Trading Vs. Hodling
What is HODL? It comes from a meme where the word “hold” is purposely misspelled, and implies “Hold On for Dear Life through crypto’s ups and downs.” The term came from a typo in the thread title “I AM HODLING” on a Bitcointalk forum post from 2013. Since then, it has caught on in the crypto space, becoming synonymous with a “buy and hold” strategy.
Globally, all crypto investors have two ways to grow capital. They either:
- Buy and hold (HODL) cryptocurrency
- Or, trade cryptocurrency in different ways
HODL is believed to be a better strategy for beginners. While there is logic in this statement, both of these strategies involve risks for newcomers. The main reason HODL is good for new investors is that it helps to keep them from panic selling at a low. However, the best results come from a combination of different elements, such as HODLing with an exit plan or trading with risk management and focusing on continuous learning.
Benefits of HODL
The HODL strategy is simple — you buy assets, keep them in a safe wallet and then you do nothing. The only thing is to wait. In the long run, the cryptocurrency market has so far shown exceptional growth. Thus, HODL will almost certainly yield profits over the long run, provided the right asset is chosen. As a bonus, you do not have to pay any taxes if the cryptocurrency is stored in the wallet.
Risks of HODL
There are also a number of risks faced mostly by beginners:
- Entering an asset when prices are high. It is psychologically difficult to hold an asset while seeing its value fall at a subsequent moment of rebound and reaching local lows.
- Lack of understanding of when to “lock in profits.” “Just HODL” does not bring profit, holding an asset can last indefinitely. Therefore, each trader must understand in advance what percentage he expects when it is time to sell.
- Entering unprofitable assets. In the context of HODL, it is best to invest in the most liquid assets, the market leaders — BTC, ETH, and others. Less stable projects, especially new ones, can promise better profits and involve downside risk. They can remain unprofitable even if the market generally moves upwards.
How to HODL the Right Way
Experts recommend the following guidelines:
- Invest only free money that will not be needed in the next few years.
- Be mentally stable and patient. Investors should always stick to their chosen strategy and follow their own goals, not follow the market. All decisions must be made only rationally, with no emotions involved.
- Avoid using borrowed funds. This becomes an additional risk factor and often leads to rash decisions. Investing with credit money is always a bad option.
Also, you should not trust recommendations and “signals” from experts. Such information cannot initiate the actions of a crypto investor, only personal analysis of the market and comparison of data from a variety of sources. As a reminder, any financial transactions are a high-risk way of income. Assume only a thoughtful and responsible attitude to them.
Benefits of Trading
The high volatility of crypto assets allows you to profit from rate fluctuations within minutes or during the day. There are three types of trading that take advantage of this feature:
- Scalping. It gives an opportunity to fix profits on the least significant fluctuations of the exchange rate. It is characterized by the highest trading tempo.
- Day trading. Intraday trading is limited to one trading session, at the end of which a trader does not leave open transactions.
- Swing trading. This type of trading is close to medium-term investing — traders enter the asset for a period from several days to several months.
The opportunity to make money on the difference in exchange rates within a short period is the main advantage of trading on the cryptocurrency market. Among others, there is a special software for automated trading, a large selection of currency pairs, access to many trading platforms and the ability to use many analogs of traditional financial instruments.
Risks of Trading
Trading involves high risks. The main mistakes beginners make are:
- Emotional transactions. The desire to win back and actions on feelings are considered one of the trader’s main mistakes. It is necessary to act only relying on fundamental and technical analysis methods.
- Lack of diversification. It is recommended to invest in different crypto assets, which have a minimal correlation between each other.
- Overly aggressive strategy. Managing your own capital and assessing risks is one of the basic skills of a trader.
- Needless fear or greed. Fear of missing out. Many beginners do not close positions, even when they reach predetermined numbers.
- Ignoring Stop Loss and Take Profit mechanics. Automated trade closing eliminates emotional decision-making and technical errors. It also helps to plan and clearly follow the chosen strategy.
Trading and Hodling: The Bottom Line
HODLing is simple, but at the same time doesn’t promise a quick profit. It requires at least a general understanding of the market situation and the specifics of the chosen asset. On the other hand, trading is harder, it implies more risks and requires a lot more knowledge. But its potential benefit from a short- and medium-term perspective is also bigger.
With that said, HODL (while taking note of the advance mentioned above) is more suitable for beginners. By contrast, an inexperienced crypto investor who has some familiarity with market analysis and exchange mechanisms can dabble in trading. But, in this case, it’s not recommended to open transactions for more than 1% of the total portfolio.
The best results are achieved by combining a long-term HODL strategy and a short-term trading strategy. But overall, crypto investing should be approached consciously. A conservative and cautious attitude implies studying all available market analysis methods, using educational programs on exchanges, a comprehensive theoretical study of the material, and, only after that, moving on to practical actions.
