What is Crypto Holding? HODL Investing Explained

Crypto holding, or ‘HODLing’ as it’s commonly known, refers to long-term investing. It means holding cryptocurrencies for an extended period — several months or years, ignoring short-term volatility. HODLing, paired with a dollar-cost averaging framework, is often the best strategy to maximize returns.

Read on, we provide a more comprehensive answer to the question; What is Crypto Holding? Learn everything there is to know about this strategy, and whether it’s right for your crypto goals.

What Does HODL Mean in Crypto?

In a nutshell, HODL is a slang word used to mean ‘hold’. Put otherwise, it means holding the invested cryptocurrencies over the long-term horizon. This typically translates to several months or years, depending on the investor’s goals and risk tolerance.

Those HODLing typically invest in a digital asset based on the fundamentals rather than recent price action. A simple example is Bitcoin. Those who believe in Bitcoin’s long-term future and use cases aren’t interested in recent trends in the cryptocurrency market.

Instead, they’re happy to hold their position regardless of broader market sentiment. This is in contrast to a short-term investment strategy, such as scalping or day trading.

Short-term traders might buy Bitcoin because a key technical indicator has been triggered, such as the 200-day average passing the 50-day average. However, that same investor might offload Bitcoin when it meets key resistance, such as a 5% correction.

A long-term HODLer might do the opposite, meaning they’ll buy more Bitcoin when its price declines. It’s important to note that HODL is used during bearish and bullish markets.

For instance, suppose you’re holding one of the best meme coins, which has increased by 700% in the past week. Investors might tell their fellow holders to HODL, ensuring the strong price momentum isn’t interrupted.

Why Should You Hold Crypto?

We’ve now answered the question; What is Crypto Holding? Next, let’s explore why HODLing is preferred by many crypto investors.

Timing the Market vs. Time in the Market

“It’s not about timing the market, but about time in the market”. This concept has been used in the traditional stock markets since the age of time. The same applies to cryptocurrencies. Put simply, it means that being in the market long-term will always produce better results than attempting to time the market.

Sure, it would be great to buy cryptocurrencies when they’re trading at 52-week lows and immediately sell when they record 52-week highs. However, even the most experienced investors are unable to time the market with any certainty.

Especially in the speculative and volatile crypto markets. After all, nobody can predict where the markets will move tomorrow, let alone in the next few weeks or months. Instead, the most successful investors HODL, ignoring short-term price action and trends.

Let’s look at an example to illustrate the point:

HODLing also comes into play during rising markets.

For example:

However, as we explain in more detail later, HODLing doesn’t always work out. There is no guarantee that prices will recover if you’re holding virtual currencies during a downward market. What’s more, you could lose some or even all of your gains by holding too long during a bullish trend.

Crypto Holding vs. Crypto Trading

Crypto ‘holding’ and ‘trading’ refer to opposing investing strategies. In most cases, holding means investing long-term, typically for months or years. The investment thesis is almost exclusively based on the fundamentals. This means the project offers a solid use case, so it has the potential for long-term growth.

Here are some examples of projects that are popular with HODLers:

• Ethereum is the largest blockchain by market capitalization after Bitcoin. Ethereum offers a decentralized framework for developers, enabling them to build on top of its blockchain via smart contracts.
• Uniswap is one of the original decentralized crypto exchanges on Ethereum. It enables traders to buy and sell crypto assets without centralized intermediaries or order books. Uniswap relies on liquidity pools and an automated market maker (AMM) system.
• Polygon is a layer-2 solution for the Ethereum ecosystem. It ensures increased demand doesn’t impact performance, with transactions handled via a side-chain. This provides Ethereum-based projects with lower fees and increased scalability.

Crucially, those HODLing quality projects, such as those listed above, aren’t concerned about near-term trends. They’re happy to hold and believe in the long-term prospects of the project.

Conversely, trading takes a much shorter-term approach. This can include strategies like scalping, which usually holds onto crypto positions for several minutes. Day trading is another strategy, where trades are opened and closed over several hours.

An even more popular strategy is swing trading. This involves holding cryptocurrencies during upward trends, often for days or weeks. The swing trader aims to exit the position near the trend’s peak. However, this is easier said than done.

