For years, “hodling” bitcoin investors have been rewarded with exuberant returns on their investment. Since the start of the year, however, bitcoin “hodlers” have witnessed their investment taking a beating, which begs the question, is “hodling” still the best strategy when investing in bitcoin?
What is “Hodling”?
In new finance, “hodling” refers to buying and holding a digital asset such as bitcoin with the intention to benefit from an increase in its value over the long-term as cryptocurrency adoption grows.
The term “hodl” comes from a 2013 forum post where a user misspelled the word hold and, instead, stated “I am hodling” when referring to his bitcoin investment. The word “hodl” is also being used as an acronym for “hold on for dear life”, which holding onto your bitcoin investment in a declining market can often feel like.
Hodling versus Day Trading
When comparing “hodling” with day trading, it is important to understand that in the equity markets, historically, passive investment approach (i.e. buying the stock index constituents) has generally outperformed an actively-managed approach (where portfolio managers seek to pick winners to perform better than their benchmark index).
This investment philosophy has also rolled over to the bitcoin investment space where many investors – especially those who have been around since the early days – have resorted to “holding” with the belief that their investment will continue to increase in value as bitcoin adoption continues to grow.
Leading up to 2018, this belief has paid off and early adopters – and even those who invested as late as early 2017 – have managed to book substantial gains by investing in bitcoin.
Day trading, on the other hand, refers to trading in and out of positions on a daily basis with the aim to book a trading profit each day and close out all positions overnight. Experienced full-time crypto traders often resort to this approach of investing in bitcoin.
In light of bitcoin’s relatively high volatility, there is ample opportunity for traders to catch the highs and lows of each day to generate a profit. Of course, this approach only works for experienced traders who know what market signals to follow and possess enough capital to make this approach worthwhile.
Should You Still “Hodl” in 2018?
A recent report by the Financial Times points out that “hodling” is slowly losing favor among large bitcoin investors according to blockchain analysis firm Chainalysis.
Chainalysis’ research has shown that the amount of bitcoin held by active day traders has increased to 5.1 million BTC, which almost equals the 6 million BTC that “hodlers” who have held their BTC for over a year are holding. This data suggests that investors are starting to move away from the popular “hodling” approach to take advantage of bitcoin’s volatility in this year’s bear market.
This also begs the questions whether you, as a bitcoin investor, should simply wait out the bear market until the price recovers or whether it may be smarter to exit your BTC holdings at highs and enter again at lower price points. Of course, that is easier said than done, especially for novice investors.
The big argument for “hodling” bitcoin is that the digital currency could one day become a major global currency that will compete with the big six currencies. However, as bitcoin has turned into more of a digital gold investment asset as opposed to a spending currency and has been struggling to break into the mainstream as a payment method, it looks like that potential scenario is still a long way away.
Furthermore, as more hedge funds, Wall Street banks, and proprietary trading houses get involved in the cryptocurrency markets, the likelihood of increasing volatility is high, which does not necessarily also mean a major boost in value as these type of investors prefer to trade in and out of positions to generate a profit as opposed to holding an asset on their books for the long-term.
Additionally, “holding” implies not taking profits on the highs, which may not be the smartest approach given that, fundamentally, you will need to cash out an investment to generate a realized profit. While not cashing out your bitcoin investment means that you will not have to pay capital gains tax, the profit you have on paper is not profit until you realize it (at which point taxation will also inevitably come into play).
Finally, the topic of portfolio rebalancing also needs to be addressed. If you held a portfolio composed of stocks, bonds, and bitcoin for the last five years – with a break down of 50 percent stocks, 40 percent bonds, and 10 percent bitcoin – you will have witnessed bitcoin becoming the dominant holding in your portfolio as its value skyrocketed. For the average investors, however, holding over 90 percent of their overall investment portfolio in bitcoin is absurd given the high volatility of bitcoin and the riskiness of this new digital asset class.
Hence, if an investor wants to keep a diversified well-balanced investment portfolio, he or she will need to sell BTC as its value increases to maintain the percentage of exposure with which he or she feels comfortable.
Fundamentally, it is up to each individual investor to decide what strategy is best suited for his or her investment goals. Day trading will unlikely be an option for most investors, who do not have the time to sit in front of the computer to follow the markets and execute trades on a daily basis.
The Bottom Line
A combination of actively-managed and passively-managed is most likely the right approach for most investors. Adding to your bitcoin holdings at the lows, selling some at the highs, and staying net long would likely be the most user-friendly and potentially profitable approach to investing in bitcoin in 2018.
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