What Does HODL Mean? Everything You Need To Know

Crypto investors quickly retrofit HODL as an acronym for “hold on for dear life,” an encouragement to other crypto investors not to sell when prices fall.

The meme also acknowledges novice crypto investors who are not skilled enough to profit from short-term trades amid the notoriously volatile crypto market.

The HODL approach has been rewarding for long-term investors in bitcoin, Ethereum (ETH) and other leading cryptocurrencies, as it’s helped them navigate extreme fluctuations in the crypto market.

Ben Gagnon, chief mining officer for Canadian-based Bitfarms (BITF), says HODL is more of a mentality than an investing strategy.

“To HODL is an acknowledgment that while a lot of money can be made trading short-term volatility, a lot of money can also be easily lost,” Gagnon says.

The HODL community encourages other investors not to cash out of their crypto when prices rise and not to throw in the towel when crypto prices fall.

“Since bitcoin was designed to be the ultimate hard money, most of the daily volatility is just the noise that comes from the most free market in the world responding to events in real-time.”

There’s no question the HODL strategy has paid off well for GameKyuubi and other bitcoin investors that have held onto their crypto investments.

Since the original HODL forum was posted in December 2013, bitcoin prices are up about 2500%. Even investors who bought on the first day of 2018 and employed a HODL strategy are still up more than 17% on their investment.

But bitcoin’s gains don’t come without years of “HODLing” through stomach-turning losses.

Bitcoin’s extreme volatility has produced a handful of horrendous annual returns throughout the years. For example, bitcoin shed 50% of its value in less than 48 hours of the Covid-19 pandemic-induced sell-off in March 2020. The original crypto plunged to $US4000 before ending the year around $US29,000.

Bitcoin prices were down 73% in 2022 as rising interest rates triggered a sell-off in cryptocurrencies and other risk-on assets. But investors who were spooked into selling their BTC in these downturns have often lived to regret those decisions: to wit, as of June 28, 2024, BTC was up again—bolstered by institutional investment in spot ETFs—to $US61,000.

Ignoring short-term market fluctuations and focusing on the long-term outlook is not a strategy that is unique to the crypto world. Value investors like billionaire Berkshire Hathaway CEO Warren Buffett also ignore short-term market volatility and focus on the long-term picture.

The “Oracle of Omaha” famously encouraged investors never to own a stock for 10 minutes that they wouldn’t be comfortable holding for 10 years.

However, the difference between long-term value investing and long-term HODLing is the difficulty in accurately valuing cryptocurrencies.

Value investors rely on fundamental metrics like price-to-book (P/B), price-to-earnings (P/E) and price-to-sales (P/S) ratios to estimate the intrinsic value of a stock.

Bitcoin does not generate cash flow, revenue or earnings, and it’s not backed by assets that create intrinsic value, making it difficult to predict its long-term value.

Harry Turner, founder of The Sovereign Investor, says the key to bitcoin’s long-term investing outlook is its leading market position and its fixed supply.

“HODLing is a good approach to Bitcoin investing if you believe in its long-term prospects and are prepared for some volatility along the way,” Turner says.

“The same can’t be said for all other cryptos, however, as most of them will likely go to zero.”

HODL may not be the right approach for every crypto investor and every cryptocurrency. It can be difficult for even professional traders to time short-term trades. And there are psychological biases that negatively impact investors’ decision-making.

Even US billionaire investor Ray Dalio said he was wrong about 66% of the time he personally disagreed with the “buy and sell” decisions of his hedge fund’s automated quantitative investing process.

The investor sentiment cycle is a visual representation of the emotions a typical investor experiences based on the performance of the investor’s portfolio over time.

When a stock or crypto’s price is at its lowest point, investors typically experience fear, anger and panic that can lead them to sell at the worst possible time. Likewise, when a stock or crypto price is at its highest, investors often feel excited and overconfident, prompting them to buy at the worst possible time.

Jason Porter, senior investment manager at Scottish Heritage SG, says the HODL strategy can be particularly useful for crypto investors during market weakness, such as 2022’s crypto winter.

“HODL can be employed, particularly when the market is declining, to assist investors in avoiding the urge to sell in a panic,” Porter says.

He says HODL investing can help investors control the emotions associated with the fear of missing out, commonly known as FOMO, and fear, uncertainty, and doubt, or FUD.

“I believe this is crucial for new investors because they are more likely to act emotionally or impulsively,” Porter says.

The HODL mindset inspired the creation of the HODL token in May 2021. HODL claims it is the highest-paying reward token on the Binance Smart Chain Network (BSC). It isn’t easy for Australians to get hold of HODL, and you may have to use an international exchange, which may cost you extra in conversion fees to USD.

A 10% tax is applied to each HODL transaction, and the tax is automatically liquified and converted to BNB (BNB). That BNB is then transferred to a reward pool and is distributed every seven days to investors who hold HODL tokens in their wallets.

At this point, HODLing HODL tokens haven’t paid off for investors.

HODL culture has been a major help to long-term investors in Bitcoin and other top cryptocurrencies. But critics of HODL culture point out that the mindset only works if the value of cryptocurrencies continues to trend higher over the long term.

Bitcoin has only been around since 2009, giving it a limited long-term track record compared with stocks, bonds, property and other assets. Others have argued that the stubbornness and close-mindedness of HODL culture is “cult-like”, blinding the community to any legitimate criticisms of Bitcoin as an investment or a currency.

Still, if Bitcoin bulls are correct and BTC eventually becomes the world’s universal digital currency and preferred long-term store of value, long-term HODL’ers will benefit.

This article is not an endorsement of any particular cryptocurrency, broker or exchange nor does it constitute a recommendation of cryptocurrency or CFDs as an investment class.  Cryptocurrency is unregulated in Australia and your capital is at risk. Trading in contracts for difference (CFDs) is riskier than conventional share trading, not suitable for the majority of investors, and includes the potential for partial or total loss of capital. You should always consider whether you can afford to lose your money before deciding to trade in CFDs or cryptocurrency, and seek advice from an authorised financial advisor.

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