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Last updated  :  | By Wojtek

Phenomenon of HODL – how to improve most popular trading strategy.

 

If you are cryptocurrency trader, you most probably have heard word HODL. Well, it used to be a word or more precisely call to not to sell any coins. Nowadays, HODL became trading strategy and those who use that strategy are Hodlers. Although financial market is very large and you can trade virtually everything, most Hodlers are crypto traders. Why is it that this strategy is so popular among cryptocurrency fans?

To understand this phenomenon, we have to go back to 2010 when a guy called Jeremy Sturdivant sold two pizzas for 10000 BTC. Back then, in May 2010,  10000 Bitcoins were worth $41. Crypto market in a today’s form didn’t exist in 2010. People made trading through internet forums where they had to agree on value of Bitcoin. Yahoo Finance BTC historical price goes as far as September 2014, which was around $400. TradingView is similar – earliest available price is from December 2014. In 2010 no-one even dreamt that Bitcoin will be worth over $1. Going back to Jeremy Sturdivant and his 10000 BTC, we can slowly see why HODL strategy is so strong. If pizza guy would keep his crypto he would turn his $41 in to $320,000,000 (as on 14/07/2021). IF he would HOLD his BTC…

To visualise price difference between common asset, like Apple stock and BTC, let’s look at the chart below.
From 2010 till today Apple stock price barely lift off from 0. To be more specific it went from $9 to $144 while BTC went from $0.004 to $32000 (as on 14/07/2021). The difference is astronomical.

HOLD - btc vs apple

HODL as a trading plan.

When you realize that the only thing which you have to do to make that gigantic profit is HOLD, you know becoming rich is as simple as 1-2-3. Anyone can HOLD; HODL I easy; HODL doesn’t require any special knowledge or qualification. When you are HOLDing, you know you are becoming rich almost effortlessly. Suddenly you realising that all those stories about overnight fortune are true because you are one of that stories. Or maybe not?

As much as I would love to believe that HODL is a great trading strategy which will make you tons of money, I have to say I disagree. Let me explain why I think HOLD is a recipe for disaster.

The easiest part of trading in financial market is opening a position. You can do it anytime as long as you have money to spend and internet access. One press of the BUY button and job done, you have just become HOLDER. Now you have to hold and watch your investment growing. If it happened, you entered at a good moment you soon see more and more money on your trading account. Ok, so where is the bad part of holding? Well, the bad part is to close your position and walk away with profit.

Most of crypto traders are people without specific or complex trading plan. They usually know about trading as much as people they follow on Twitter, Reddit, Facebook or YouTube. They open position when everyone is shouting Buy The Dip and never sell because everybody is screaming HODL HODL. Only after they miss the top and find themselves in another bottom, they can’t sell because they lost most or all the profit they made. Usually they HODL for so long they losing initial investment and walk away with nothing but pain and humiliation.

Becoming HODLer is like placing yourself among an ever-growing group of people, which are opening Long position every day and want to close it once money is doubled or tripled. This creates situations where people who entered market a month ago can’t leave it because people which entered week ago or yesterday screaming and shouting HOLD HOLD. They are convincing other members of the group to not to liquidate position because price will go higher.

HODL vicious circle.

How it works :
–  You enter position when HODLERS are shouting Buy Buy.
– Once you’re in You shout HOLD HOLD because price goes up.
– When you are at the top HODLERS are shouting HOLD HOLD expecting the price to go higher.
– Market is crashing HODLERS are shouting HOLD HOLD believing that they are controlling the price of crypto and as long as they don’t sell, price can not drop.
– Then comes the dip so HODLERS are screaming BUY THE DIP.

At this point, most of them (holders) already lost all profit and often lost part of initial investment. Now there is nothing else to do but start the cycle again.

HODL strategy infographic

Improving trading strategy.

Holding strategy is missing one important stage- SELL. There are no Holders which are brave enough to close position and enjoy profit. Holders believe in never ending price rise but what’s worth noting is the fact that there were never financial assets which didn’t stop growing in value.

So how can you improve most popular trading strategy? There are two points which you should add to your trading plan:

1 – close your position once you made sufficient profit

2 – close your position once you lose too much of your initial investment

 

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