HODL term is basically a meme that originated in 2012. Since then, HODL has become popular in the crypto community but also spread to other quarters. According to Wikipedia, this is its definition in a nutshell:
Hodl (often written HODL) is a slang term and Internet meme that is used in the Bitcoin community when referring to holding the cryptocurrency rather than selling it. When we say holding, that means keeping it in your crypto wallet such as Coinbase, Ledger, or eToro Bitcoin wallet, and not ever converting it to cash. It originated in a December 2013 post on the Bitcoin Forum message board by an apparently inebriated user who posted with a typo in the subject, “I AM HODLING.” In 2017, Quartz listed it as one of the essential slang terms in Bitcoin culture, and described it as a stance, “to stay invested in bitcoin and not to capitulate in the face of plunging prices.”
Essentially, it means that you should not start selling an asset as soon as you notice that it is losing its fiat value on the market. In many ways, it is the complete opposite of the trader approach because it rejects getting hung up on the daily highs and lows of a particular crypto asset. For many in the community of cryptocurrency believers, the main drive for the HODL mentality is the idea that this technology is revolutionizing the world. A lot of these individuals are certain that having a crypto network up and operational is already the biggest reward they can attain. It was and still is an ideological thing – cryptocurrencies are freedom from the big brother of the government and antiquated financial institutions.
For regular investors, however, this principle of ideologically supporting cryptocurrencies is not that appealing. For them and presumably people like you, crypto investment is a practical thing. When it comes to those practical investors, the winning concept is that one that literally wins money. Traders, as mentioned, can win money, but leverage their time, effort, and exposure to constant risks of a bad decision. As a trader, you would have to put in the work and constant effort while you follow the movement of the market. In that case, as I stated, investing means having another job.
HODL is a way around this. Essentially, it includes investing in one or more digital currencies and keeping those assets as long as possible. At the same time, the HODL approach also includes trading occasionally to first get back the investment in fiat and then earn a profit through this process.
It is a means of bridging the two worlds. On one side is the state of having no crypto assets and on the other is having crypto investments but constantly trading with them. HODL stands in the middle of these two. With HODL investment approach, you don’t have to be a crypto evangelist, but you also do not have to be that guy who constantly talks how cryptocurrencies are a scam while he, she or any other pronoun knows nothing about them. It is a way how ordinary people with a bit of (spare) money to invest can get a piece of the crypto action.
At the same time, this approach considers the possibility of you losing everything and throwing away that money as you went to a casino and bet wrong (minus the free drinks and having fun). Yet, the hope is that even if this happens with HODL (which did not happen so far once with any major cryptocurrency) you will not see your life torn to pieces. This investment uses disposable funds and provides the owner with a chance that they will earn several times that in just a year or two. Or maybe five or ten. With HODL, you have to be willing to wait.
But most importantly, it puts that crypto itch you have to bed – it allows you to enter the crypto world and stop thinking about how you’re missing out. If you are reading this, you definitely know what I’m talking about and it is important to recognize it. In the modern world, this psychological component is essential for almost any level of deliberate success (I use the word “deliberate” to signify some process that you were building towards, instead of stumbling into success). With HODL you can finally have that cryptocurrency investment everyone is talking about but without the risk of falling into one of the many foxholes in the crypto domain.
HODL Essentials
HODL works just like it sounds. You buy a particular cryptocurrency and you hold it, not selling when the price changes either way. The reason why you are doing this is to wait and see if the same cryptocurrency will blow up in value as it happened to most of the current big names of the crypto world. Bitcoin is the best-known example, but other digital currencies, mainly Ethereum and its token Ether, went through a similar process, although scaled-down. All of them started by being worth just a couple of dollars or even a lot less than that. This is how a smart HODL $10 investment became a $10,000 one in a couple of years.
Essentially, you are buying an assurance that if the same cryptocurrency somehow ends up being worth a fortune you will have a bit of it you can sell and make a huge profit. Choosing the cryptocurrency you want to invest in is not easy, but forget about picking out a new Bitcoin that is currently worth only cents. Not even huge investment companies can pick a sure winner and during 2017, a lot of those altcoins (a term for new cryptocurrencies that do not have any big tech difference to the current top contenders like Bitcoin and Ethereum) that came out ended up being complete failures – at least as of this moment.
