This article was written by Yasin Ebrahim, financial expert.
Keeping up with the ever changing world of cryptocurrencies can be daunting for newcomers: the language used is often cryptic, volatile price moves are common and new cryptocurrencies pop up on an almost daily basis.
While there appears to be little that can be done about volatile price moves and the influx of new cryptocurrencies, having an understanding of the many cryptic terms in the world of cryptocurrencies often pays off.
‘Hodl’ is one of those cryptic terms. The term can usually be found in a question and answer exchange that would look a little something like this: ‘Should I sell my Bitcoin if it hits $10,000?’ – ‘No, don’t sell, you need to hodl.’
At first glance you would assume that hodl is just a typo of ‘hold’. And you would be correct.
Apparently the term originated from a popular Bitcoin internet forum during the 2013 December Bitcoin crash. Using the pseudonym GameKyuubi, a Bitcoin investor vented his frustration in a post titled “I AM Hodling” explaining that only good traders know when to sell Bitcoin as they can identify bear markets. He admitted that “Hodling” was a typo.
The term hodl may have been borne out of anger and frustration but it has moved on to become a way of investing in cryptocurrencies. Now, it’s commonly used as an abbreviation – hold on for dear life. But should you always hold on for dear life or hodl each cryptocurrency?
Bitcoin – everyone’s favourite hodl
Understanding what makes an investment successful is always important: some investments require a long-term hold in order to reap the returns, while others are more short-term swing trades usually entered and exited in a very short space of time.
The same is true of cryptocurrency investing. . .
If ever there were a cryptocurrency that deserved the title of the hodl crypto, Bitcoin would be it. The popular digital currency has faced many crashes during its nine year history but has always rebounded, so far.
The most recent example was the China crash in September. Bitcoin slumped to a low of $2,981 as investors feared that China’s decision to ban initial coin offerings (ICOs) and subsequent move to order all local cryptocurrency exchanges to cease trading would be the end for Bitcoin. It wasn’t. Bitcoin went on to post new all-time highs, rallying above $7,000.
For the uninitiated, an ICO is a means of fundraising via the use of a cryptocurrency, or ‘token’. A company creates its own digital currency which is sold to investors to raise funds. Investors buy the offered token in the hope that it will increase in value as the business becomes successful.
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While it is clear that the Bitcoin has, thus far, shown a knack for rebounding from crashes, there is another reason that people hodl Bitcoin: the promise of more coins.
Like any investment community, the Bitcoin community has a lot of different participants – some want to change the way the Bitcoin network functions – for the better, they argue – others want to leave it the same.
The difference in beliefs in how the Bitcoin network should function results in some participants creating a new set of rules that govern transactions on the Bitcoin network, leading to split, or ‘fork’, the underlying software of Bitcoin. New rules tend to lead to new coins – think Bitcoin Cash, Bitcoin Gold – which are freely distributed to holders of Bitcoin.
The most recent example of the hodl in action was the late October Bitcoin rally, which some called the SegWit2x rally from around $5,000 to above $7,000. Crypto-investors piled in Bitcoin hoping that a software upgrade known as SegWit2x would lead to a split in Bitcoin’s underlying software, creating a new coin, which would be freely distributed to any investor holding Bitcoin.
The SegWit2x upgrade was cancelled – much to the relief of some investors – sending Bitcoin surging to an all-time high of $7895, but relief soon turned into disappointment as other investors who had invested in Bitcoin hoping that split would create a new cryptocurrency, dumped their holdings of Bitcoin.
So, while a split or fork may not be a favourable outcome; it is common to see Bitcoin surge higher in the days leading up to a split as participants look ahead to receiving their share of the newly created cryptocurrency.
Conversely, when a split or fork fails to materialize à la the cancelled Segwit2x split, then it should come as no surprise to see investors fleeing the cryptocurrency as their sole purpose of investing – to receive free coins – no longer exists.
To hodl or not to hodl?
Most cryptocurrencies are currently in a price-discovery mode as it is difficult to apply the same valuation methods used for equities to determine the fair value of a cryptocurrency. There are no price-to-earnings metrics or no cash flows to discount.
But there’s a few ground rules to follow to avoid hodling onto a poor-performing cryptocurrency. Circulating supply of coins vs. max supply. Take a look at the token ATMChain – it has a total supply of 10 billion but there are only roughly 3 billion tokens in circulation, according to CoinMarketCap.
Assuming the idea behind the ATMchain is one that that you support, it’s still quite risky to hodl ATMchain as there’s a risk that management releases the remaining 7 billion tokens into the market, pressuring the price of the token.
Total market capitalization of all coins in circulation is also another important metric to watch as a higher total market cap indicates that the overall demand (money) in crypto-investing has increased.
The total market cap of all coins is more than $200 billion, compared to less than $100 billion six months ago, according to CoinMarketCap.
So whether you’re a hodler or a swing trader it pays to remember that you should manage your crypto-portfolio as you would any other investment portfolio: let the winning trades run, or in other words, hold on for dear life to the cryptocurrencies that offer long-term value.