Crypto investors fall into two main categories. Some adhere to the HODL strategy: they do not sell their assets for years, believing they will cost more in the future. Those who adhere to the first strategy are called hodlers. They are not afraid of drawdowns, not chasing a ‘to the moon’ momentum, and remain calm during crypto winters or price rallies.
Traders, on the contrary, cannot afford to wait and want to get rich right away. They actively trade, read charts and candlesticks and never miss opportunities to make a profit. We compared both strategies and figured out which one is more suitable for a novice investor. Let’s get started!
HODL: Buy and Hold
The term HODL originated from a typo by one of the users of a major crypto forum bitcointalk․org. In December 2013, the bitcoin exchange rate experienced a strong correction — in two weeks, the price of the coin fell by half: from $1,120 to $560. A forum user with the nickname Gamekyuubi created a topic with the subtitle ‘I AM HODLING’ instead of ‘I AM HOLDING’. In his post, he revealed that he is a bad trader and is simply holding bitcoin in an attempt to save money during a period of volatility.
Gamekyuubi admitted that he mistyped by accident — he drank whiskey before creating the topic. But this post went viral and the word HODL has become synonymous with long-term investment strategy.
Gradually, the crypto community came up with one of the options for deciphering the term — ‘Hold On For Dear Life.’
What Is This Strategy All About?
Formally, HODL is a variation of a classic Buy & Hold investment strategy used for centuries in the stock market.
Instead of trying to figure out the right time to buy and sell, an investor simply buys an asset and holds it until they want to cash out. Legendary investor Warren Buffett likes to say that you should choose a stock to buy as if you were going to own it forever.
Hodlers do not sell digital assets because they believe that their value will only increase over time. Therefore, a hodler keeps a purchased asset and does not sell it under any market situation, ignoring drawdowns, crypto winters, price rallies, FOMO, and FUD. He believes that no matter what happens, the crypto market will maintain a long-term uptrend in the future.
Read Next: Best Ways to Survive a Crypto Bear Market & Crypto Winter
The hodler’s logic is simple: if the market grows in the future, then the later you sell the asset, the greater the profit will be. Of course, active trading of digital assets can be profitable but still significantly increases financial risks. It is much safer to simply hold your assets and ignore short-term losses.
Most often, the HODL strategy is applied to the very first crypto and digital gold — bitcoin. Confidence in a long-term uptrend of the first cryptocurrency is based on its deflationary nature: the supply of bitcoin is limited, and there will not be more than 21 million coins on the market. That is, if demand is maintained, the price of the first cryptocurrency will always grow.
Hodlers hold coins not only because of the potential for high profits, but also for ideological reasons, such as benefits of decentralization, complete financial freedom, and belief in the mass adoption of cryptocurrencies.
Key Strategy Benefits
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- Simplicity and accessibility. HODL is the simplest investment strategy that does not require special knowledge. It is enough just to buy a coin and not sell it — you do not need to monitor news and forecasts, study technical analysis, or look for entry points. Hodlers don’t even care about the market cycle: bullish or bearish. If sometime a bitcoin will cost a million dollars per coin, then it doesn’t matter if you bought it for $35,000 or $40,000. Therefore, hodlers can not wait for a correction but regularly buy crypto assets for a certain amount.
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- Fighting against volatility. Hodlers may simply not notice price jumps. While panicky investors dump assets at a loss at the first drawdown, hodlers calmly wait for an asset to be appreciated.
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- Eliminating emotions. Traders lose money because of mistakes provoked by excessive excitement. HODL protects an investor from unwanted emotions and, accordingly, from mistakes.
Key Strategy Drawbacks
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- Frozen funds. The main disadvantage of this strategy is the risk of freezing money for years at the onset of another crypto winter. After strong price decreases, a return to previous rate highs may take several years. And if an asset has no prospects, then holding it may even turn into a complete loss of invested funds.
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- Lost profit. HODL deprives an investor of the opportunity to make a profit on all-time highs, as well as to earn tens, and sometimes even hundreds of percent, on short-term price fluctuations.
How Profitable Is HODL Strategy?
Despite all its shortcomings, HODL has proven to be one of the most profitable strategies in the long run. All early bitcoin investors who did not sell their coins in the early years of its existence enjoyed fantastic returns. Investors who entered the market later, but showed sufficient restraint, also received their X’s. So far, no one who has owned bitcoin for more than four years has ever been at a loss.
