What does “HODL” Mean and How does it Apply to Bitcoin?

If you are new to the world of Bitcoin and cryptocurrencies, then you may not be familiar with the slang used by traders, commentators, and cryptocurrency enthusiasts. One of the most popular Bitcoin forms slang is “HODL,” which is a misspelled version of “hold.” In this article, we look at what the term actually means and how it applies to Bitcoin.

The History of “HODL”

The term first emerged on the popular Bitcoin forum, Bitcoin Talk, in December 2013. A Bitcoin talk user by the name of GameKyubbi put a short post on the popular forum with the title “I AM HODLING.” GameKyubbi explained in his post that he realized he is a bad trader and is using a passive trading strategy to buy and hold Bitcoin, so he is not influenced or forced to take action. As a result, its wild price fluctuations.

HODL Bitcoin

The post states, “I type d that tyitle twice because I knew it was wrong the first time. Still wrong. w/e. GF’s out at a lesbian bar, BTC crashing WHY AM I HOLDING? I’LL TELL YOU WHY. It’s because I’m a bad trader and I KNOW I’M A BAD TRADER. Yeah you good traders can spot the highs and the lows pit pat piffy wing wong wang just like that and make a millino bucks sure no problem bro.”

He went on to explain that he doesn’t want to furnish the pockets of talented traders by selling his Bitcoins and exclaimed, “When the traders buy back in I’m already part of the market capital so GUESS WHO YOU’RE CHEATING day traders NOT ME~!”

The misspelling of hold comes from the fact that GameKyubbi confessed to drinking Whisky when writing the post. Around the time of the post, Bitcoin experienced a massive rally – going from $15 in January 2013 to over $1000 at the beginning of December 2013. On the day of GameKyubbi’s post, Bitcoin declined sharply from around $700 to just $438 as reports of a Chinese crackdown on the leading cryptocurrency circulated the cybersphere.

Since then, the term has gone on to win mass appeal amongst Bitcoin enthusiasts and traders. What started as a humorous misspelling has become a viral meme. People who hold Bitcoin for the long term and are unfazed by its price movements are said to be “hodling” Bitcoin. It encapsulates the sentiment amongst Bitcoin enthusiasts that the crypto-network will be the future of finance. Why sell Bitcoin now when it’s just getting started? True believers want to see it through to the end and never part ways with their Bitcoins, and HODL is the term that the community rallies around to express their belief in the future of Bitcoin.

Hodl Trade

As a result, HODL has come to mean resisting the urge to sell Bitcoin when the price drops or rises sharply, enjoy the ride and own the crypto-asset for a long period of time. As GameKyubbi’s post explains, not everyone is good at trading. In fact, it is estimated that just five to ten percent of all traders ever become successful. But how well does the HODL strategy actually work?

How Well does the HODL Strategy Work?

Since Bitcoin is deflationary, the longer you hold the asset, the more purchasing power you will obtain in terms of fiat. At least, in theory, that’s how Bitcoin works. As there will only ever be 21 million Bitcoins in existence and the inflation will carry on declining over time, it is anticipated that the long-term trend of Bitcoin’s price in USD or fiat currency will be upward.

If everyone hodls Bitcoin, then it is not used as a currency, and it is hard to see a successful future if Bitcoin is not being used. It would be hard to argue that if Laslo Hanyecz never purchased two pizzas with 10,000 BTC, Bitcoin would be as successful as it is today. So in a way, the HODL strategy could prevent Bitcoin from being more widely adopted. If no one wants to spend it, no new merchants will accept Bitcoin.

The HODL strategy has existed before Bitcoin but was just called something else; a long-term investment strategy. Famous investors such as Warren Buffet follow this strategy, by buying and holding and quality asset for a very long period. Since markets can be volatile and are continually absorbing new information, it is usually much more profitable to take long-term trades rather than short-term trades.

If we take the date of GameKyubbi’s post as an example, Bitcoin fell around 40% between December 10th and December 18th, 2013. However, since then it has gone on to multiply by about ten times from its 2013 high, currently trading above $11,000 which just goes to show that on a long enough timeframe, HODL pays off.

A recent Reddit post highlights that you could have bought Bitcoin at any time in its history, barring a period of 14 weeks, and you would have made a profit, lending more credibility to the HODL strategy. Since then, this figure has reduced somewhat as Bitcoin’s price has increased in the past seven days.

Looking at the entire price history of Bitcoin on the log chart, we see that at Bitcoin’s current price, you would have only lost money if you bought near the end of 2017 or early 2018. Apart from these seven weeks, if you bought Bitcoin at any other time, you would be in the black.

HODL Chart

However, one drawback with HODL is that you are exposing yourself to massive fluctuations and therefore, risk. You could improve your risk-adjusted returns by rebalancing your Bitcoin holdings and other asset holdings to ensure that Bitcoin does not become a large proportion of your wealth.

Another potential drawback of HODL is the time value of money. For instance, if you HODL’d through the peaks in December 2017 and January 2018, you do not know how long you will have to HODL Bitcoin before it regains those highs.

So whether or not HODL is a good strategy depends on your entry point and how much disposable income you have that is not in Bitcoin. For example, if you had all of your wealth in Bitcoin and didn’t cash out when the price neared $20,000, you would have to draw down your Bitcoin holdings to buy necessities. When viewed this way, HODL is an accessible strategy for those with savings in fiat, but having no savings or emergency funds and HODLing Bitcoin can be a recipe for disaster.

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