Pros and Cons of Holding Crypto

This section discusses the benefits and drawbacks of HODLing digital currency.

Avoid Trying to Time the Market

As per veteran stock investor Warren Buffet; “market timing is both impossible and stupid“. This sentiment is amplified in the crypto markets, considering they’re overly speculative and volatile. Crucially, not even the most seasoned crypto trader can predict a sentiment swing.

Therefore, one of the key benefits of HODLing is it removes the need to time the market. This is particularly important for beginners with limited experience in the industry. Instead, it’s just a case of buying and holding cryptocurrencies that align with the investor’s goals and risk tolerance.

Maximize Investment Gains

In many cases, long-term HODLers will generate the biggest investment gains. This has been proven time and time again when investing in Bitcoin. Sure, Bitcoin has gone through many market cycles, with bearish trends often shedding over 70% from its previous all-time high.

However, those HODLing Bitcoin during extended volatile periods have witnessed substantial success. For example, consider Bitcoin investors who bought Bitcoin in Q1 2020 when it was trading at $10,000. Bitcoin declined by 50% in a matter of days when COVID-19 was declared a pandemic.

An experienced Bitcoin investor would have HODLed, while beginners might have been tempted to sell at a loss. Bitcoin has since hit all-time highs of about $74,000, representing growth of 640%. Ultimately, HODLing enables the chosen cryptocurrencies sufficient time to reach their full potential.

Highly Suitable for Dollar-Cost Averaging

HODLing and dollar-cost averaging go hand-in-hand. This involves a buy-and-hold strategy while investing frequently at specific intervals and amounts — no matter what short-term trends are occurring.

The idea is to average the cost basis out over time. So, you get to buy the best cryptocurrencies at a discount when they’re on a downward trend. And, when prices are bullish, the overall portfolio benefits. In many cases, long-term HODLers look forward to bearish cycles.

They enable investors to buy their preferred cryptocurrencies at a much lower price. This is why dollar-cost averaging is so popular.

Avoid Emotional Trading

Emotions are one of the biggest threats to inexperienced investors. Especially those entering the crypto markets for the first time. For instance, consider a first-time investor who buys a meme coin. That meme coin drops by 10% in the next 24 hours. Bitcoin drops by 3% over the same period.

A seasoned investor would know that this volatility is normal in the crypto space. However, an inexperienced investor might not be able to handle the emotions of rapid price swings. As such, they might mistakenly sell the meme coin, only to find it explodes by 50% a few days later.

HODLing removes these emotions, considering that cryptocurrencies are held for long-term value appreciation irrespective of short-term volatility.

You should also make sure that you have enough resources that you aren’t forced to sell your holdings when faced with unexpected liquidity needs. Planning is needed for this long-term strategy.

Mistakenly Expecting Prices to Recover

HODLing isn’t a surefire way to make money. On the contrary, there are no guarantees you’ll see investment gains just because you’re in the market long-term. This is even the case with established large caps.

XRP is just one example. Many cryptocurrencies have performed well during specific bull rallies only to lose a large chunk of their value and fail to recover during future bull markets.

Failing to Lock In Gains 

Another drawback of HOLDing is that you could fail to lock in investment gains. Some cryptocurrencies go through extended rallies, peak, and begin an indefinite downward trajectory.

This means you can end up losing money when you were initially at a profit.

• For example, Decentraland went on an unprecedented run during the last bull market.
• Those investing in July 2020 would have paid just $0.037.
• Decentraland hit highs of $5.90 in November 2021.
• Selling at the peak would have converted to gains of almost 16,000%.
• However, let’s say you decided to HODL.
• Today, Decentraland trades at $0.32 – 95% below its all-time high.

This is why having an exit strategy is so important. It’s important to regularly lock in gains during bullish trends. This ensures you still make money if the project eventually fails.

Conclusion

You should now have a clear picture of what crypto holding is This strategy is best suited for long-investors preferring cryptocurrencies with solid use cases. It removes the guesswork on crypto market trends and sentiment and enables projects to reach their full potential.

However, HODLing can also mean missing out on short-term trading opportunities. What’s more, never assume that prices will recover just because you’re in the market long-term.

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