Not all cryptocurrencies of today will become Bitcoin. In fact, the insane majority of altcoins will never see their second or third year. With HODL, the trick is not to bet on the outsider in a race, but on one of the biggest contenders. I would always recommend investing in one of the top 10 cryptocurrencies in the world, either by price or market cap. In fact, I would advise you to limit that list to the top three. It does not matter how little or much you invest, the potential of that cryptocurrency and the end-game profits are all that matter.
The Passive HODL Approach
Keeping your funds and waiting for this to happen can be called the passive HODL approach. For this investment, the mission is completed as soon as you purchase your crypto funds using fiat money and then transfer it to a (relatively) secure digital wallet. After this happens, you only have to figure out what would be your winning point or at what price would you cash out. $1 million sounds like a good position to do that if you hold, for example, 0.1 BTC, which you bought for $1000. But, what if the price rise continues past that one million USD? Maybe the BTC price could reach $1.1 a week later or $1.5 a month after that? Or maybe it could drop to $0.9 million and climb back only after many months if it ever returns at all.
Every passive HODL strategy should have its exit point, a moment when you get back your investment and also make a profit. Remember, any profit is only valid when you actually sell your crypto assets and get that actual fiat funds. It is a stark difference from the hypothetical profit. You might be holding in your digital wallet a cryptocurrency which you bought for X and now you can sell it for 10X. But, as long as the crypto funds are not moved to exchange and traded, this type of profit can only be called a hypothetical one. The problem is that the mentality of following the daily market fluctuations to see how good (or bad) your investment decision was will eventually lead you towards becoming a trader (which is still the thing you want to avoid). That is why every investor, even the hardcore HODL club members have to have a defined exit strategy and a predefined price when they would sell their assets. This is the moment when they turn their hypothetical profit into a practical one.
Anything bigger than the sum you invested (minus the fees for the trade/transaction) is a fair target. As long as you take out more fiat money that you put in, you’re winning at the HODL game, and do not let anyone tell you otherwise. But, imagine yourself cashing out at $1 million, only to see BTC reaching $3 million a year later. You do not have to be very imaginative to see yourself really regretting not sticking a while longer and getting three times the reward you got this way. That’s why there is a better version of the HODL investment process.
The Active HODL Approach
The basis for the Active HODL approach is the same as the passive one, with the difference in the concept of cashing out. While the passive path includes taking out all of the investment at the moment when the predefined threshold of profit has been reached, the other alternative includes a gradual cashout process. Also, unlike the passive approach, it asks that the investor become familiar with the crypto scene once every year or so and re-distribute the profits in both crypto and fiat currency (if there is a profit, of course). Here is how the active HODL should work.
Let’s say you invest $1000 into the one token of the Y cryptocurrency (let’s call it that). You set up the cash-out threshold of your assets reaching the value of $2000. Once that moment arrives, you sell only 50% of your assets, which covers your initial investment – you get $1000 back and still have 0.5 of the Y token.
However, out of the profit of $1000, you take 10% and invest in a completely different cryptocurrency. In this period, you should try to figure out which digital currency would be a good choice for the upcoming period – again, you are not trading in the short term. Instead, you are looking for long-term potential in the sense of the cryptocurrency technology, development plan, chances of widespread adoption, the potential for other uses, and so forth. Let’s say you end up buying 0.1 coin of the Z cryptocurrency for $100. You also set new cashout thresholds for both Z and Y, and the new cycle begins again.
Now, a year later, you check your thresholds for the 0.5 Y and 0.1 Z and go through the same decision process. Sometimes, the thresholds will not be reached by a part of your crypto portfolio (or all of it) – in that case, you wait for another year, not doing anything. If the thresholds for one or the other had been reached, you again take out 50% and use the 10% of the whole profit sum to invest again, while you keep the rest. That way, even if the price of one or more cryptocurrencies goes through a bitcoin-like cycle a decade from your initial purchase, you will make a fiat profit and still keep some investment in the cryptocurrency form. Thanks to that, even if the price of Y cryptocurrency reaches $100.000 in ten years from that moment, you will still have something like 0.005 Y – at that point, the same would amount to $500.
