Should I Hodl or Trade Cryptocurrencies?
Both hodling and trading can be extremely profitable if you have the right approach.
Hodling requires less technical expertise and is generally safer than trading, but it takes a longer time to see an ROI. Trading, on the other hand, necessitates market knowledge, charting skills, as well as a solid risk management plan to be used.
In this post, we will explore the debate between “hodling” and “trading” cryptocurrencies and see which one may be a better approach.
What does Hodl mean?
Hodl in cryptocurrency lingo refers to holding onto your coins without ever touching or managing them because you believe they will go up over time.
Hodlers may also refer to investors who don't actively trade their holdings but trade less frequently over a longer period of time.
This strategy is considered more passive, and as such may not offer the same short-term profit opportunities that trading does.
However, it can generate long-term returns through prudent buy/hold strategies.
Here is an Hodling Strategy Example:
John invests in Bitcoin when it's worth $100 USD per coin. He decides to hodl those coins for three years because he feels confident that they'll be worth much higher than their current value over time.
After three years of diligent holding, John sells his bitcoin at a price of around $2500 per coin which has brought to him a 2500% ROI.
What to know about cryptocurrency trading?
Active trading cryptocurrencies is the act of executing trades (buying and selling) to capture profits on alternate price movements.
Active traders will keep track of the markets at a high frequency, sometimes as often as every hour or so.
Cryptocurrency trading is different than traditional stock trading or forex trading. Because the dynamics of the crypto market are much more different, and it is still at the development stage.
The cryptocurrency market is tradable 24/7 as opposed to other financial markets that are tradable only during business days. It means more trading opportunities without being interrupted by the weekends or national holidays.
However, the cryptocurrency market can be trickier to trade because it's still not fully regulated by major institutions like the SEC (Securities Exchange Commission) and can be manipulated easily.
Therefore, investors need to be extra cautious using their traditional investment strategies while investing in this new market.
Let's take a look at the Pros & Cons of each approach to understanding which one may be good for whom.
Pros of Hodling
It is safer
In general, hodling is the safer way to profit from cryptocurrencies. Because hodlers typically hold their cryptocurrency holdings for long periods of time (months to years) in order to benefit from the potential growth of their investments.
Hodlers are not affected by the cryptocurrency's fluctuations in price.
They can simply ignore short-term market movements, and enjoy their holdings' growth over time with less stress. Therefore, for most folks hodling is a better approach to follow.
Hodling is less stressful due to the fact that hodlers don't have to worry about market volatility and short-term fluctuations in price. As an hodler you can simply buy and forget your crypto for years to come.
No active time spent on investment
Hodling doesn't require an active time investment. If you have a full-time job or other priorities, then hodling cryptocurrencies may be a better option for you than trading.
You can check the market a day or even a week which literally takes no time at all.
No trading fees
If you hodl cryptocurrencies, you’ll not pay trading fees except the first time you take a position and later on closing that.
However, if you actively trade cryptocurrencies, you will pay a commission every time you buy and sell which can add up very fast.
May pay dividends through staking
One thing all blockchains have in common is that transactions must be validated. Bitcoin, for example, does this through a process known as mining, which is known to consume a lot of electricity (Proof-of-Work).
There are also other consensus mechanisms used for validation.
Proof-of-Stake (PoS) is one such consensus mechanism, which has several variants as well as some hybrid models. To keep things simple, we'll call all of this staking.
Staking coins gives you the ability to vote on network decisions and earn money in return. It is similar to receiving interest for keeping your savings account or giving it over to a bank so they invest it for you.
The only difference being that this investment pays off with cryptocurrency, not fiat currency like dollars.
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Pros of Trading
Can maximize earnings quickly
If you have earlier traded other markets and know-how of financial markets work, then trading can be a very lucrative option. But the reality is you can win only as much as you can risk.
Most people don't have the patience to wait many years to 2X or 10X their initial investment. Although it is a very impressive return, most people still don't like the idea of doubling their initial investment every year.
