The term HODL dates back to a 2013 post on a Bitcoin forum. The title of the post, found on the platform Bitcointalk, was “I AM HODLING.” The post’s author went on to say that because he couldn’t predict market trends well enough to be a successful day trader, he would hold his investments instead. Other forum participants embraced the misspelling, and it soon became the subject of memes. The week the post was published, the price of Bitcoin dipped nearly 40%, as a result of actions taken by the Chinese central bank.
How Does HODL Work?
HODL is an investing strategy in which individuals purchase cryptocurrencies and hold them for a long period of time. This allows investors to take advantage of an increase in the value of the asset. Someone adopting a HODL strategy isn’t trying to time the market, and they aren’t going to sell their investments when they think the market might dip.
HODL vs. Buy-and-Hold Investing
The strategy of buying and holding an asset for a long period of time is hardly a new one, and its roots predate the invention of cryptocurrency. Buy-and-hold investing occurs when individuals purchase an asset—often stock—and hold it for a period of many years. Rather than trying to time the market, this strategy simply operates under the assumption that the asset’s price will increase over time. There are many benefits to a buy-and-hold investing strategy, including:
You reduce the money you pay in transaction fees when you don’t trade regularly. Because you’re holding your investments for long periods of time, you avoid higher short-term capital gains taxes. The Securities and Exchange Commission (SEC) claims that those who adopt a buy-and-hold approach to investing tend to be more successful in the long run, as opposed to those who try to time the market.
It is worth noting that there could be some differences between a HODL strategy and the traditional buy-and-hold investing strategy. When people adopt a buy-and-hold approach with stock investing, they often put their money into index funds in the hope of not beating the market but matching it. But long-term cryptocurrency investors, on the other hand, tend to hope for more substantial gains.
Pros and Cons of HODL
Pros Explained
Isn’t reliant on timing the market: Short-term trading is reliant on timing the market, which means you have to guess when prices are going to rise and fall. But unless you’re a market expert—which most people aren’t—it’s unlikely that you’ll be able to accurately predict every market shift. HODL removes the risks of timing the market. Profits are subject to long-term capital gains taxes: Capital gains on assets held for more than one year are taxed at a lower rate than those held for less than one year. A HODL strategy will result in a lower tax rate on your earnings.Proven track record of buy and hold: The reason so many financial experts recommend buy-and-hold investing is that it has a proven track record. While it’s important that investors recognize the difference between stock investing and cryptocurrency investing, buy-and-hold investing traditionally wins out.
Cons Explained
Cryptocurrency doesn’t have a proven track record: With buy-and-hold investing, there are many decades of performance to look back on, and you can see the market trends drive upward over the long term. In fact, the first stock exchanges date back to 1792, giving us literally centuries of data to study. But since cryptocurrency is only about a decade old, there’s no evidence that it will trend upward forever. As a result, we can’t really know if a buy-and-hold strategy will be effective in the case of cryptocurrency.Capital is tied up for long periods of time: When your money is tied up in the market for many years, or even decades, it can’t be spent on other things. HODL may not be an effective strategy for any money you hope to use in the next few years, so be sure you have the funds allocated for investments.
Is HODL Worth It for Individual Investors?
Now that you’ve heard some of the arguments for and against the HODL strategy in cryptocurrency trading, you might be wondering whether it’s really worth it. After all, we know that cryptocurrency doesn’t have the same proven track record that the stock market has. To answer that question, let’s go back to the example of the 2013 Bitcoin crash. At its lowest point over those few days, Bitcoin reached a trading price of $506.17. Let’s take a look at what would have happened if you invested in Bitcoin in December 2013 and held onto it. At one point on Friday, May 21, 2021, Bitcoin was trading at $35,889.63. If you had purchased 10 Bitcoin at its low price in December 2013, your investment on May 21, 2021, would be worth $358,896.30, an increase of more than $350,000. It’s important to state that debating whether or not a HODL strategy is worth it when investing in cryptocurrency is entirely different from the question of whether to invest in cryptocurrency at all. Cryptocurrency is still relatively new and isn’t subject to the same regulation as traditional investing. This could leave investors open to additional risk. As with any investment, you should make sure you understand cryptocurrency before you begin investing.
