unpumped coin.
· Holding through multiple cycles because you are afraid of exiting too early by flipping it and in the result missing out the rest of the ride. I can guarantee that when the time is right you probably will be too afraid to sell anyway, just like people are afraid to buy the bottom as they are scared it’s going to dip even lower. Nobody ever regrets taking profits. If you did it too early, there are hundreds of other opportunities out there. The more times you miss out on a pump, the quicker it will stop bothering you.
· Holding a bottomed out coin because all-time high is 50x from my entry and it’s been ranging for so long. Instead of sitting in a sideways action when the rest of the market is moving, try catching early stages of already ongoing trends. Look for some momentum signs like the volume increase and higher lows with higher highs being formed. Just because something is ranging for ages doesn’t mean it’s primed to have a big move and often the potential returns of catching the bottom of that range are not worth locking up the funds when there are other opportunities already playing out.
A very important note here — active trading doesn’t mean you are required to daytrade shitcoins. It’s more about simply acknowledging trend changes and reacting to it. This can just as well mean doing one trade per weeks if you stick to higher timeframes. People are so afraid of engaging in trading because they think it will require them to understand every aspect of it and sit in front of the charts 12 hours a day. In reality, you could be spending no more than a couple of minutes daily to update yourself on the situation and proceed with your day, while keeping most of the benefits we crypto degens have from doing it full-time.
Now — when you are HODLing you are often accepting the fact of a short/midterm drawback for a huge reward run that comes after it. But what if the recovery never happens? What if the price is never going to not only surpass but even reach the old highs?
There are a couple of reasons why HODL became the biggest meme of 2018 and is probably going to take down a lot of people with itself in the future as well. Let’s point them out.
Nature of the space
Starting with the obvious one — BTC is the king and remains one until proven otherwise. For me, further adoption on certain alts and more USD pairs could be the ignition points for decorrelating from BTC’s price movement but this is neither a short-term perspective nor a given, we might just as well see the correlation continue in the following years. What it means is that besides observing selected alts, a person needs to also be aware of the overall market conditions that are dictated by BTC. We have seen dozens of quality projects getting released in 2018 and despite having ongoing development, that in better market conditions would result in a healthy uptrend, they got absolutely destroyed. This brings us to the second point.
The whole market is extremely volatile. The market cycles are short but explosive, so whenever somebody asks about “a good coin to hold for the next 3–4 years” it’s almost certain that this person will be holding that investment through several 80–90% retracements as well. As long as crypto is still in its early stages, the volatility is here to stay which is every trader’s wet dream, as they understand the opportunities associated with it.
This is also extremely important if you consider the last point which is uncertainty about the market’s future. Of course, almost everyone invested currently in crypto is a big believer in its faith with the hopes of reaching trillions in market cap in the upcoming years. I myself am extremely confident that the technology in one way or another is going to get adopted globally, otherwise, I wouldn’t be writing this article. I do, however, have a very cautious approach to altcoins as a whole as most of the stuff out there right now is still in or just leaving prototype stages.
There is a good chance that we are already seeing the next Google or Amazon being built in front of our eyes, but this shouldn’t be a distraction to the fact, that vast majority of the current and future coins are going to die. If not because of their own incompetence (no business model, no use case, no revenue, blowing up the funds, trouble scaling and getting clients, competition too strong, legal issues — you can name hundreds of things here) there are also outside factors that will play a huge role going forward. One of them is how the technology is going to get adopted by the current corporations like Microsoft which can easily replicate any solid use case with its resources, taking automatically a huge market share from the current startups. Of course, those small companies can always be acquired and actually develop the product themselves, but we cannot rule out tech giants depriving current players of market opportunities (which is why I prefer to invest in already established businesses and infrastructure coins).
The second outside factor that already has a huge impact on this space and will continue to do so going forward is the regulatory aspect. It’s pure speculation on how deep the regulations can go outside of ICO crackdown, but we are already seeing exchanges approached as well (IDEX anyone?) and there is too much uncertainty about what can be named a security, to believe that the current utility tokens are ever safe. With the incoming STOs and coins being shut down by SEC regularly, I wouldn’t feel confident about leaving my altcoin investment untouched for years in a market that is in the middle of its biggest transformation yet.
That is how the bigger picture presents. Even more interesting is how HODL fails on the fundamental research level as that is what drives people into the trade in the first place.
Misunderstanding of fundamental’s importance
Before we even start tackling that issue, we need to get one thing straight -fundamental analysis does matter. I understand there are different trading styles and some prefer to base their trades solely on TA, some on FA, while I and many others do both. I do not think maximalism in any direction is healthy because it unnecessarily limits the point of view, often missing very important bullish facilitators or obvious profit taking spots. And since we are talking about fundamentals, I am often shocked when I see traders talk about FA being a meme and them being capable of trading the same coin without even knowing what it does. That one is actually true, many do perform better on coins with already some sort of liquidity but that is not how you catch the next NANO or BCO. The main purpose of FA is to find and enter coins with extremely high potential when it’s yet impossible to judge them by the price action — an ICO that just got released on the exchange, a PoW coin which recently launched or simply a coin with the strongest development when all the charts look alike (basically what we are experiencing right now). Whenever a TA maximalist is laughing from profiting on a coin that he never researched, an FA guy is laughing even harder because he sold it to him on a 5x premium as he caught it before the coin had any liquidity.