The point of Active HOLD is to combine a range of financial concepts, including stock dividends and portfolio diversification. Some of the investments you make in the subsequent years will certainly be a failure, even to a point that one or more cryptocurrencies you bought using that 10% will completely fail, leaving you with a total loss (even though you should focus on those digital currencies that have first and foremost potential for longevity or the top ten ones). However, the process should still leave you well inside of the profit margin counting both traditional currency payouts and continuous holdings in different still-working cryptocurrencies.
Why Consider the HOLD Option in the First Place?
The Active HODL is all about the long game so you have to be psychologically prepared for this. Naturally, all cryptocurrencies could technically fail or go under, but the chance of that happening is really low as of now. Their prices could drop horrendously, which did frequently happen in the past and will happen in the future, especially when the big waves of regulation on the national level of important countries (US, China, EU nations, South Korea, Japan) hit the crypto market. This will surely happen and the only question is when – whenever it comes, the prices will plummet. As they say, death and taxes are a certainty and right now, governments are trying to figure out how can the second part of this saying reach the crypto markets.
But the government will not kill off the cryptocurrencies and here is why – they physically cannot do this. Even if made completely illegal across the planet, Bitcoin will still work on undisclosed locations in offshore territories. Once BTC might be worth $0.01 at that point, but it will still be around as long as there is a single mining operation supporting it. Right now and for the foreseeable future, Bitcoin, like most top cryptocurrencies, seems simply too big to fail. Unlike many who believe that crypto tokens are made out of thin air, they are actually leveraged by the number of energy miners consume.
That’s the real-world basis of the crypto assets. As long as there are miners active in a cryptocurrency network, it will survive. Currently, the Bitcoin network consumes as much power as the country of Colombia. Crypto assets are based in the real world and they cannot die out overnight.
They can gradually fall through and become next to worthless, but as long as there is at least one mining rig running their code, they will keep going.
In many ways, investing in crypto with a long game in mind demands a mind which can imagine leaving a single digital token to their grandchildren. The same mind can fathom the same token bringing those grandchildren a fortune 50 or 100 years later, even only as a digital antique piece (yes, we will have digital antiques in the future). If you find this too strange or incredibly unlikely, you should not invest in crypto, it is as simple as that. Also, if you are cash strapped, this is not the way you make loads of money – I keep repeating this only because I know how people easily persuade themselves that crypto investment is their way out of their money problems. In 9 out of 10 cases, it will be the complete opposite.
I cannot stress this enough – investing in cryptocurrency should be seen as a luxury of those who have the means to do so. It is incredibly risky in the short term and incredibly unpredictable in the long run. With a HODL approach, you are basically betting that this crypto thing is not going away. You are putting yourself in a position where you inoculate yourself against the Fear of Missing Out or FOMO. This impulse is a lot more dangerous than staying away from crypto altogether. With the FOMO wind behind you, you could find yourself going into debt just to “catch” that latest crypto-train to riches. The same fear brought countless people to a bad financial spot, while at the same time, it helped a tiny minority make big profits. However, the other group of individuals certainly got to the same bad spot sooner or later. As I said, no one stays lucky forever. If the fear of missing out is driving you to act, you will eventually act badly and that is going to be game over for your investment playtime.
HODL is the counterpoint of FOMO. It is the stake to the FOMO vampire and that is why it is so valuable. With a HODL investment, you are definitely in the game. Yet, you play it in a way that will not bankrupt you or have you sitting behind a computer screen for hours a day, praying and watching trading candlesticks go up and down. With it, you are sufficiently in the game to potentially profit from it, but not so deep that you can drown in its murky and unpredictable currents. The game will not end for you overnight. Instead, in the worst-case scenario, it will gradually die away over the years.
Naturally, HODL has its share of flaws and issues, while it does not guarantee anything. The crypto ecosystem is ever-changing and shifting, while at the same time, the movements inside of the markets are often completely unpredictable. No one understands crypto fully so that they can predict the future moments. We’re all figuring it out as it evolves and no one is always right. I have to do the same and tell you that I guarantee with this blog absolutely nothing aside from giving you some information to the best of my knowledge and a few ideas you should take with a bucket of salt. But, the experience of the previous decade of the movements of the crypto market, as well as the logic of a world that is interested in technology shows that HODL is the best out of all uncertain crypto investment strategies out there.
If you decide to use it, I hope you do well. I say this not just because of you, but because of all of us HOLDers out there.
