The buy-and-hold strategy among cryptocurrency investors
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“HODL” is a term that is often used in the Bitcoin investment community. It is a misspelling of “hold,” with an interesting story behind it. The term also spread to the communities of other cryptocurrencies. It is not only a popular term but is also considered an investment strategy.
“HODL” is a misspelling of “hold,” referring to the buy-and-hold strategy among cryptocurrency investors.
The “hodling” strategy helps investors avoid realizing loss from the short-term volatility of cryptocurrencies and gain returns from long-term value appreciation.
Although the “hodling” position is theoretically less risky than trading, investors still need to reckon with the risk of changing regulation and the public’s perspective.
The Story of “HODL”
The word “HODL” originated from a post on the Bitcoin Forum, a platform where investors can share their opinions about Bitcoin and the economy. On December 18, 2013, a forum member with the handle “GameKyuubi” wrote a post with a title called “I AM HODLING,” as “HODLING” is a misspelling of “HOLDING.”
2013 was a big year for Bitcoin. The price surged from $15 in January of said year to over $1,100 at the beginning of December, which delivered a return of 7,230%. With a high-volatility nature, the price fell from $716 by 39% to $438 in mid-December.
The fall was possibly a result of a ban of third-party payment companies from working with Bitcoin exchanges from China’s central bank (People’s Bank of China). The “I AM HODLING” post is a response to the price plunge. The author loaded the post with typos and upper cases to express his firmness in his simple holding strategy.
The misspelled term “HODL” circulated quickly in the forum and spread to other cryptocurrencies. Cryptocurrency investors use the term to refer to buy-and-holding assets for a longer time horizon rather than making frequent trades.
It’s been demonstrated that the post’s author made the correct decision. The price of Bitcoin began another surge in mid-2017 and reached a historic high of $19,167 at year-end. However, the price fell again after the 2017 surge; it hiked again during the COVID-19 pandemic and hit a new high of over $58,000 in early 2021.
Why “HODL” Cryptocurrencies
Cryptocurrency is a type of digital currency supported by blockchain technology. It functions as a medium of exchange and can also be held as an asset or investment. Examples of cryptocurrencies include Bitcoin, Ethereum, Ripple, etc. Decentralization is the major feature and advantage of cryptocurrency, as it is not issued by a central authority such as a country’s central bank.
Cryptocurrencies continue to gain more attention as an investment opportunity due to the remarkable breakouts in 2017 and 2020. The trend of financial decentralization and currency digitalization provides room for growth to cryptocurrencies. Under the post-COVID low-interest context with inflation expectation, investors also hold cryptocurrencies for value reserve.
“Hodling” refers to the buy-and-hold strategy. Buy-and-hold investors tend to hold their assets for an extended period of time to profit from the long-term value appreciation. In contrast, traders are much more active in transactions and seek returns by buying at low prices and selling at high prices.
Due to their highly volatile nature, cryptocurrencies provide great opportunities for traders to build up long and short positions frequently. However, “hodling” can provide more safety to investors, as investors are not exposed to short-term volatility and can avoid the risk of buying high but selling low.
Risks of “HODLING” Cryptocurrencies
Despite the recent high rate of return and the reasons to invest, as mentioned above, prudent investors should also reckon with the risks of holding cryptocurrencies. The prices of cryptocurrencies are very volatile. Investors may have to experience extreme ups and downs of their asset values, which means they should have much larger risk appetites than investors of conventional investment instruments. They must have sufficient capital capacity to avoid forced sales or meet unexpected liquidity needs.
With a relatively short history compared to other types of assets and fiat currencies, cryptocurrencies face a future with lots of unknowns. The policy over cryptocurrency has not been well-established. Without surveillance from a central authority, cryptocurrencies can be used for fraudulent activities, such as illegal transactions and money laundering.
Different countries and parties express different attitudes towards the use of cryptocurrencies. It can significantly hinder their role in supporting international transactions, affecting the value of cryptocurrencies. Unfavorable policy-making and public perspective might drag down the asset value for the long term.
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