Is it Better to Trade Cryptocurrency of to HODL?
Those brand new to cryptocurrency investing are often better off averaging into a position and holding rather than trading. However, each tactic has its perks and pitfalls.
We discuss the perks, pitfalls, and strategies of trading vs. HODling and offer some opinions and insights.
What is HODL? Its a purposeful misspelling of “hold” that implies holding on for dear life through crypto’s ups and downs. It is solid advice, but it is also much harder to pull off correctly that the memes imply (as HOLDing through 80% corrections takes a level of grit most people don’t have… and 80% corrections are common in crypto).
TIP: Want to learn more about what strategies you need to trade successfully? Check out this page on trading.
Trading Vs. HODling Cryptocurrency
New investors generally tend to do one of two things when they first get into cryptocurrency.
- Buy and hold (HODL) cryptocurrency.
- Or, trade cryptocurrency and try to grow their dollars or coins.
Of those two, the general wisdom of the internet is that HODL is a better strategy for new traders. There is logic in that statement, but more-so both of these strategies are a little dangerous for new traders if executed improperly.
The main two problems being:
- HODLers tend to HODL to the top and then back down again (i.e. they tend not to take profits).
- Most people aren’t great traders. Especially when it comes to the insanely difficult to navigate and volatile cryptocurrency market.
With that in mind, let’s go over each strategy to get a sense of what one has over the other, how they can compliment each other, and how either can be deployed in isolation successfully as long as we sprinkle in a dash of nuance so we aren’t just holding into the ground or eroding our portfolio with mistimed trades.
Too long didn’t read: “Just trade” and “Just hold” are pretty poor strategies on their own with no nuance considered, as each strategy is full of potential traps. To make these strategies shine, we need to augment them with a few rules. After we add in those rules, one could argue that they work best when paired together (rather than feeling the need to choose one). Further, this is essentially true regardless of your experience level unless you were luckily enough to buy very low. In my opinion the main reason HODL is good for new investors is because it potentially keeps them from panic selling at a low and from getting itchy fingers and taking profits before a big run. That part is good, but it can get dangerous when a new investor HODLs into the ground only to give into the pressure to sell anyways! Meanwhile, trading is even risker, because the coin that is currently doing well tends to change and corrections are very common (leading people who trade to be exposed to buy high and sell low just like the HODL’er, only more frequently). Thus, given the many traps of crypto and these strategies specifically, both of the HODL and TRADE strategies merit discussion.
Perks, Pitfalls, and Strategies of HODL
Perks of HODL: HODL is simple. You buy the coins, you put them in your wallet, and then you do nothing (aside from check Blockfolio way too often like it is 1999 and you just figured out email). In crypto patience often pays off, thus after some sleepless nights, weeks, months, years… one day you check your Blockfolio and you are up and feel like a rockstar. You did very little (thus had little chance to muck things up), you got a very big reward, congratulations. ON TAXES: As a bonus, you won’t pay taxes until you cash out and your tax reporting is going to be very simple. Point here being, in almost every respect, HODL makes life simple and prevents you getting in your own way.
Pitfalls of HODL: The main pitfalls of HODL are the following: 1. New investors tend to get into crypto when prices are high, as the excitement of a bull market draws them in. If one buys the top, they have a long hard road of HODL ahead of them. That road is filled with many chances to sell low and lots of potential to watch one’s on-paper wealth decrease by 25%, 50%, 80%, etc. That is psychologically difficult, especially for someone without experience. 2. When it comes time to take profits, a HODLer has no experience in such things. They have conditioned themselves to “just HODL,” but this is a set-up to HODL through profit taking time and into the next correction. The problem here is that HODLing on the way up (or on the way down and then up) conditions one to HODL through the time they arguably should be selling. You can’t make profits if you don’t take them. If and when such time comes when we get a big crash, true HODLers are primed to HODL to zero. We don’t want to be the ones who held to zero or held through a bear market after buying the top just because general wisdom was filtered down to us as “just HODL – period.”
How to HODL the right way: To HODL the right way, average into a position over time (days, or weeks, or months, or even years) especially when prices are low compared to recent highs and lows. This helps you prevent mistiming the market. Then, when you see some really great profits, consider taking some [not all] money off the table to average back in with later. This requires extreme patience and control over one’s emotions (as messing it up takes little more than a click of the “buy” or “sell” button). In the meantime, learn some basic TA so you can better sense buying and selling opportunities. We want to HODL the coins we bought low through a stagnant or bull market, we likely want to average out and take profits before or once long term market trends turn bearish (so we can average back in lower). If you don’t know what bear and bull markets are, take the time to learn TA while you HODL (as a new trader, you’ll want to use TA to spot long term trends, you don’t need to get into the day-to-day stuff)
Perks, Pitfalls, and Strategies of Trading Cryptocurrency
Perks of Trading: Cryptocurrency is insanely volatile. In Forex 2% gains are a blue moon event, in the stock market 2% gains are a real score, in crypto trading 2% gains are something that you can see 5 minutes after hitting the buy button (they are almost as common as 2% losses; which can also happen moments after hitting the buy button). There are lots of opportunities to see big gains and losses in crypto. If you can learn to take advantage of the gains, you will outpace a HODLer very quickly… “if.”
