HODL: What The Best Crypto-Trading Strategy Should Look Like

Written by alexlash | Published 2018/10/11
Tech Story Tags: bitcoin | crypto-trading | hodl | cryptocurrency | cryptocurrency-investment

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“The stock market is a device for transferring money from the impatient to the patient” — Warren Buffett

The cryptocurrency market is known for its volatility. More often than not, it has become a source of complaint. The double- or even triple-digit increase or decline in value of crypto coins within a fluctuating 24-hour period can often give crypto-traders dramatic and sudden losses or profits. Even Bitcoin, Ripple, Ethereum and other crypto stalwarts have suffered from volatility issues over the past few months.

In 2017, the performance of these coins continued to gather momentum and more people invested in the market. The prices of these coins and other digital currencies have dipped numerous times in the past few months, yet the market value has continued to grow. The three most popular cryptocurrencies have made huge gains in this period of technological evolution. Ripple and Ethereum have continued to gain value at a rate of more than 40 times within months.

So, what does the best crypto strategy look like in late 2018?

Crypto-investing: two perspectives

The price of many cryptos, together with their technological potential, has led to the development of two major perspectives when it comes to crypto-trading. There are those traders and investors, on one hand, who believe that cryptos are very profitable and powerful instruments of trading. These people see volatility, realistically both the downside and upside, as a chance to gain more profits. Most people in this category are ready to quickly liquidate their positions if the value of cryptos is going against them, and they are willing to limit their losses or protect their profits when they re-enter the crypto-trading environment.

The most popular trading strategy amongst most crypto traders and blockchain enthusiasts is HODL, an acronym for “Hold on for Dear Life.” These are the investors and traders who are ready to keep crypto coins for an indefinite period, irrespective of the price or current price fluctuations. It must be noted, however, that the recent dip in the value of most coins, especially Bitcoin from $20,000 to about $6,450 within weeks, led a lot of HODLers to doubt that this is the best crypto-trading strategy.

Understanding the strategy of Crypto-trading

Investors are interested in cryptocurrency trading for many reasons. Some people are less sensitive to the underlying assets of the crypto coin itself as they are mostly attracted by the excitement of trading with high volatility which characterizes the crypto market. Some are inspired by the potentials of blockchain technology. Regardless of the reasons for investing in cryptocurrencies it suffices to say that no one invests in crypto with the aim of losing money. Whether you invest your life savings with the aim of never having to work again or you want to invest your pocket change to test trading strategies, the fact is you intend to increase the value of your investment. As mentioned earlier, the two trading approaches originate from the simple course of “buying and holding”…but what are the underlying approaches to each strategy?

One of the most popular phrases in the traditional investment landscape is “slow dime or fast nickel.” Slow dime refers to the approach of making a lot of money over a long-term period rather than small profits right away. It is safe to say that most crypto-traders are attracted to the crypto sphere as a result of its potential for a “fast nickel.” Fortunately, many newcomers in the industry got lucky (particularly those that invested in late October to mid-December). However, many were disappointed — especially those who invested when Bitcoin was priced at $20,000, only to see it crash.

The underlying rationale is that cryptocurrencies are especially seductive and fascinating to most traders who seek quick gains as a result of its unpredictable ups and downs. The high volatility involved makes keeping any profits a challenge. In addition, the cryptocurrency economy has a fascinating history of unpredictability which doesn’t necessarily relate to the fundamentals of a traditional technical analysis. According to Cointelegraph, the prices of Bitcoin do not follow the same price path of standard currency markets. Therefore, one may miss the target of lows and highs which might result in losing a huge amount of funds predicting the wrong events of the market.

HODL — the best crypto-trading strategy

Created in 2013, the term HODL was used in a Bitcoin chat forum by a crypto enthusiast who was touched by a dip in the price of Bitcoin but decided not to sell it. He mistakenly wrote “I am HODLing” instead of “HOLDing.” The misspelling caught the attention of the general Bitcoin community but eventually worked backward. It has now been turned into a general acronym used for ‘Hold On for Dear Life’. This is indeed true of the recent volatility of the cryptosphere. It is an indicator of the whole crypto insanity and the mainstream investment community.

