No, “HODL” is not a typo or misspelling. At least not anymore — it’s now a backronym, after starting as a drunken typo, then later being declared an acronym for “hold on for dear life.”
It all started on a Bitcointalk forum when a sodden crypto investor went on a whiskey-drenched diatribe. Once you get past all the typos and tangents (including one on the multiple spellings of whiskey), the semi-coherent rant actually kinda sorta makes sense. If you squint hard enough and breathe through your mouth to avoid the booze fumes wafting off the screen.
Let’s get down to HODLing.
What Is HODL?
In 2013, a forum user named GameKyuubi made the following observation about his Bitcoin strategy, in between curses and invectives: “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.” More rant you can’t repeat in polite company here, then: “You only sell in a bear market if you are a good day trader or an illusioned noob. The people inbetween hold. In a zero-sum game such as this, traders can only take your money if you sell.”
You own shares of Apple, Amazon, Tesla. Why not Banksy or Andy Warhol? Their works’ value doesn’t rise and fall with the stock market. And they’re a lot cooler than Jeff Bezos.
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The post’s title? “I AM HODLING.”
The memes started in mere moments, as you can imagine.
But GameKyuubi simply made an amusing argument for an age-old strategy: buy and hold. In volatile markets, and in down markets, it makes more sense for the average investor to hold their assets rather than selling them at a loss, at least if you believe the asset’s value will eventually recover. Only the most skilled day traders consistently make money in these markets.
And as GameKyuubi’s quick to point out, most of us don’t have the skills needed.
The term took on a life of its own after that, becoming a rallying cry for committed cryptocurrency investors who hold on no matter how wild the price swings. Investors started referencing the “diamond hands” of those who hold on for dear life, compared to the “paper hands” of investors who sell when the market movements get too hot for them to handle.
How the HODL Strategy Works
The buy-and-hold strategy is about as simple as the name suggests.
And to give credit where it’s due, Bitcoin was worth around $950 in December 2018 when GameKyuubi spewed his now famous rant, and history proved him right. The price of Bitcoin later rose to highs over $60,000.
That particular example aside, buy-and-hold comes with plenty of perks. You avoid emotional investing decisions, which lead to weaker returns over time. You not only avoid losses from selling low, but you also defer capital gains taxes, especially higher short-term gains taxes. And hey, you don’t have to sit glued to price tickers all day, either.
As an added bonus, you can hopefully sleep better at night without worrying about every gyration in the market.
Today, investors use HODL as a rallying cry against emotional investing decisions based on FOMO (fear of missing out) or FUD (fear, uncertainty, and doubt).
Now that you’re armed with crypto slang acronyms, you can go HODL on social media without feeling like a noob.
HODL & Cryptocurrency
Many crypto enthusiasts believe that cryptocurrencies will one day replace, or at least augment, fiat currencies issued by governments. If you hold on long enough, you’ll earn enormous returns — or so the logic goes.
Still, of the thousands of cryptocurrencies that have emerged on the market, few have seen any long-term traction or value creation. There remains little underlying value, outside of laundering money or making illegal transactions.
Sure, the underlying blockchain technology has plenty of inherent uses. But that doesn’t make cryptocurrencies themselves inherently valuable. After all, cryptocurrencies don’t generate cash flow the way that businesses or real estate does, so they only have value to the extent that someone else is willing to pay you for them, like collectibles or NFTs.
Buying and holding an asset only makes sense if you feel certain it will recover its value. But just as GameKyuubi was proven right about Bitcoin rising in value later, plenty of other crypto investors have lost fortunes on fad altcoins that popped briefly in value before later collapsing in ignominy. Which says nothing of the countless Ethereum and Bitcoin investors who have lost money on even the most popular coins.
HODL & Stocks
Eventually the term HODL expanded beyond cryptocurrencies to include other volatile investments. And stocks offer a perfect example of another bucking-bronco asset.
Although stock investors have used the buy-and-hold strategy for centuries, “HODL” especially appeared in online conversations about meme stocks like GameStop and AMC. Like cryptocurrencies, these stocks were fueled by online chatter among retail investors, and exploded in value only to later collapse.
Some savvy traders made astronomical returns, selling at the peak of the meme stock mania. And plenty of HODLers who bought in during the hype lost fortunes. Because ultimately, retail investors had artificially inflated the meme stocks’ value, partially to exploit a weakness in the market and make money, but also to stick it to “the man” — big investment banks who had shorted these stocks.
The HODL strategy made little sense in the case of meme stocks. There was a good reason that Wall Street banks had shorted those stocks: the companies had weak fundamentals. Investors had no compelling reason to believe that the companies were undervalued in the short term and fated to rocket in value in the long term.
Which is, of course, the foundation of the real buy-and-hold strategy.
Should You HODL?
It depends on what you’re buying, your net worth, and your investing strategy.
When it comes to fundamentally sound companies and index funds, yes it makes sense to hold on for dear life when bear markets get their growliest. Most of these companies with strong balance sheets will recover and continue growing in the long term.
But the realm of digital currencies, meme stocks, and tech stocks that have never reported a profit are another story entirely. Sure, another feeding frenzy could send GameStop’s stock surging again, offering you an exit ramp. Or it could continue limping along with weak revenues.
And crypto markets still feel like the Wild West. No one knows how future regulation will change the market or crypto prices, or which coins will prove useful and stable and which will just flash in the pan.
The wealthier you are, the more leeway you have to experiment with high-risk, speculative investments like cryptocurrencies and unprofitable stocks. Even so, stick with just 5% or so of your net worth in “play investments,” and leave most of your portfolio in assets that have a proven track record.
Final Word
There’s nothing wrong with the premise of holding volatile assets for the long term. In fact, it’s a good strategy to manage volatility and emotions.
For fundamentally sound investments, that is. But investments that don’t actually generate revenue aren’t investments at all — they’re speculations. There’s nothing wrong with speculating on high-risk, high-potential return assets, just make sure you don’t bet the farm on them.