“Buy and Hold” is a strategy used by long-term investors.
When it comes to cryptocurrencies, this strategy is called “HODLing” – which is not only a way to differentiate investments in cryptos and in more traditional markets, but also a funny anecdote, since the term was born thanks to a drunk investor who was writing in a popular crypto forum during the 2013 Bitcoin crash.
Well then, no more talk, let’s try to answer some important questions: how buy and hold works? Why is this strategy so popular? What are its pros and cons?
This is precisely the purpose of this article: we will analyze the characteristics of this type of investing, take into account some real-life examples, and see what are the advantages and disadvantages for investors. Moreover, this article will dispel some myths. Holding is considered by many a safe strategy, but we will cover the reasons why investors shouldn’t consider it a 100% safe strategy – since it comes with risks and requires knowledge in fundamental analysis.
Buy and hold cryptocurrencies: how it works and examples
“Buy and Hold” – or simply HODLing – refers, as the name suggests, to buy crypto assets and hold them until they will reach significant returns – at least significant enough to meet the investor’s needs.
This is a definition of hodling, and it might sound too easy. But there are some important considerations to make: since investing always comes with risks, how can investors be sure that this strategy will always work?
And here’s the tough task. In fact, no one can be absolutely sure that the strategy will work, but there are some elements that can make investors choose some assets instead of others.
These elements are part of a deeper analysis of the asset, both under a technical and fundamental perspective.
To better understand this point, let’s compare two crypto assets: the most popular, longest-living and first-by-market-cap crypto asset – Bitcoin, and an asset that was extremely popular for a couple of months in 2021 – SQUID (the Squid Game crypto).
For those of us who were “lucky” (and experienced) enough to read the whitepaper, navigate the website, see the Twitter account, and even be added to the Telegram group (!) of the Squid Game crypto phenomenon, it was pretty clear that the best thing to do was running away from the project – as fast as we could.
For those of us who lived this experience, but didn’t take notes, Wired comes to the rescue with a timeline of what happened. In fact, you won’t be able to navigate the SQUID website or social accounts, because they disappeared – yes, it was a scam, and it was replaced by a now-decentralized token that owns its website and media.
Long story short, at the end of October 2021, this crypto inspired by – but not tied to – the popular Netflix series Squid Game made its appearance on social media. Investors were saying that the crypto was already up by over 1000%, and that it was about to reach $1.
Attracted by a new investment opportunity, people started betting on the crypto, which was born with the intention to fuel a play-to-earn gaming platform. Impressively, SQUID reached an all-time-high of $2861.8 on November 1, 2021 – as reported by CoinMarketCap. Unfortunately, SQUID reached its all-time-low during the same day – $0.0007926.
What happened? Its creators had blocked the sale of the token, and then ran away with all the money included in the liquidity pool used to trade the token.
A classical example of rug pull: creators pump their projects, attract investors, and then remove liquidity.
But why even experienced crypto traders and investors fell into the trap? Maybe it was just Fear of Missing Out (FOMO) on a great speculation opportunity.
And why did some others avoid the risk? Simple analysis:
- The whitepaper was full of typos, which is a clear sign of lack of attention – and this is never a pro when analysing a project you want to invest in.
- The creators clearly stated that it was impossible to sell SQUID. This is not necessarily a negative sign, since this is a strategy often used by creators to avoid a sudden crash in price once the token is listed on major exchanges, but …
- Creators tied the capability to sell to the acquisition of another crypto token, Marbles. The point was that traders and investors had to buy at least 5 Marbles to sell 1 SQUID, but Marbles were more expensive, and the quantity needed to sell 1 SQUID increased over time, so investors would have lost their funds in any case.
This is the point: in spite of the amount invested, investors would lose everything even if HODLing, and there were several signs of a scam.
Let’s see Bitcoin.
This cryptocurrency was born to create an alternative, open and inclusive financial system. Even if we don’t know the identity of the creator, he (or she, or they) presented its project in a small group of tech experts and professionals, who were able to check the whitepaper of Bitcoin – free of typos and with a clear explanation of the technicalities involved, the process to follow to produce and use this asset, and the demonstration that the project was fully decentralised – so, investors and users would fully control their BTCs.
Moreover, crypto had, since the beginning, a clear purpose and it was fully transparent.
An investor who invested $50 in 2010 and followed the “Buy and Hold” strategy, at the time of writing would have over $23 million.
This is the precise functioning of the “Buy and Hold” strategy: investors who use this strategy believe in the project behind their investment and can allocate a certain amount of money for an indefinite period of time.
This strategy has both pros and cons.
Pros of the Buy and Hold crypto strategy
- This strategy doesn’t require investors to constantly rebalance their portfolios or follow their investments. To be more precise, intraday trading, for instance, requires traders to constantly check their positions and the price of an asset, in order to understand when it’s time to buy or sell. On the contrary, the buy and hold strategy is based on the fact that once the investor buys, the only thing he has to do is wait.
