Hodling 101: Risky Strategy Based on Calm
Posted on 02-26-2020.
This is an article written for general educational purposes. It is not investment advice and shall not be construed as such.
Back in 2013, user GameKyuubi created a thread called I AM HODLING. The forum users took a liking to the typo and thus the name for a fundamental investment strategy was born.
To hodl means to adhere to a strategy of buying and holding assets. In the crypto-community, long-term investors are referred to as hodlers, and the investment itself a hodl.
In this feature, forklog.media will take a look at why hodling may be profitable.
Trading vs Hodling
In the long term, the market is growing. Of course, it’s not a linear process. It always includes crises and stagnation periods.
Dow-Jones Industrial Average has increased 510-fold since 1915. Source: Tradingview
Traders make predictions by buying assets that they expect to become more valuable. Sometimes they are wrong and the assets cheapen.
Deprecation does not necessarily put an end to a bull market. Still, traders may panic and close their positions at a loss.
Unlike them, holders do not make predictions. They believe the market will grow to a new maximum. They just buy an asset and then hold it until it brings a profit. Or becomes a total piece of junk with no future.
Below is the BTC price chart for January 2020. Green arrows point at major buys. Trader believed the market would grow and kept buying Bitcoin. Red arrows point at panic sales. Trading as the arrows suggest would have brought a 14% profit.
Possible points for buying and selling. Source: Tradingview
Still, if someone just HEDL the coins without trading from January 1 to January 31, they would have closed the month with a 30% profit.
Entry and exit points for hodling. Source: Tradingview
Hodling Before Bitcoin
Hodling existed well before cryptocurrencies. It brought profit to experienced investors, rookies, and even circus monkeys. Like, for real.
The first self-taught hodler was described by an experienced trader Jesse Livermore in his How to Trade In Stocks (1940). The hodler lived as a hermit in the mountains of California. We visited an exchange three times a year, bought something, and always won. He said to Livermore that he would have gone bankrupt had he been confused by minor market movements adding that the real movements never end on the day they started.
In fairness, the author of the book shot himself just a year after its publishing. Moreover, his son took his own life thirty-five years later. And his grandson also followed that sad example. His granddaughter, on the other hand, became a porn actress.
The moral of this story is that whoever offers you investment advice, always remain cautious and proceed at your own risk.
Jim Rogers is an American investor and the co-founder of Quantum hedge fund together with George Soros. They have managed to trade for ten years without losses.
His favorite strategy was to buy stocks during a flat and keep them for several years. Thus, in 1982 he found out that West German companies save money instead of expanding due to high taxes.
Rogers concluded that sooner or later the authorities will cut down the taxes, which would prompt the production rate and drive the stocks’ price upwards. He bought their stocks, HEDL them for four years, and got a $3 million profit as a result.
Jim Rogers’ four years of hodling. Source: Tradingview
In 2008, Finance, a Russian magazine, held an experiment with a local circus monkey named Lukeria. They gave her thirty cubes with the names of Russian publicly traded companies written on them. She chose eight cubes. In their imagination, the experiment-runners invested make-believe $40,000 in the shares of those companies.
By 2009, the monkey’s portfolio gained 194% while the Moscow Stock Exchange’s index rose by 107%. During her imaginary hodling, Lukeria earned hypothetical $77,600. Not so bad for monkey business.
Cryptocurrency may appreciate or depreciate to a significant degree during a year. This is the way patient newbies and bitcoin whales make their fortunes.
In 2009, Kristoffer Koch from Norway bought 5,000 BTC as an experiment for $27 and forgot about it for four years. In 2013, Bitcoin was worth $259 and the media started covering it. Koch heard something familiar and found keys to his wallet.
The same year, Koch sold his bitcoins for $177 and got $877,000 of profit. Still, had he waited for a few more years, the profit would have been even greater. Today his 5,000 BTC are worth around $45 million.
One hundred ‘fat’ bitcoin addresses have not withdrawn money for five years. Together, they keep 592,000 BTC, which is around $6 billion at the time of writing. The wallets, however, are not abandoned. Their owners topped up their addresses after the bull rally of 2019. Back then, Bitcoin quadrupled its price in the course of three months.
Three Life Hacks for Hodlers
The secret of successful hodling is the ability to wait. Just forget about the market and ignore its fluctuations.
Volume Down the Market Noise
Select a period of one month or one week on a chart and then convert it to Heiken Ashi candles. This tool mitigates market fluctuations to show the general trend. Thus you won’t be panicking because of minor downs.
Heiken Ashi (top) and candlestick charts for BTC. Source: Tradingview
Don’t Use the Money You Cannot Afford to Lose
Any investment, including hodling, is a serious financial risk. Never ever should you invest a lot in cryptocurrency unless you can afford to lose than much.
Have a Goal
Promise yourself you’ll be hodling for a month or a year. This may help you wait for the profit (if any).
Traders tend to lose money due to human errors and anxiety. Hodling may help fence against the emotions and increase the chance of making a profit.
Hodling does not require any special skills but calm and patience.
Remember that hodl, trading, and investment are risky. No strategy can offer a 100% guarantee of profit.
Written by Pavlo Skoroplyas
Translated and edited by Jenny Aysgarth
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