However, I am not here to defend the FA traders as most of them currently could just as well be called community members. The point that I want to make is this — HODL usually comes from putting too much emphasis on what role FA does play in trading. I will expand this thought in more details in a second but for a clearer picture here is what FA is good for:
· Evaluating the value of the coin when there is little or no price history
· Assessing the potential based on similar coins and their market caps
· Forecasting bullish/bearish momentum based on incoming events
And here is what FA will not tell you:
· Are the news already priced in?
· Did the trend reverse or is it just a correction?
· How limited is the downside if I enter at this spot?
So in short, you use FA to decide which coins have the best potential but you execute that trade with your TA. When the chart is showing you signals for the top being in, it doesn’t matter if the coin is still undervalued or if the launch is close. You sell it right away and if you have doubts because “it will be worth 20x from here in the future” you do it even quicker as you clearly got over attached to your magic internet bean.
This would be it on why fundamentals shouldn’t be your reasoning behind HODLing a coin. But what about the fundamentals themselves? What actually is considered valuable?
One of two things that are essential for proper FA is understanding that the price is a result of speculation. What it means is that at the current early stages of the market, the coins are not valued fairly cause if they were, we wouldn’t have vaporwave scams in the top 100 and fully working companies with revenue outside of top 300. The price is based on the promise that coins represent, not the actual results that more often than not are a selling signal. As you will see soon in the next segment about Hype Cycles, the main gains are made in the early stages when the project is just starting to get recognition and hype around it. You are buying a coin that will appreciate in value along with more investors discovering it, while the working product is the peak that is already priced-in since all the price action was leading up to this point. What you should be looking for is the stuff that brings easy awareness to the coin — big partnerships, new future use cases, benefits for the hodlers. Basically anything that is easy to understand and shill further, which might not be the case with the coin trying to promote adding, for example, atomic swaps. This is the reason why Tron had an enormous success with its announcements of announcements, despite not differing much with its approach from a scam, including plagiarising its whitepaper.
Of course, this will change as the cryptospace matures and more coins start to show real development and adoption, but that is not the case just yet. Whenever you will be surprised why a scam coin has 100x higher market cap than your quality pick, keep in mind that the market is not fair in its valuation, although it does not mean it’s not rational (higher exposure is a value in itself as well). And to sum up this point — what kind of coins do create more hype and speculation around themselves? New ones. It is much easier for a yet unknown coin to reach new heights quickly while in price discovery, than for an old coin to climb back up through all the resistances, while all its values are already known to the public.
Okay, so what about the coins with actually good tech, will they get forgotten simply because they do not decide to blatantly shill themselves? Of course not, but the real value sits a little bit outside of that technology. This is the second point that I wanted to cover, so to put it as simple as possible — good technology means nothing if you cannot sell it. And by selling it I do not mean marketing, although that is extremely important as well. By selling it, I mean having a team that understands this tech needs to have users, just like the company needs clients and revenue from creating that product in the first place. There is a reason why so many ICOs currently are on a brink on bankruptcy, as not only they have no current income but in many cases, it’s not even in the near future plans and they are fully depended on their ICO funds which plummeted over 90% this year.
What really matters and what makes a potentially good investment (or a HODL until the cycle is done) is having a management that has a clear business orientation. What I mean by that is having a CEO with an understanding that the company needs to get clients and create revenue, which comes from a specific business model (subscription? one-time fee?). Instead of having cool features that nobody will ever use, I would rather take a solid network of contacts that would help that company stay relevant and active for years, while all the other startups leave the space or in some better cases keep pivoting until they find a place for themselves. As much as we all love decentralization and feel-good stories of small coins creating massive things in their basements, this is not how tech companies work. The point is to offer a solution to either individual clients or to companies with a purpose of improving their systems and cutting the costs. To do this, you need people that will be able to sell the idea to different business owners and if I would have to pick between a shitposting dev or a CEO of QNT with over 20 years of experience, the choice is kinda obvious. Plus the partnerships are basically a perfect shill — both easy to promote and easy to understand the value coming from it (hence the success of VEN, now VET, which thrived on its almost weekly partnership announcements).
This sums up this short segment on what kind of fundamentals matter in crypto and why you shouldn’t get attached to them as the coins will still get affected by the market cycles. Now let’s proceed to the final segment that I foreshadowed already a couple of times in this article — the Hype Cycles.
This is, in my opinion, a single most important concept that absolutely nobody covers on Twitter. This is the main reason behind my bias towards new projects that appear on the market, leaving the OG coins to die out in their never-ending accumulation period, with the only shills coming from old-timers feeling nostalgia towards them or simply bagholders. Long story short — if your coin experienced an exponential growth in the past, there is a good probability that it will never reach the same level again. Let me explain why.