They want to 10X or even 100X their investment in a day or less because they have seen some guy on Youtube achieved that.
Trading is a zero-sum game, but not an ATM machine that dispenses free money.
If you risk a dime, then you can potentially earn a dime. If you want to earn millions then you want to risk millions because no one will hand over their millions to you for free.
Therefore, cryptocurrency trading is no shortcut to other financial markets (stock market, forex, metals, etc) as a faster alternative. It is another area that can diversify your holdings, and provide you more opportunities to trade.
In fact, nowadays you can adjust the amount of risk you take almost in any market by increasing/decreasing margin (aka leverage trading). The volatility of the cryptocurrency market doesn't guarantee quick returns.
Again, you can only make as much as you risk for any trade you take.
Even inexperienced traders have the potential to outperform Hodlers. However, he will fail to make it repeatable and will eventually lose all of his investment because he does not know how to manage his risks.
Cons of Hodling
Most cryptos will disappear over time
Most cryptocurrency projects are doomed to fail even if the cryptocurrency market will grow significantly.
Most cryptocurrencies that exist today will become worthless over time because other cryptos with even more usefulness and value will replace them.
If you have been in the crypto market in 2017, you should have witnessed so many ICO (Initial Coin Offering) projects that promised to disrupt different industries and change the world.
Now, most of them either failed due to problems or become an exit scam.
Most cryptocurrencies on the market will likely share the same fate. If you plan to hodl, hodl something that has the potential to be used by a lot of people.
Hodl Bitcoin, Ethereum, or something solid. Only in this way you can be sure that you will not lose your entire investment in a single day.
If you are looking for cryptocurrencies that might survive in this highly competitive market, then they should have these characteristics:
- Showing usability/active use cases and solving real problems.
- A strong roadmap with future development plans or active progress on current goals.
- Token economics aligns incentives among stakeholders (i.e., users) and developers so that all parties benefit from network growth instead of just one side benefiting more than others.
A cryptocurrency project is not worth investing in if it only does marketing hype but lacks any substance behind it.
Projects like these will likely die off after some time because there is nothing working at its core except an idea.
Hodling is not a foolproof process
Even if you invest in a solid cryptocurrency project like Bitcoin or Ethereum you are not guaranteed to make a lot of money.
The odds are you will jump into the market at all-time highs and will be only able to recoup your initial investment a few years later or so.
A lot of retail hodlers don't have the necessary tools or skills to buy crypto at a reasonable time to make a profit sometime later.
Here is what I mean to be more specific.
If you buy crypto with everyone else (aka during the bull market) you will likely buy expensive, and sell when the market crashes (due to FUD – fear, uncertainty & doubt) end up losing your investment or optimistically speaking break even.
So many hodlers who bought BTC during the 2017 bull run suffered massive losses in the next few years.
If you have bought BTC in December 2017, you had to wait 3 years to let the BTC price come to the same level again. And you have more likely suffered a financial loss of %80 during this endless wait.
Because the BTC price dropped down to $3800 during the subsequent bear market.
Therefore, if you want to hodl, you still need to know the fundamental principles of trading. Because hodling is nothing different than trading except the time period you keep your position, and stop-loss you are not using.
That said, you don't need to be a trading genius to become a profitable hodler. Because you are rewarded for your patience in keeping your position over the long run.
However, you should know how to read trading charts, and ideally use an indicator or two to filter some bad trades.
Indicators don't guarantee to be profitable yet, you can have an idea of overbought/oversold market conditions before you take a position.
It is also worth learning how to size a position if you don't want to invest all funds into a single crypto project.
Hodling requires patience
Hodling requires a lot of patience. However, the magic happens just because of that since it is not the path many people are willing to take.
Here is a quote from one of the best investors you can learn a lot from.
Although Mr. Buffet was talking about the stock market, the same principles apply to most other markets as well including the crypto market.
When you hodl you simply turn a blind eye to trading opportunities that may come your way.
