Genuinely, many cryptocurrency investors have used the HODL strategy because they want to avoid learning about or dealing with the complexities of making the most of their tokens and assets. In this article, we will discuss its meaning, functions within the field of cryptocurrencies, and history in great detail today because it is one of the simplest ways to invest in cryptocurrencies.
List of Contents
What Exactly Is HODL?
HODL is frequently employed by cryptocurrency investors who refuse to sell their cryptocurrency regardless of price fluctuations. When people refuse to sell their coins despite the price decline, this term is utilized more frequently in a bear market. Later, HODL became an acronym for “Hold on for Dear Life” and refers to not selling even during periods of high market volatility and poor performance.
The Background of HODL
The term “HODL” came from a post on the Bitcoin Forum, where investors can discuss Bitcoin and the economy. On December 18, 2013, a forum user known as GameKyuubi posted a message titled “I AM HODLING.” Significantly, “HODLING” is a misspelling of “HOLDING.”
Significantly, 2013 was a monumental year for Bitcoin. The price increased from $15 in January of that year to more than $1,100 at the start of December, representing a return of 7,230%. Due to its high volatility, the price fell by 39% from $716 to $438 in mid-December. The People’s Bank of China’s ban on third-party payment companies working with Bitcoin exchanges may have contributed to the decline. The “I AM HODLING” message is a reaction to the price decline. The author stuffed the post with typos and capital letters to emphasize his confidence in his straightforward holding strategy.
Therefore, the misspelled “HODL” quickly spread throughout the forum and to other digital currencies. Investors in cryptocurrencies use this term to refer to buying and holding assets for an extended period instead of trading frequently. It has been established that the post’s author made the correct decision. Midway through 2017, the price of Bitcoin began to climb again, and by year’s end, it had reached an all-time high of $19,167. Nonetheless, the price fell again following the 2017 increase. It rose again during the COVID-19 pandemic and surpassed $58,000 in early 2021.
What Does HODL Mean in the Context of Cryptocurrency?
Cryptocurrency is a digital currency that operates on a distributed ledger called the blockchain. It is both a store of value and a medium of exchange. Bitcoin, Ethereum, Ripple, etc., are all examples of cryptocurrencies. Since cryptocurrency is not issued by a centralized authority like a national central bank, its primary feature and benefit is decentralization.
The remarkable breakouts in 2017 and 2020 have increased interest in cryptocurrencies as a potential investment. Cryptocurrencies have a chance to expand as the trend toward financial decentralization and digitalization of currency. Many investors have used cryptocurrency as a store of value in the low-interest, inflationary environment that has persisted since COVID.
The term “HODLING” is slang for the buy-and-hold investment strategy. Long-term value appreciation is the primary goal of buy-and-hold investors, who typically hold assets for several years or longer. On the other hand, traders are constantly making and taking positions in the hopes of profiting from price differentials.
Cryptocurrencies’ extreme volatility makes them a fantastic asset for traders looking to build long and short positions. Still, “HODLING” can be a more secure investment strategy because it protects traders from the double-whammy of buying high and selling low by removing them from the market entirely for the short term.
Due to their extreme volatility, cryptocurrencies offer frequent opportunities for traders to establish long and short positions. However, “HODLING” can provide investors with greater security because they are not exposed to short-term volatility and can avoid the risk of purchasing at a high price and selling at a low price.
Strategy of HODL
As mentioned before, HODL is a cryptocurrency strategy in which traders hold on for dear life. This implies that a trader must refrain from selling the cryptocurrency token even during periods of extreme price volatility. This strategy can be effective for investors who would otherwise try to time the market. The reason is because HODL can be used when the market is falling to help investors resist the urge to sell in a panic. This is also a highly intelligent and effective strategy for novice cryptocurrency investors or investors prone to emotion and frequent rash decisions.
3 Reasons to HODL
There are numerous reasons why the HODL strategy can be advantageous for cryptocurrency assets.
It can pass the wealth from generation to generation.
The wealth you amass from holding cryptocurrency may be passed down through the generations, providing financial security for your family members. Because of this, many members of the millennial generation are hodling. According to a CNBC Millionaire Survey, nearly half of all millionaires have at least 25% of their wealth in cryptocurrencies. The data reveal a new generational split in crypto wealth creation, with younger investors able to amass large fortunes from the price boom of Bitcoin, Ethereum, and other digital currencies. This means that your family’s future generations can employ your HODL portfolio.
It can help you to generate long-term profits.
Typically, the leading cryptocurrency tokens have produced long-term profits. Everyone who purchased BTC during their developing stage is currently reaping enormous rewards. Surprisingly, many will likely continue to hold the tokens and capitalize on their future rise. The technique of holding tokens for at least a year for long-term profits. Some may even recommend HODLing until you need to remove the assets for specific, more critical purposes.
Cryptocurrency HODLing Can Be Used Against Inflation.
Cryptocurrencies are gaining popularity, particularly among investors who fear inflation. This is because many investors view cryptocurrencies as a superior hedge against inflation compared to gold. HODLing cryptocurrencies may result in the value being maintained much more stable than many fiat currency alternatives. As a result, holding cryptocurrencies, particularly Bitcoin, which has a very limited supply and a known inflation schedule that decreases over time, maybe a prudent choice.
Risks of Cryptocurrency HODLING
Despite the recent high rate of return and the reasons mentioned above to invest, investors must also consider the risks associated with holding cryptocurrencies. As we know, cryptocurrency prices are highly volatile. Investors may experience extreme fluctuations in the value of their assets, necessitating a much higher risk tolerance than investors of conventional investment instruments. They must have sufficient capital capacity to prevent forced sales and satisfy unanticipated liquidity needs.
Moreover, with a brief history compared to other types of assets and fiat currencies, the future of cryptocurrencies is uncertain. The policy regarding cryptocurrency is not well-defined. Without centralized oversight, cryptocurrencies can be used for fraudulent activities such as money laundering and illegal transactions.
Various nations and political parties hold divergent views regarding the use of cryptocurrencies. It can hinder cryptocurrencies’ ability to support international transactions, lowering their value. The asset’s long-term value may be negatively impacted by unfavorable policymaking and public opinion.
Conclusion
To sum up, it is critical to note that debating whether or not a HODL strategy is worthwhile when investing in cryptocurrency is not the same as debating whether or not to invest in cryptocurrency. Cryptocurrency is still in a growing stage and is not governed in the same way that traditional investing is. This may expose investors to additional risk. Thus, before investing in cryptocurrency, as with any other investment, ensure you understand it.
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