You probably know this chart that represents one the models of a market cycle:
With a couple of exceptions in DOGE, FTC or XCP, most coins experience one main cycle which highs are never challenged again in the future. It’s a result of absurd expectations and hype surrounding the coin that is nowhere near justifying such valuation when looking at its development. The price is the result of speculatory potential based on promises and ongoing momentum — both of which are very hard to regain once the initial hype dies out and people realize the project is far from picture-perfect as it is presented.
My point would be perfectly visible on the Gartner Hype Cycle chart. Yes, I know it’s not exactly tailor-made for young startups especially in a market at such early development stages, but it proves the points that I want to make. Generally, the chart represents the life cycle of a technology from the moment of its creation to the mass adoption if such ever happens. It is supposed to cover a whole branch of technology (like VR or AR) and its adoption curve, but we will try to present a singular project on it.
· It begins as a concept without any usability that is just starting to get some sort of attention (for example new ICO with a whitepaper for a product). This is a starting point. A presentation/website/whitepaper. Absolute beginning.
Peak of Inflated Expectations
· Then, along with more publicity, the project starts to appreciate in value based on its promise and increasing hype as this is something new and exciting (ICO gets released, Ian Balina shills it, you get a couple of partnerships/exchange listings and the whole space is talking about it). This is where you should cash out on your 10/20/50/100x. The top. A point where hype drastically exceeded the development and the project itself is extremely overrated compared to its current offering. A “buy XRP for 3$ on CNBC” or “posting pictures in a moon suit bought by ICX gains” kind of moment.
Touch of Disillusionment
· After that euphoria period, people start to realize that you are not exactly delivering on those promises and that the coin actually has little to no value (delays in product launches, ICOs wasting their funds like we are seeing currently with projects going broke or selling its ETH after 90% retracement). This is where everyone thinks the projects is a scam and will never rebound. In many cases, it won’t. This and the next point can be more or less smooth, depending on how the company the managed.
Slope of Enlightenment
· If the project is still alive, this is where is reorganizes itself and sets itself realistic goals. The deadlines are actually being met and some of the promises are getting fulfilled. The hype this time around is being at least partially justified. This is where the next potential run begins. That is in case it is driven by actual development and it stands out from the competitors in a similar situation.
Plateau of Productivity
· The project is continuing its development and its wider adoption begins. It’s starting to work with actual clients and has a real use case. The noise around it comes from the results, not promises. This is a decision point for a coin — if the fundamentals are solid it will continue to grow and you might be watching another ETH in the making. If it’s too niche, forget about new ATH.
The reason why I and many other traders believe that most coins won’t ever see their ATH again is because vast majority of them finish their journey at the Touch of Disillusionment stage. People who catch 100x are buying in the Technology Trigger and sell it at the top of Peak of Inflated Expectations. The HODL meme along with new community members is born during that 2nd and 3rd stage. This is where you get caught up in the promises and go down with the reality check. It doesn’t mean that good coins won’t pump again — the quality ones can easily exceed their ATH just like ETH and NEM did. It’s just that not many can be considered valuable.
As I’ve mentioned in the previous parts of this article, the fundamentals of these coins are extremely fragile and only few will manage to actually experience successful Plateau of Productivity. If you are looking to maximize your gains during your time in crypto the rule is simple — with so many new coins on the market that are yet to experience this cycle, there is no point in investing into something mediocre, that already had its peak interest. This cycle does not happen twice in one case. And in a market that is driven by speculation, that initial interest and its growth is still the core part of the movement that you should be trying to catch.
One last very important note before the summary — not every pump is “the” pump. You could have a coin that had decent gains in the past and then went into prolonged consolidation but it doesn’t mean it was its peak interest. Judge it by the number of people actually talking about the project and the noise it managed to generate around itself. It’s those invested bagholders that make it hard to come back again. No previous movement will matter if it happened with nobody around.
What can we take away from all this? HODLing obviously is not an optimal strategy as no long-term investment currently makes sense in a market that volatile. The benefits of actively trading your stack drastically overweight the risks of selling the position too early and the trading itself doesn’t need to be as complex as day-trading as the main point remains in reacting to the trend changes.
What I would like to add from myself, outside of all the technicals that I talked about earlier, is a different kind of opportunity cost. As there is a good chance that we are currently hovering near the bottom before the next cryptocurrency bull market appears, most of us reading this right now will be present for the start of it. No matter if you already got a lot of experience in crypto or you just joined recently (nice timing) you are standing in front of an opportunity to profit from a once-in-a-lifetime market as an early adopter. There are people who were able to retire in a couple of months period during 2017 and many more found the passions and place in this space even if they didn’t profit from it so much yet. 2018 despite an enormous drop in values was a year when the attitude towards crypto was challenged in a very positive way, with a lot of institutions opening up to it going forward. This, at least for me, makes it not a question of “if” but “when” we will get the proper adoption of the market, that will very likely exceed things we saw the past couple of years. And with this vision in front of us, I would like to say — don’t waste this opportunity by being lazy now and not trying to get a grip on crypto. You will thank yourself for that in a couple of years.
And for God’s sake — stop HODLing illiquid shitcoins.
Thanks for reading my article. If you want to find more of my work follow me on the following channels and if you are interested in learning more about crypto — check out my book on trading cryptocurrencies. Cheers!