If you are familiar with crypto investments, you’re likely also familiar with the concept of HODLing. Many crypto investors use HODLing as an investment strategy, while others are a bit more wary of it. But if you plan to have a long-term future in the world of crypto, you will have to consider HODLing at some point.
Whether you decide that it is best for you or not, you must have an understanding of what it is and the ways that it can benefit you. In this article, we’ll touch on the concept as well as its pros and cons.
What is HODLing?
HODL is an acronym for ‘Hold On for Dear Life’. HODLing refers to putting cryptos in a wallet and holding on to them for a long period of time before selling. The time in question varies from one investor to another. Some people HODL for several months and some people HODL for many years. The idea of HODLing is that an investor acquires a cryptocurrency at a certain price and then waits until it appreciates to sell for profit. This is done with both legacy tokens that have already established themselves in the market and even newer ones.
For example, an investor might believe that a token has a lot of future potential and may choose to HODL until this potential is realized. As Kosta Kostadinov writes, several cryptos ready to 100x are emerging in the market and some investors might choose to buy now and HODL. HODLing is an age-old practice that has existed for as long as cryptocurrency has and will likely always be used by investors.
Pros of HODLing
Huddling has remained popular over the years because it has several benefits, some of which are as follows:
1. Profit
The entire point of HODLing is to make a profit for investors in the future, and this often happens. A person who bought Bitcoin in 2012, for example, and held on to the tokens until 2022 would have made several hundred times their initial investment. Between the time the tokens are bought and when they are sold, there would have been several market spikes and dips. The idea is that the Investor will ignore these movements until the tokens reach their full potential price-wise. When you choose to huddle a token, there is the chance that you forgo short-term gains for long-term profit.
2. Mental Stability
When you actively trade crypto from day to day, you’re forced to keep up with the dramatic price swings that are common in the market. For many investors, it is mentally taxing to keep up with these changes and deal with the anxiety that comes with the prices going up and down. Those who choose to HODL cryptocurrency, however, usually set a price target or a time deadline e.g. when the token gets to $100 or 7 years pass. By doing this, they can essentially skip the anxiety that comes with the market, unlike day traders who have to deal with this mental burden.
3. Automation
These days, the process of HODLing can be automated, which saves investors a lot of time and money. Whether it’s through trading bots or time-based crypto locks, an investor can buy a token and set it to be locked away for a certain amount of time or until they reach price points. With the use of trading bots, an investor can instruct the tool to only sell the token when it reaches a certain price. This takes away the efforts they would have had to put in and automates the process of profit-making.
4. Staking Benefits
If you choose to HODL a token that is based on the proof-of-stake consensus, you can also earn interest on it. By locking away your Ethereum, for example, within the network to support transactions, you can earn interest on it. This is very beneficial for investors who HODL as they can earn a lot of interest if they stake for several years. The same applies to token lending as investors can generate a passive income as they HODL, which reduces the associated risks of not having immediate access to their tokens.
Cons of HODLing
While HODLing clearly has many benefits, there are a few potential downsides that you should be aware of.
1. Market Loss
In the best-case scenario, the token you are HODling will go on to make more market gains and you can earn a profit. But this doesn’t always happen. In the worst-case scenario, the tokens do not appreciate in value and the short-term profit you missed out on trying to HODL would have been the most profit you would ever make. It is not impossible that at the end of your HODLing cycle, the tokens are worth less than what you initially spent on them.
2. Token Loss
When you put tokens away for several years, you have to make sure you practice proper storage. This includes having your password and recovery phrase stored properly. More than a few crypto investors have lost their tokens after several years due to poor wallet practices. The last thing you want is to get to the end of your HODLing cycle but realize that you don’t have access to your tokens anymore. Token storage issues are more quickly found by day traders who access their tokens more frequently. When you HODL, however, these issues may not be apparent until years later when they are too difficult to fix.
Conclusion
HODLing is a very common practice among crypto investors that can see them make massive profits through long-term investments. This buy-and-keep strategy also comes with its downsides as we’ve highlighted. But with proper risk management and token storage, many investors can make the most of HODLing.
