What is the HODL Strategy? A Beginner's Guide

In this article, we’ll explore the origin of the HODL strategy. We are also going to see the main characteristic of it and how it can be applied.

What is HOLD?

The actual term “HODL” originates from a post in one of the best-known Bitcoin forums, BitcoinTalk . On December 18th, 2013, a user named GameKyuubi started a heated discussion with several other people about why he was not selling despite the drop in prices. Many were accusing him of being a bad trader and not knowing when to take his profits.

He replied that he was “Hodling” (by which he meant holding) his Bitcoin in a fateful typo. The term quickly became a meme in the crypto community, and even later, an acronym that many people interpret as “Hold On for Dear Life.”

The anecdote of the origins of HODL is the first indication for what the strategy is about. HODL is about holding an asset for long periods despite the short to medium term performance of it. It is all about the long-term horizon.

How to HODL

Now that we are acquainted with the basic idea behind HODL, we need to know how to apply it. It is not only about buying Bitcoin or some other crypto token and just waiting with some far off date in mind.. Other factors and details demand consideration when planning a HODL strategy; as with all responsible trades. The same risks we talk about at the start apply here, so any potential investor needs to be aware of them.

Let us look first at how a potential HODL strategy visually appears over time. As we have said, HOLD works with Bitcoin and other crypto assets in the long term. Generally, this is defined as twelve months or more, meaning a person needs to hold the asset for at least a year. If we were to look at a price chart of a successful HODL strategy, it would be something like this:

The entry point, or the buying price, happens at some point in time. We’ll look at how to choose an entry point later. As the price moves, in and out of periods of volatility,, there are many moments in which selling pressure will be great. A successful HODL subscriber likely retains a target date for sale even against these forces.

Described in this way, it doesn’t sound like a non-viable trade practice. What justifies a HODL strategy is the behavior of volatility over through time. . Over Short periods volatility is pronounced; across large timescales however, volatility shrinks.

The constant buy and sell orders are what moves the price rapidly; registering as volatility. With a long term investment horizon, volatility tends to diminish, as price movements become relatively insignificant to the value of the underlying asset. What emerges is the price trend. That is to say, over a long period of time, value is more predictable. It is possible to see if an asset is appreciating or losing value. For example, if we look at Bitcoin in a day, we have:

The illustrated price action seems chaotic, and it is difficult to say where it may end up. But if we broaden our perspective to over a year, we have:

Now it is clear to see that Bitcoin has been moving up on the long-term horizon and a trend which is hardly related to the daily price. By holding to the asset, a la the HODL strategy, long term appreciation might be realized while ignoring short term unrest in the valuation of an asset.

The HOLD strategy in crypto is highly dependent on fundamental analysis. The above charts belong to Bitcoin, the most widely known and valuable cryptocurrency in the market. It is a great asset for a HODL strategy because there are strong signs that it will grow in value in the future. But how to pick other crypto assets for HODL?

Here is where the similarities with fundamental analysis begin. To know if a crypto asset is good candidate for a HODL strategy, a person must dive deep into fundamentals . A few points of investigation for any asset:

Use case: What is the purpose of this crypto asset. Is it going to be used in a large ecosystem? Who is going to use it? Does the use case make sense? Those are the questions a person needs to answer aboutw crypto assets when determining long term viability.
Total supply: Another important aspect is how many tokens are there. The way tokens are created in crypto demands that the total supply of them is deterministically coded within the blockchain used to create them. Market Capitalization can be determined by understanding the number of coins and the potential maximum coin population
Token distribution: Next, tokens are not all sold to the market at once. Generally, a portion is sold to raise money, and then a distribution timeline is set. Every time the supply of the token increases, there is a chance that the price will drop, so knowing when tokens will unlock in the future is crucial for a HODL strategy.
Token adoption: How many people are buying the token? What is the daily trading volume? Are people buying to use the token or just to speculate? Those are some of the most important questions when it comes to a token.
Institutional adoption: One of the best signs a crypto token is a good investment is when it has institutional buyers. If large money funds or similar actors are buying it, then the volatility of the asset over time tends to diminish.

These basic analytical steps, which cost little time or effort, absolutely must be carried out prior to any investment thesis performance. Many more exist. Some more advanced analytical stems threads being: the development timeline of the product, the progress made, the team behind the project, market conditions, etc. To reduce the risk, a potential investor needs to be aware of all the project’s particulars.

After the initial investigation, a person needs to be able to plan an information strategy. Over the period, the investor is HODLing, and it is important to stay informed regarding the status of the underlying asset. Some events can throw the entire crypto market on a tailspin regardless of how good an investment is. So, it is crucial to stay informed even after investing.

Now that you know how to choose what crypto assets are good candidates for a HODL strategy let’s look at how to pick an entry point.

Entry Price

The entry price is simply the initial price a person buys an asset. . There are many ways to choose when to enter a market, but generally speaking, there are three basic ways, and all other methods are just variations of these:

Random entrance: It may sound counterintuitive to buy an asset randomly, but since the HODL strategy is about the long term, the initial price is not significant. Once the trader is sure the asset has long-term value, entering a market is just a random event. The daily volatility will be averaged by the passing of time.
Planned entry; A trader looking to maximize returns will use something like technical analysis to see when an asset is at the lowest price in the short term. That becomes the entry point, and then it is used to calculate gains over the investment time.
Dollar-Cost Averaging (DCA): Our previous two examples are of traders entering the market in just one buy. Dollar-cost averaging is an entry strategy meant to accumulate exposure to a crypto asset over time. The trader chooses an asset, allocate a determinate sum of money and a time interval through which to disperse that amount evenly. For example, 100 US dollars averaged over a four week period. In this example the trader buys 25 dollars of Bitcoin until the target amount is reached over the course of a month.

The use of the dollar-cost average strategy reduces the risk a trader has over a single asset. Also, it helps planning out crypto investments with income streams, as most people don’t have large amounts of money to invest all at once. DCA is great as an entry point strategy but also works budgeting method which includes crypto investment.

Those are the basics on how a HODL strategy works. It is a combination of deep research, constant information, patience, and designation of the best entry point to maximize gains.