Still, it is important to understand that the HODL strategy is not suitable for all cryptocurrencies. If with bitcoin you can be relatively sure that it will retain its value even after 20/30/50 years or more, then with other assets, there is no such certainty.
Having survived several price rallies, many assets will never again approach their previous highs. Therefore, you only need to hold the coins of those projects that have proven their relevance — these are the top 20 or top 30 cryptos by market cap. But even high capitalization is not a guarantee of long-term success.
Study a project’s whitepaper, learn about the issues that a project solves, and understand tokenomics of its native coin to better understand how promising this investment is for you. It is definitely not worth hodling assets of new projects, coins with a small market cap, or meme coins. Additional returns can be obtained from those assets that can be staked or provided to liquidity pools.
Who Is HODL Suitable For?
HODL is suitable for everyone except active traders. This is an ideal strategy for beginners and those who have no time to constantly monitor the market. Thus, the only thing you need to do is buy some coins and hold them.
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Trading or Active Trading
The opposite of the HODL strategy is active trading. Some traders from this category prefer trading during the day and engage in so-called day trading — they closely monitor the slightest changes in rates to earn a few percent of the deposit per day. Others prefer to buy assets in the medium term and hold them for weeks or months until their price reaches certain values. Such a moderate approach allows you to reduce risks and rebalance a portfolio in time.
Key Strategy Benefits
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- Quick profit if successful. If a transaction is successful, a trader will quickly receive their profit and not wait for X’s for years.
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- Potentially higher returns than passive investing. If you do not miss all the opportunities that arise in the market, you can earn much more than just holding an asset. For example, if you sell bitcoin at swing highs and then buy at swing lows, you can gradually increase the number of coins in your portfolio.
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- Access to a large number of investment tools. Traders have access not only to investments in digital assets but also to derivative financial tools based on cryptocurrencies, such as futures and options.
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- A better understanding of how the market works and where it will go next. Active trading allows you to better understand the specifics of the market and understand how to correctly use various analytical tools to predict its further movement.
Key Strategy Drawbacks
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- Requires a lot of time and resources. Active trading is a full-time occupation. To trade in profit, you need to constantly monitor the news, analyze a situation on the market, study charts, and use technical analysis. Also, before you start using various investment tools, you first need to thoroughly study them and understand their structure. The crypto market works around the clock, it has no days off, and it does not close for holidays. And this means that a trader has no days off.
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- High risks. Trading is the best way for a beginner to lose the entire deposit and earn nothing. The risk of losing investments is many times greater than the possible profit. Day trading is more gambling than investment: it is impossible to reliably predict price movements. According to some estimates, 95% of traders lose money and trade in the red. Even if you are a regular profitable trader, just one mistake, such as a bad short, can wipe out profits from months of successful trades.
How Profitable Is Trading?
As mentioned above, active trading is unprofitable for most investors — they lose their money. The desire to win back pushes traders to replenish their deposits and lose new money again and again.
Losses of 95% of traders ensure the profit of the remaining 5%. These lucky ones may earn up to 5-10% of the deposit per day and hundreds of percent in the case of a pump. But such luck is not permanent, and a few unsuccessful trades can wipe out all profits.
For most investors, medium-term investments will be optimal: buying out on drawdowns and selling after reaching a certain price level. Typically, such transactions take from a few days to a couple of months in a growing market.
Who Is Trading Suitable For?
Trading is absolutely not suitable for beginners and those who do not have enough time to engage in trading seriously. This is an occupation for professionals who know what they are doing and adequately assess the risks.
If the excitement of trading appeals to you, spend a few months learning and set aside the money, you lose while you study. But this is not a guarantee that you will be able to earn more than if you just hodled coins.
Conclusion
Undoubtedly, only HODL is suitable for beginners in the crypto market — this is the safest and easiest strategy. Active trading is an activity for professional adventurers ready to risk money daily.
For most investors, combining HODL and medium-term investments is the best solution. For example, hodl 60% of a portfolio and trade on the remaining 40%. This will help to reduce risks and, at the same time, not to miss emerging profitable opportunities.
What crypto strategy do you prefer? Feel free to share your thoughts in the comments below. Have a great weekend!
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