At the time the phrase HODL was coined, the price of Bitcoin dipped 24.7% as part of the 46% slide that occurred from mid-December to early January. This type of price movement is one of the reasons why people might panic. To those investors who believe in the disruptive power of blockchain and consequently, cryptocurrencies, HODL is the best trading strategy since there would be long-term benefits from holding the coin which would lead to the general acceptance of cryptocurrency. Even with the increasing awareness about cryptos, some people (especially in Africa and Latin America) are yet to embrace cryptos over the traditional trading medium. However, people who believe in the revolutionary potentials of the technology of Blockchain still believe that the value of cryptos will increase over the course of many years.

The past performance of an asset does not guarantee its future success. There is no way to be sure about the direction of its prices. Most of the approaches adopted in the traditional trading system only seek to increase the likelihood of success by considering several factors including complex mathematical analyses and public opinion. Overall, they all depend on historical data to arrive at a good decision with diverse sets of success. Over a period of years, when we analyze the historical price of cryptos, there are several dips and peaks, but the prices have been generally upward.

The buying and holding strategy are not complex; it is exactly what you think it is. Regardless of the market, you are buying and holding cryptos to maintain an investment. Following this approach, the trader will be looking at a long-term return and will ignore short- and medium-term market movements.

There are crypto investors and traders who never shake despite the “bleeding” in the markets but later win. An excellent example is those people who kept their investment amidst the 2013 Bitcoin incident. It means that HODLing has led them to an amazing investment decision. They are now celebrating as they have garnered a huge financial reward.

Knowing what to HODL is key

Anyone who understands the science of investment is aware of the secret to making any portfolio of investment work over the long term; the rule is to simply diversify. Smart investors and traders have always understood the fact that diversification is necessary for long-term business goals. This also holds true for cryptocurrencies, especially with the emergence of the modern blockchain-driven asset class. When you invest in multiple cryptos with multiple levels of risk associated with each, you are trying to immunize your portfolio to adverse movements in the market. In essence, maximizing your return while minimizing risk. In addition, diversifying your crypto portfolio increases the likelihood of getting a better return-on-investment, and you can rebalance your portfolio to reflect your target returns and business goals.

Unfortunately, a lot of people — including the self-acclaimed, experienced crypto investors — do not understand the application of portfolio diversification in crypto, or how it even works. There are still other crypto holders, at the other end of the spectrum, for whom Ethereum or Bitcoin is the first investment they made. To these traders, especially the newcomers in the industry, it is too easy for them to be caught up in cultish devotion, FUD, and the hype of some coins.

In simple words, diversifying your crypto portfolio involves putting your coins in several places to reduce risk. By allocating your coins across different portfolios, you spread the risk, so that if one coin dips, you won’t lose all your investments at once. The fragmentation of several exchanges with complicated user interfaces and a general lack of proper information on a particular coin are some of the reasons why people are still struggling with the diversification of their crypto portfolio.

How to diversify a crypto portfolio

Despite the past success of the HODL approach to crypto trading, nowadays it is becoming harder and harder to make a profit just by investing in a single asset and sitting on it. There were a handful of cryptocurrencies back in 2013, and now there are almost 2000. Not all of these 2000 are good options for investing your savings.

To maximize your chances, you should invest in a portfolio of crypto assets. Diversification is the key to success but how do you successfully identify promising assets amongst the thousands of altcoins? On fiat exchanges, these problems are partially solved by tools like ETFs or market indices such as NASDAQ Composite, S&P 500 and others. Until recently there was no such tool for the cryptocurrency market, but things have changed thanks to the Cryptoindex project.

It is an informational tool that provides investors with an AI-driven analytical snapshot of the world’s 100 best-performing cryptographic currencies. The CIX100 is automatically computed by a sophisticated algorithm called ‘Zorax’ which filters out speculative transactions and “over-hyped” coins and instead analyzes sentimental data to determine the most promising coins. The result: Cryptoindex has shown the potential to outperform the market, as well as Bitcoin, by up to 70%.


Written by alexlash | journalist, tech entrepreneur
Published by HackerNoon on 2018/10/11