- HODLing doesn’t require extensive knowledge in trading techniques – for the reason we previously mentioned. Investors who use this strategy don’t need to fully understand all the different types of orders – since they just buy, they don’t need to understand the different technical indicators and patterns, they don’t need to stare at charts for hours to see how the price of an asset develops.
- For the two previous reasons, holding is less prone to the difficulties faced by traders who can act because of FOMO or any other type of emotion involved in trading. A hodler will be less subject to the natural fluctuations in the price of crypto assets.
- There is a significant cut in transaction costs. Every time a trader or an investor wants to open or close a position, they have to pay some fees or commissions – independently from the type of exchange they use. Since hodling involves only two actions – buying and closing the position when the investor is satisfied with the results, is it less costly when compared to other types of investing and trading – like swing, trend trading and speculation, which involves many more actions.
- Holding can be integrated with staking and interest-earning crypto-based products. Cryptos that use staking protocols allow holders to earn interest on assets they hold and use as staked assets. There are also exchanges that offer interest-earning products, to allow users earn interest on subscribed assets.
- As any other type of investment or investment strategy, the buy and hold is not free of risks. Even if the investor doesn’t necessarily need to know all the secrets of trading, he does have to know how to analyse a project and, most importantly, he needs to be able to distinguish between a scam and a valuable project.
- Since this is a hard task, investors can lose money also when they use the Buy and Hold strategy.
- Buy and Hold means that the funds invested are blocked. In fact, an investor who uses this strategy needs to consider that it implies that those funds won’t be available if another opportunity arises – unless they sell their assets.
- This strategy might not be the right fit for those traders and investors who prefer flexibility and shorter term strategies.
- Moreover, this strategy might not fit the needs of those investors who want to use the volatility of crypto assets. In fact, not all traders and investors consider volatility as a bad characteristic of cryptocurrencies.
Characteristics of the Buy and Hold Strategy
The examples we provided above should have clarified the main characteristics of the Buy and Hold strategy, but let’s recap them to fully understand how B&H works:
- This is a long-term strategy and actually has to do more with investing than with trading.
- Technical analysis can be useful to understand what the right time to buy might be, but when it comes to Buy and Hold fundamental analysis is far more important than technical analysis. In fact, if an investor wants to use his funds to invest in a project for an indefinite period, it’s important to evaluate if the project has a real and useful purpose, which can involve a strong and dedicated community; it is important to understand if creators set a precise roadmap, and if they’re following it; it is important to evaluate if attention, precision and transparency were emphasized enough during the creation of the official documentation.
- Investors use this strategy when they believe in a specific crypto project and are willing to allocate a certain amount of funds for an indefinite period of time.
Conclusion
At the beginning of this article, we briefly mentioned the story behind the birth of the term “HODL”. Over time, this term started to be considered not only as a curious typo, but also as an acronym: for many, HODL stands for Hold On for Dear Life.
This actually summarises what’s the theory used by holders: they hold their assets for an indefinite period of time because they believe in the appreciation in value of an asset, and they don’t sell, no matter if the market goes through fluctuations and deeper crises.
They will sell only when they’ll consider that the results achieved are able to meet their needs and initial goals.
Even if this might seem an intuitive and safe strategy, it’s important to consider that all types of trading and investing strategies are risky: holding requires analytical skills, knowledge in fundamental analysis, the capability to avoid emotions in trading, and the possibility to block a certain amount of funds for an indefinite time.
That’s why this strategy isn’t suitable for every investor, and investors and traders should always choose a strategy that can make them feel comfortable with their investing activities.
FAQ
What does “Buy and Hold” mean in crypto investing?
Buy-and-Hold is an investing strategy that implies buying an asset and holding it for an indefinite period of time. When it comes to cryptocurrencies, the term HODL replaces the normal “hold”. This strategy is used by those investors who believe in the project they’re investing in and can “block” a certain amount of funds for an indefinite period of time.
What are the advantages of holding?
Holding doesn’t require an extensive knowledge in technical analysis, it’s less prone to fluctuations and emotional trading, it’s able to cut transaction costs (since it doesn’t require all the activities involved, for instance, in day trading), it can be integrated with the use of staking protocols and interest-earning products and services.
Is buy and hold safe?
Even if holding – or hodling – is considered a less risky activity if compared to many trading strategies, it can’t be considered a risk-free strategy: in fact, it requires extensive knowledge in fundamental analysis, the capability to avoid negative emotions and to distinguish between valuable projects and scams.
Is Buy and Hold suitable for everyone?
Buy-and-Hold is usually less suitable for those traders who prefer flexibility, the adrenaline involved in short-term trading, and who want to use crypto volatility.