Pitfalls of trading: If you don’t have a solid understanding of the fundamentals and technicals of a coin, and if you don’t understand the nature and moods of the crypto market, and if you aren’t already essentially a pro trader or very lucky…. trading is very likely to result in you losing money. Essentially the crypto market is full of traps and pitfalls for traders. If one buys a coin high and then trades out of it, they have to re-enter the position to benefit from the recovery of that coin. On a good day, a trader takes profit high or trades out of a coin and avoids going down with the ship. On a bad day, a trader takes profits too early or doesn’t re-enter a position before a coin goes back up. It is common for inexperienced traders to experience portfolio erosion due to trading out of coins that aren’t doing well and into coins that are, only to see both trends reverse. Still, one who trades actively likely won’t be going down with the ship in a major crash, and that is itself fairly valuable. Lastly, another pitfall is that a trader is conditioned to trade, and thus they may miss out on easy money in a very bullish market due to being conditioned not to HODL. That said, there are different styles of trading, and not every trader has to be a day trader! NOTE: Those who trade too frequently, and without experience, are taking a giant risk (one or two trades a week is a good pace for a new trader). ON TAXES: One of the worst parts of trading cryptocurrency is taxes. You have to tally up profits and losses on every trade (an absolute nightmare in terms of reporting). Not only is reporting a headache, the taxes themselves also eat into profits. See how crypto trading works with taxes before trading.
How to trade the right way: Even an inexperienced trader has potential outperform a HODLer, but to do this they have to put aside emotions and have patience. Here, a trader will act as if they are a HODLer, averaging into positions and HOLDing. However, they will then average out of those positions once they have profits or once the price starts heading on a downward trajectory. Stop losses, profit taking, and averaging out of positions can help to avoid many of the risks of HODLing, but of course these tactics present their own risks as well. A major risk of being willing to cut losses and take profits is… taking small but consistent gains and missing parts of runs (thereby underperforming a HODLer). If the market is bullish, try to stay away from trading too much unless you really know your stuff (if all it takes to make a profit is buy and HODL, then revert to doing that and keep it simple), in a stagnant or bear market, or when it comes time to take profits, trading can be your friend. Most of all though, find a trading style that works for you, and make sure to employ proper risk management tactics!
The Bottomline on HODLing Vs. Trading
If you don’t have a lot of experience, you should enter crypto investing and/or trading with caution. A conservative and cautious approach involves averaging slowly into positions and out of them. If you do this, you limit a lot (but not all) of what can go wrong in the long term!
From there it is about choosing between HODLing and trading.
- HODLing is easy, but has some serious logistical problems (especially for those who go all in at the top or who HODL through every all time high).
- Trading is harder and has more pitfalls to watch out for, but it’ll set you on a path where you will be conditioning yourself to do what you’ll need to do eventually, that is “buy and sell at opportune times to realize profits over time.”
Given this, we can say that a slightly nuanced version of HODL (where you average into and out of positions) is the most beginner friendly strategy.
However, as one progresses in their journey they are going to want to be able to trade effectively. Thus, it can make sense for even an inexperienced crypto investor to ease into trading out of the gate.
If you are going to trade, start of with small trades (like 1% of your portfolio per trade and no more than a few trades a week), use stops, and start learning about Technical Analysis (as understanding longer term trends is vital for both short term trading and entering and exiting long term positions).
If you can get down the basics, like how to tell a bear market from a bull market and what sort of targets you are looking for to take profits or to buy, you will start approaching a point where a buy and hold everything ONLY strategy will likely no longer be your best choice.
That is to say, almost every cryptocurrency investor will benefit from refining both a long term HODL strategy and a shorter term trading strategy.
Thus, and to the main point of this article: people are generally right when they say HODL is a better strategy for the inexperienced investor, but the claim is a little misleading, as trading is rather important and teaches one a host of skills that will help ensure they find success with both their long term and short term investments.
HODL might be the best strategy for a new investor, but buy the top and HODL to zero is actually one of the worst possible strategies I can think of. Since this is true, we can’t just fall back on “HODL – period” we need to have a slightly more nuanced strategy that accounts for the reality of things. That reality being most will get into the crypto market late and HOLDing will simply mean exposing themselves to the pressure to sell over time.