There are a lot of options when it comes to investing in cryptocurrency, with the option of HODL cryptocurrency being commonly recommended. In fact, some people argue that this is the best strategy when trading crypto. Take a closer look at the HODL definition and risks, then learn why it is not the best option for your crypto.
What Is HODL?
The HODL definition is pretty straightforward. If someone says they HODL cryptocurrency, they mean that they hold onto it. In practice, that means buying crypto and just holding onto it for a long time without selling it. The idea behind HODL crypto is that you don’t impulsively trade it. This includes both when it falls dramatically and when it rises dramatically.
How to HODL Crypto
If you want to HODL cryptocurrency, you just buy it and place it in a wallet, then leave it there. You don’t need to do anything else.
Why Is HODL a Good Strategy for Long-term Investment?
The biggest reason that the strategy to HODL crypto is so popular is the volatility of cryptocurrency. If you HODL cryptocurrency, you won’t sell it, even if the market changes. Therefore, you won’t lose a significant amount of money if the price drops, as it will likely go back up.
If enough people HODL crypto, it could also theoretically reduce its volatility.
Confidence in the Future of Crypto
The reason that HODL cryptocurrency is popular is the belief that cryptocurrency will continue to increase in price in the future. People who are confident in its real-world applications and future adoption believe the price will rise over time. This should make HODLing a smart strategy.
Minimal Effort
Another good reason to consider HODLing is the lack of effort required. As mentioned, you just buy your crypto, put it in a wallet, and leave it. You don’t have to learn technical analysis or spend time doing it like you would with day trading.
What Are the Risks of HODL?
The biggest risk when you HODL cryptocurrency is that the cryptocurrency will become worthless or simply drop in value significantly. This may happen due to changes in regulation or public perception. Or, in the case of smaller coins, it may simply be because the idea was not good enough or there was too much competition. Because of this risk, it is smart to at least pay a minimum amount of attention to any crypto you HODL.
There’s also the risk that you won’t be able to deal with the volatility of the crypto. You may feel tempted to sell it at a loss if it drops and you are worried it will continue doing so. Then, if it goes back up, you would have lost your investment for no reason.
Unrealized Potential
There’s also the fact that if you HODL cryptocurrency, you are not making the most of it. You could, for example, day trade it and have greater potential profits, but there would also be higher potential risks.
Even if you compare HODLing to other options, there’s the fact that you would not earn interest on it. After all, crypto wallets don’t give you interest. If you want to keep the crypto for the long term, there are other options that could let you do so and earn interest. These include lending or crypto savings accounts.
If the value of the crypto increases as you expect it to, then not only will each crypto be worth more, but you also will have more of them. If something happens and the value drops, you will at least have more of the cryptocurrency to make up for any drop.
HODL Vs. Day Trading
The biggest difference between day trading and choosing to HODL cryptocurrency is the length of your strategy.
This leads to other consequences as well. For example, if you day trade, you need to watch the market carefully to find opportunities and know when to buy and sell. By contrast, if you HODL crypto, you can just leave it in your wallet and ignore the market.
Risks Vs. Rewards
There is also some element of a trade-off with risks versus rewards with both day trading and HODLing, although you can’t know for sure what will happen in the future. Day trading has the potential for high profits, but it is incredibly risky, and you can also easily lose everything with a poor investment.
Of course, you could also lose everything if you HODL a crypto and don’t pay attention to the market at all. For this to happen, however, it would have to fail. HODLing without watching the market makes more sense for larger cryptos, such as Bitcoin or Ethereum. If you choose to HODL a smaller crypto, on the other hand, you will want to at least pay some attention. That way, you can see if it seems like it will fail and sell to at least retain some of your investment.
Overall, day trading looks for short-term rewards, while HODLing aims for long-term rewards.
Disclaimer: This article is for informational purposes only and all opinions belong to the author alone. Nothing here constitutes professional investment advice. Please do your own thorough research before making any investment decisions.