HODL (Hold on for Dear Life) is the mantra of the crypto community because the prices of cryptocurrency fluctuate so wildly that a bad day can quickly turn into a good day. And a good month in Bitcoin can turn negative just as fast. The idea of HODL is to wait out the storm because the crypto markets have been trending upward for years and history teaches that all Bitcoin storms end up leaving bag holders with beachfront property. More specifically, HODL teaches that time is on your side if you are able to wait. But is this really true?
The History of Bitcoin
Bitcoin is often described as a bubble because of how fast the prices rose. Calling Bitcoin a bubble shows a lack of financial understanding as I described here, but the reason people do so is because sharp price rises are a classic indicator of a bubble. What is interesting is that Bitcoin has been called a bubble many times because it has in fact grown rapidly over the years. Bitcoin started at less than $1 and by the time it was $3 it would have been called a bubble by many. But then it rose to $12 and was once again called a bubble. People like to say that “what goes up must come down.” However, the law of gravity is a poor investment strategy and would have failed you at $12 Bitcoin which rose again to $20, and then $50 and all along people called it a bubble. Bitcoin’s price spikes have occurred hundreds of times and each time justifying a small part of the bubble definition. But in late 2018 the price of Bitcoin soared to almost $20,000 and many people who once feared the bubble were now buying into it.
The Bumpy Ride
Looking only at the highs of Bitcoin can be misleading, giving the impression Bitcoin only goes up…it does not. Rather Bitcoin is notorious for its wild swings of as much as 10% in a day, or even an hour. This is when HODL can prevent emotional investors from making the worst mistakes of buying high “look how fast it’s going up” and selling low “Bitcoin is dead, better get out now.” But when is HODL a mistake? When can refusal to sell create more risk than it prevents? That is too difficult to answer because the real answer is “it depends.”
There is a lesson in Psychology here. It is the trap of cognitive dissonance. Essentially, when we do something that makes us uncomfortable we have two choices, to change our behavior or change how we think about that behavior. With Bitcoin, if you refuse to sell and the price goes down, you will either sell (change your behavior) or rationalize and think ‘it will go back up’ (change the way you think about that behavior). Is HODL a good or bad strategy for you today? That is for you to decide. However, it has served me well as I first bought into Bitcoin when it was rising rapidly from $500 to $1,100 in late 2013 before the 2014 crash. Should I have used HODL when the price fell to $250 or should I have sold my coins? Clearly, HODL would have been the better strategy even as the price seemed to have no bottom.
No one can predict the future, but the only trend Bitcoin has so far followed 100% of the time is that Bitcoin breaks its all-time high. It has 8 years of breaking its all-time highs. With adoption rates still low for cryptocurrency, it would be very surprising if Bitcoin has actually hit a wall, a permanent crash, that it will never recover from. What is far more likely is that Bitcoin will do what it has always done and in time, break its previous high.
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Featured Image: depositphotos/ melpomene
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