There may be a perfect trading setup your trading strategy suggests but you simply don't since as an hodler you are not looking for short-term price movements.
Cons of Trading
Trading requires knowledge & experience
Actively trading cryptocurrencies requires knowledge and experience. It’s not as easy to trade successfully as it seems.
If you have never traded before, and don't understand how do markets work you will probably be disappointed in the results.
Traders expose themselves to higher risks because they buy and sell frequently when prices fluctuate dramatically due to wider spreads between highs and lows that exist on exchanges.
It also exposes them to an increased risk of getting “stopped out” during periods of high volatility as well as emotional trading habits that may lead them down to an unprofitable path.
If you plan on actively trading cryptocurrencies then make sure that you have a well-thought-out strategy in place beforehand with strict rules around buying and selling.
Cryptocurrency market is volatile
Volatility is a measure of how fast the price changes over time. It can be a good thing or a bad thing depending on how you utilize it.
I'd recommend using minimum daily charts when actively trading cryptocurrencies. Because the longer the time frame, the less market volatility you will expose your investment.
It's also key that traders have their limits set properly before beginning any trades, with stop losses to manage their funds better.
Active trading requires timing skills
With active trading, you have to pay close attention to timing, buying too early or late can dramatically change the outcome.
When done right though, trading offers a much higher opportunity to profit from the market hodling on its own.
You should consider what type of trader you want to be before determining whether hodl or trade is better in your case.
If you use leverage trading (ie margin) and trade with a short-term time horizon, then there is more opportunity to make money off of crypto volatility than if you just hold it over the long run.
The trading illiquid cryptocurrency market is hard
The cryptocurrency markets are still in their infancy stage of development relative to other markets such as stocks or bonds which have been around for over 100 years.
Therefore, most cryptocurrency pairs are still illiquid, meaning that the market is not deep enough to allow buyers and sellers to exchange at a stable price.
Therefore, it is possible that prices could be manipulated easily by one or two traders (or “whales” in the crypto linguistic) because the market is not deep enough to absorb their trading volume and push up demand for a particular cryptocurrency in question.
Given these reasons, if you are considering actively trading cryptocurrencies, then I would advise caution as an investor when selecting which coins to invest your money into.
If you day trade cryptocurrencies that have a very low market cap, then you could be gambling with your money. Because low market cap means an illiquid market that can spoil any trading plan easily.
As the cryptocurrency market matures, it will lead to an increase in liquidity due to increased participation from institutions and then technical analysis can work better in this market.
Trading can be time-consuming
Active trading does require an active time investment and is best for those with a background in finance or who have lots of free time to dedicate to learning about new opportunities.
Actively trading cryptocurrency is time-consuming and can lead to stress, anxiety, and more serious health problems from overwork.
Exchanges are still not fully regulated
Most crypto exchanges are still not fully regulated by government organs. If you accidentally take a trade due to a technical problem on the exchange website there is nothing much you can do other than creating a ticket and waiting.
Stock exchanges on the other hand are heavily regulated. This means that if there is a problem during a trade with the website, you can escalate it to sue the exchange.
If you are thinking of trading cryptocurrencies, please be aware that most crypto exchanges have no insurance to cover a loss sourced from theft or mistakes made by the exchange.
Crypto exchanges do not offer you protection against mismanagement or loss, so they can be risky if your funds aren't stored somewhere secure like an offline wallet.
So should you hodl or trade cryptos?
The decision really comes down to what you want from your investment depending on your risk tolerance, available capital, expertise level, and investment goals.
That said, I've seen too many people invest significant amounts of money into cryptocurrencies with no clear understanding of how markets work and then end up getting burned due to emotional decisions they have made.
If you have the necessary trading knowledge, and earlier exposure to other financial markets you may want to trade cryptocurrencies.
If you don't have it then hodling is likely to be a better choice.
When hodling, you'll sleep better at night and be more likely to see your investment grow in the long term.