The Benefits of HODLing
This research was sponsored by Luno Global, a platform that allows users to buy, save and manage cryptocurrencies.
Over the last six or so years, I can safely say I have been through the gauntlet of the cryptoverse. From the fall of Cryptopia in 2019 to the Bitcoin Civil war of 2017, I have been around the block a few times.
From spot purchases of bitcoin on multiple exchanges to DeFi platforms and decentralized exchanges, I have tested many cryptocurrency products and services. I have experimented with leveraged trades, futures, and options. One question that has come up repeatedly is whether it is better to trade or simply HODL.
The term HODL comes from a drunken rant posted by a former bitcoin trader. In 2013, bitcoin prices skyrocketed, rallying from roughly $13 to more than $1,100. Following this impressive run, the digital currency lost much of those gains, falling to nearly $400 in 2014.
In response to this, the trader known as “GameKyuubi” wrote up a now-famous post titled “I AM HODLING.” He then went on to explain why he thinks holding is an overall better strategy. His main point is that he is a “bad trader,” that he knows he is a “bad trader” and this is the reason for this simple tactic and overall long-term strategy.
Some of the more interesting indicators I came across in doing research for this piece are called “HODL waves.” Glassnode Academy describes them as follows:
“HODL Waves present a macro view of the age distribution of the coin supply and provides insight into changes to this age distribution arising from holding and spending behaviour. The metric bundles the coin supply into categories depending on age, and presents it in colour bands with a thickness proportional to the total coin supply.”
The HODL wave chart below, provided by Glassnode Academy, helps shed some light on this subject. It shows how in the earlier days of bitcoin, the digital currency changed hands more frequently, as illustrated by the high incidence of red and orange. This took place during a time when the price was significantly lower than it is today.
As time went on, and the price of bitcoin continued to rise, this situation slowly changed, which is displayed by the increased incidence of colors like yellow, green and blue.
This shift represents people who have held their bitcoin for much longer time frames. A new color, purple, eventually showed up, representing people who have held their bitcoin for more than 10 years!
This video from Glassnode Academy helps give a better explanation of how this redistribution occurs.
The Benefits Of HODLing
What are the benefits of HODLing? It is an easier, safer, and less stressful strategy than actively trading. It can also save an investor hours spent in front of a computer screen trying to turn a profit by making trades.
Further, HODLing can be combined with something the bitcoin community commonly refers to as “stacking sats,” which involves acquiring satoshis, the smallest unit of bitcoin, and slowly adding to that position over time.
The best way to do this is by using a technique called dollar cost averaging, which has a goal of minimizing volatility risk by spreading one’s investment out over a longer period of time.
To do this, an individual makes investments in small increments instead of making them all at once. For example, an investor could purchase $100 worth of bitcoin every week, or every month, depending on their situation.
When a downturn takes place, the investor will be able to acquire more of the underlying asset, in this case bitcoin, and average the cost over time. This gives one the ability to obtain more satoshis in the lower points of the chart in a shorter time frame like a month or a week.
One of the best features of HODLing is that it is much less stressful than trading. In an ever evolving market that is open 24/7 and presents investors with literally thousands of options, it is easy for the “cryptoverse” to become overwhelming. One can look at “stacking sats” as a much simpler approach and a way to save. It takes 100 million satoshis to equal one bitcoin!
What are some of the advantages of trading? Well the biggest and most obvious are the gains. In crypto, they can be in the hundreds of thousands or percent. These returns can be very alluring and this brings us to the disadvantages of crypto trading.
For starters, digital currency prices can be very volatile, up one minute down the next. Further, it can be very stressful watching your portfolio go up and down drastically; and if multiple components of your portfolio are doing this, you may want to pull your hair out.
Eventually, it will start to take a toll on you if you are not properly trained and prepared, since these markets can be brutal.
People see some of these professional traders on YouTube or other social media platforms and they are like “I can do that”! In most cases, they cannot. It takes a lot of time, practice, patience, and capital, and if you are lacking in any of these categories; you most likely will get “REKT” (lose your money). Also, do not get blinded by beginner’s luck!
Some feel that if they make one or two good trades early, they can do no wrong. This is where one can fall into the “hot hand” fallacy,” which Investopedia defines as “the psychological condition that people believe an individual is ‘hot’ or ‘cold’ depending on past performance, when that performance has no bearing on future outcomes. For instance, rolling a die is independent of how you rolled it in the past.”
This is how people get in trouble: they make a couple good calls based on assumptions or feelings and apply this strategy with a larger position. This position in most cases is out of the investor’s “comfort zone,” meaning that the investment probably has more zeroes than it should. When the market starts to get rocky, and the investor has no set investment plan, they do one of a few things.
One possibility is they sell at a loss based on market conditions and rumors and vow never to return. Another is, they start to experiment with leveraged trades to make up the loss or hedge against their bet by shorting the positions. Again we have waded into deeper waters of the trading universe, yet alone the “cryptoverse” which has many more twists and turns.
For example you could find yourself with what I call a “ghost bag,” a crypto holding you own but cannot access for any number of reasons. For example, the bag could be on a centralized exchange like Coinbase or Binance and they go down because of traffic.
Alternatively, the exchange where your crypto is held might want you to perform KYC or some other task that may involve releasing sensitive information to an unsecure world. Or it could be just an error or glitch like what happened with CoinMarketCap on Dec. 14, 2021.
So in a huge sea of over 16,000 coins and tokens and counting. One of the easiest and smartest things you can do is learn what bitcoin is, what satoshis are; and then start stacking sats! The simplest way you can do this is to DCA and start HODLing! Good luck and G-dspeed!
This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.
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