The word “hodl” is virtually synonymous with the ethos of the cryptocurrency community. Originally a typo in a 2013 BitcoinTalk thread, it has since become a rallying cry in the face of extreme market volatility. It has also spread to popular culture, with John Oliver recently featuring the phrase in an episode dedicated to cryptocurrencies. Even a parody of “Gucci Gang” has been made in honor of this word.
The hodlers’ strategy is simple: they simply hold their cryptocurrency coins indefinitely and never try to guess the best time to sell based on short-term market trends. This strategy has proven largely effective thus far; everyone who bought Bitcoin at least two years ago and hodl’ed until now would’ve enjoyed a 20x gain or greater in USD value.
However in the past year or so, there have been many cryptocurrencies that claim to be the next Bitcoin. This has led to many adopting the hodler’s strategy for these altcoins, hoping to strike it rich. I’m skeptical as to whether this strategy will work for just any coin. Past performance is no guarantee of future results, and now hodlers will have to be careful on which cryptocurrencies to put their money in.
Here are the prerequisites that I think are crucial for the modern hodler. Note that everything in this article and blog is purely for informational purposes, and is not financial advice.
Do your own research (DYOR)
Before you think about putting any of your hard-earned money into a cryptocurrency, do your own research! Keep an open mind and actively seek out arguments for and against its success. I like to consider these four factors.
- The development team: How strong is the development team? Which members (if any) have previously delivered successful projects? How well does the team hold itself accountable to a roadmap? How much substantial progress has the team made? Remember to ignore the hype and to evaluate this critically.
- Token economics: How many coins do the founders reserve for themselves? How is development funded? What is the circulating supply? What is the max supply, if any? How will the remaining supply be distributed? Too many coins in the founders’ wallets or a select few wallets could be a bad sign.
- Adoption: What are the main use cases of this cryptocurrency? Is it a store of value, a medium of exchange, and/or a utility token? If it powers a platform (e.g. Ethereum, NEO), how viable is that platform? It’s probably okay if the cryptocurrency doesn’t see much real-world use right now, but there should be concrete plans for adoption.
- Unique features: What features does this cryptocurrency bring to the table? How compelling are they? Have these features been implemented yet? If not, when? Reading whitepaper(s) and listening to development teams pitch their own cryptocurrencies are good ways to gauge this factor.
Resist your emotions
It’s easy to succumb to your emotions when getting involved with cryptocurrencies. When doing your research, you might have a difficult time separating valid criticism from unfounded fear, uncertainty, and doubt (FUD). And when you look at the market and spot an altcoin that doubled in price this week, you might fall victim to the fear of missing out (FOMO).
Do whatever you can to resist these emotions. Step away from the computer and forget about the market for a day or two. And while you’re taking a break, evaluate your options in a logical and methodical manner—whether you want to buy, sell, or do nothing. Once you come back, you’ll be in a better position to make good decisions.
Don’t invest more than you’re willing to lose
If you have done your own research and acted rationally, you’ve likely maximized your chances of picking a portfolio of cryptocurrencies with long-term potential. But even if you have done everything right on your end, the market can still be depressed in the short-term, denying you a quick profit. This brings me to my third prerequisite: don’t invest more than you’re willing to lose.
In the past couple of months, a lot of folks have been burned by putting too much money into cryptocurrencies, often by taking out mortgages on their homes or dipping into their retirement savings. Many of them bought Bitcoin near its all-time high of $19k. Now in March, Bitcoin is sitting at around $8k-$9k. While I believe that Bitcoin’s price can make a recovery over the next year or two (and I’m willing to wait that long), it doesn’t matter to those who sunk their life savings and home equities into it. Unless Bitcoin’s price doubles soon, they’re financially screwed!
Now if the market actually ends up increasing that much in the next month, that would be great. But to bet heavily on that is akin to playing slots until you’ve doubled your money or lost all of it. Cryptocurrency markets have extremely high volatility, and are subject to price manipulation regardless of how viable individual cryptocurrencies are. If you’ve put in too much money, be warned that the market can stay irrationally low longer than you can stay solvent.
My strategy is to ease into positions by dollar-cost averaging. Additionally, I don’t think anyone should have more than 25% of their assets in cryptocurrencies. Low-cost index funds and bonds are still the best with regards to building wealth.
Take your holdings off of the exchanges
If you control the keys, it’s your Bitcoin. If you don’t control the keys, it’s not your Bitcoin.
– Andreas Antonopoulos
The above quote applies to any cryptocurrency, not just Bitcoin. If your bank is robbed of all its assets, then you’re fully or partially protected by deposit insurance, depending on jurisdiction. But if your favorite crypto exchange gets hacked à la Mt. Gox and loses all its assets, then you lose everything that you’ve left on that exchange. So if you have put a lot of money in cryptocurrencies—enough so that if you lost it all, you would be at least sad—then you should look into getting a hardware wallet and transferring your holdings there.
I personally recommend the Ledger Nano S. I’ve owned one for a few months, and I really like its ease of use. Now I don’t have to worry about insecurely managing private keys and pasting them into software and online wallets. You can buy the Ledger Nano S on the official website with my affiliate link.
So to recap, simply hodling any cryptocurrency and expecting to profit likely won’t be effective anymore. You have to put in the effort to do your own research and control your emotions. Secondly you have to be careful not to put more money than you’re willing to lose into crypto. And finally for peace of mind, you should get a hardware wallet so that you can store your coins off of exchanges without worrying about viruses and keyloggers.
In order to obtain a lot of altcoins, you need to open an account on an exchange. I recommend Binance; they offer many notable altcoins that you can buy for Bitcoin or Ethereum. Here is an affiliate link to sign up.