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HODL is one of those terms that’s shown up amid the rise of cryptocurrency. While it looks like an acronym – one of those terms like FBI or KFC that abbreviates a word into its initials – HODL is simply a misspelling of the word hold, albeit one that caught on for the silliness of its mistake.
The term HODL emerged from a 2013 message board post on the Bitcointalk forum as an errant misspelling. Since then, some traders have retroactively redefined HODL to mean “hold on [for] dear life.” This revisionism is what’s called a backronym, fitting words to an existing acronym to give it a similar or new meaning that wasn’t intended at the word’s origins.
Here’s the origin of HODL and why it can be a valuable investing strategy.
What is HODLing and where did it come from?
The exact origin of HODL is well established, and the context surrounding it offers a good lesson to cryptocurrency traders and those who would like to get started trading crypto.
On December 18, 2013, Bitcointalk user GameKyuubi uttered the phrase “I AM HODLING” as part of a rant against the difficulty and even futility of trading cryptocurrency. Digital currency is notoriously volatile, and those who try to time the price swings may find themselves buying high and selling low — gradually or quickly eating away at their capital.
The term almost immediately became a meme via social media, and the misspelling continues to live on in internet message forums such as the infamous Wall Street Bets board on Reddit.
For those who invest in cryptocurrency, HODL has become a banner proclaiming their long-term allegiance to digital currency. In Reddit or Discord forums, those who buy and hold crypto might call themselves “HODLers” and talk about the virtues of having “diamond hands.” These phrases indicate their stated unwillingness to sell volatile assets such as crypto. These terms stand in contrast to “paper hands,” those who are willing to sell when volatility ratchets higher.
But these phrases have extended beyond crypto to other assets, such as stocks. During the run-up in the stocks of GameStop and AMC in 2021, individual traders rallied around the phrases, egging each other on to continue to hold or even buy more on the dips.
Does it make sense to HODL?
It’s impossible to argue that long-term Bitcoin HODLers have not done well. Since its debut in 2009, Bitcoin’s value has climbed from just pennies to more than $60,000 at one point. So, a long-term buy-and-hold approach would have returned traders many times their initial investment, because the strategy prevented them from selling when things got tough.
Other advantages of a buy-and-hold strategy:
- Upside is still captured. A buy-and-hold strategy makes great sense for an investment that has room to run higher, regardless of what kind of asset it is. You ride out the volatility, giving the asset plenty of time to recover.
- No capital gains. You avoid realizing capital gains on your investments, meaning you’re able to continue deferring taxes even as your investment rises. Many crypto traders may think their investments are tax-free, but the IRS says crypto gains are taxable.
- Less time investment. If you don’t have your eye on the market all day, you can do other things that you love instead of trying to time an exit point.
- Change in mindset. With a buy-and-hold mindset, price declines become opportunities to consider buying more instead of periods of doom, gloom and handwringing.
- More rational decisions. By extracting yourself from the market’s greed-and-fear cycle you can make more rational decisions and take advantage of attractive prices.
- Avoid sleep issues. This approach can literally help you sleep easier at night, something that crypto traders may have a hard time doing, according to at least one study.
However, while “HODLing” might be a good strategy, it doesn’t tell you what to own. Buying and holding a poor investment can lead to years of bad returns, if not a total loss on the investment.
Therefore, traders interested in crypto need to carefully understand what they’re investing in with crypto. The legendary volatility of cryptocurrency is due to the fact that it’s driven entirely by sentiment, since no hard assets or cash flow back cryptocurrencies (with the exception of stablecoins). Many crypto coins, maybe even most of the 10,000 or so in existence, may end up worthless.
In that case, buying and holding means you’ll ride it all the way to a complete loss. Regardless of what you buy, you’ll need to analyze whether it makes sense to use a buy-and-hold strategy.
And if you’re a HODLer, capital gains aren’t the only way you can make money on cryptocurrency. You can also participate in staking rewards with many cryptos, allowing you to generate income while you continue to hold the digital asset and potentially ride it to new heights.
HODLing can be a great strategy for an asset that could deliver returns for years, potentially decades. A long-term buy-and-hold strategy helps keep your emotions in check and keeps you focused on the long term, meaning your head is clearer to make smart investing decisions.
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Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.