We all know that cryptocurrencies are highly volatile.
But there is a strategy we can use to limit the downside while gaining upside exposure to cryptocurrency, and it’s called HODLing.
What is HODLing?
HODLing means maintaining your position in a particular cryptocurrency for a long time, generally speaking.
There are other variations on this, such as Dollar Cost Averaging. You set up an automated recurring payment into the market for x number of dollars per period [say $100/month] to buy bitcoins using fiat.
The main thing to note about HODLing is that you must go against human instinct, saying, “buy low and sell high!”. Instead, it would help if you did the opposite, “Buy high and (maybe) sell higher!” or “Don’t sell!”
This means buying into dips because logic tells us that this would be the best time to buy before a rebound which will send prices up again.
However, this doesn’t mean buying blindly without doing research; you need to know why it’s currently undervalued (because everyone else thinks the price will drop) for you to determine if it’s likely to rebound soon or not.
How can you apply this knowledge to your cryptocurrency investments?
HODLing is one of the few ways to get significant exposure to cryptocurrency while mitigating risk. Instead of having 100% of your funds exposed (like when you day trade), you will be reducing your exposure by 50%.
This makes it an excellent strategy for most people who don’t have experience with technical analysis and want to limit their downside while still gaining some exposure to the cryptocurrency market. Of course, even HODLing has its risks and downsides, notably that during a downtrend, prices could drop massively, and you could lose50% of your funds if you HODL.
Let’s take a look at some commonly asked questions and their answers.
Can I buy and sell whenever I feel like it?
Yes, and many people do precisely that with their investments in cryptocurrencies; they hold no coins but enter/exit positions frequently.
Though, there are some things to consider; selling during a dip is fine. However, make sure you invest what you’re willing to lose because cryptocurrency is exceptionally volatile (meaning prices could drop by 50% tomorrow).
It’s possible to lose all your money if you try to pick the bottom [when markets rebound after a significant price drop. You could also miss out on significant gains, so be careful and always do your research before deciding to enter or exit a position.
How much money should I tie up in this strategy?
This is up to you. There is no right or wrong answer here; some use 50% of their investable funds while others use 100%.
The more money you’re willing to risk, the more exposure you can get, but keep in mind that if prices drop as they did during the first half of 2018 (where we went from ~20k USD to 6k), then even 100% will not be enough [to guarantee profits].
Tips: While the example used above references bitcoin, this strategy can also be applied to ethereum, litecoin and the vast majority of the top 100 market cap cryptos out there.
You can also HODL altcoins such as ripple, monero and neo buy only buying them when they dip, so you get a discount. Remember, always do your research before investing!
The key advantages over time by implementing the HODL strategy can be found below:
Avoiding transaction fees
Individual cryptocurrencies set transaction fees; these fees reward miners who maintain the blockchain.
Higher transaction fees encourage miners to prioritize transactions, which means that users can have their transactions processed in a more timely fashion.
Capital gains tax
In the US, these are defined as “any type of profit from an activity classified as being for-profit – whether you buy and sell cryptocurrency or not – is subject to taxation.”
If you aren’t HODLing your crypto, this could be a considerable issue come tax season.
Diversification by holding multiple cryptocurrencies
Diversifying across many different coins allows investors to ensure they don’t hold too much risk on any single coin.
For those who already hold Bitcoin, diversification can also result in lower overall risk exposure (exposure to price fluctuations) and higher overall returns.