Successful traders understand that no one knows where the crypto market is going. There are numerous influential traders online who release detailed technical analysis (TA) daily either on TradingView or YouTube, all of which are very helpful when learning. Some are fairly accurate but only as accurate as one can be in such a volatile market subject to mood swings and whales, news and government regulatory moves. There are no magical gurus that can accurately forecast the bitcoin market on a consistent basis. The reputable ones tell you this – the scammers make you believe they can do this in an attempt to get you to give them your money or pay them for signals, education, etc.
Successful traders limit the amount of risk they take on a given trade to no more than 5% of their assets, and they are prepared to exit a trade with a loss when necessary without regret. Those who do not trade in this manner should not be trading, and that is about 95% of traders. That 95% is the reason successful traders are successful because there must be losers in order for there to be winners.
A fundamental HODL strategy is the plan for those who don’t want to be in that 95% group. If you believe that a unique intrinsic values of bitcoin is that it is unconfiscatable and want to invest – but have no experience as a trader, then this is the best strategy for you.
There are some reputable influencers in the Bitcoin community that strive to provide bitcoiners with sound educational content. There are also imposters whose sole purpose is to separate newcomers from their money. The crypto space is full of scammers promising unrealistic returns and the promise of wealth. Reputable influencers encourage informed participation and emphasize the risk when outlining the potential rewards. These players in the ecosystem want Bitcoin to succeed and most often focus on the downside instead of the promise of wealth. This is how newbies to the crypto space can tell the difference instantly.
Dollar Cost Averaging
One of the best strategies outlined by reputable influencers is the HODL strategy combined with the power of dollar cost averaging. Buying a fixed dollar amount of bitcoin at specific intervals over a period of time, and just hodling (holding) it. This strategy outperforms even seasoned, experienced traders as long as the underlying fundamentals remain in place for Bitcoin. It means that you buy the greatest amount of the digital asset at the lows, without the risk and inherent dangers of speculation. For example, let’s assume a household income of $100,000 per year and 6% of income is risked on investment = $500.
A monthly purchase of $500 on the 15th of the month starting in Jan 2014 would have resulted in a $29,500 investment for a net worth of $275,134 by Nov 2018. The purchase of a little over 50 bitcoin would mean the average price was just over $540. Some of that bitcoin could have been sold near the peak in Dec 2018 when the unrealized equity reached $873,000. No exposure to the inherent risks involved with trading, none of the stress involved with trading, and results that rival top pro-bitcoin traders make for a very attractive strategy.
Even if the monthly purchase is as little as $50, the percentage of gain is the same. Even following the drop in the price of bitcoin in 2018, the strategy resulted in a significant gain. More importantly, dollar cost averaging from the all-time highs in Dec 2017 would result in a drawdown of less than 30% compared to those who saw their investment lose 80% in value.
The word HODL was used mistakenly in a Bitcoin chat forum back in 2013 by a bitcoiner facing a price dip who decided not to panic and sell. He wrote “I am HODLing” instead of “I am HOLDing” and it caught on with the entire Bitcoin community. Since then, the acronym HODL has come to be known as “Hold On for Dear Life” as well.
Investors and traders ready to keep their crypto assets for an indefinite period regardless of the price are known as HODLers. It can be difficult to retain faith in this strategy when the price drops significantly. Those who believe cryptos will be more valuable in the future continue to hold. Others view the volatility, both the upside and the downside, as a chance to gain more profits and quickly exit their positions when the value drops. When the value starts to go back up, they might re-enter the market with a new position, gaining more bitcoin in the process, or banking profits from the original exited position. This strategy can be more stressful and can easily work against the trader. It also requires more diligence that the HODLer does not have to exercise.
There are several reasons for investing in cryptocurrency. Some people are attracted by the excitement and the ability to trade without the barriers faced to trade in traditional markets. Others recognize the potential of the technology and believe these assets will be worth more in the future. There is a phrase that is popular in traditional investing, “slow dime or fast nickel” which means one approach is to make a lot of money over a long period of time, rather than a little money right away. No matter the reason, all investors do so with the intent to make money, not lose it, but there are basically two different approaches that are taken – buy and hold or trade.
Traditional market traders consider several factors to gauge the likelihood of success, including analysis, public opinion, and historical price data. If one analyzes the historical price of bitcoin, while there are many ups and downs, the price has been generally upward. Those investors who held on during the 2013 bitcoin crash realized incredible returns in 2017.
Investment Asset Choice
Knowing what asset to invest in is a large part of the equation also. Savvy investors realize the importance of diversification for long-term gains and that is also true for cryptocurrencies. However, it is a bit more complex given the number of new cryptocurrencies that have been created and introduced to the marketplace. Diversifying means putting your money into several assets to reduce risk, so that if one asset value drops you won’t lose all your investments at once. However, in the crypto market when bitcoin drops typically so do all the altcoins. When bitcoin goes back up, that does not necessarily mean the altcoins will also. Many have failed to survive the crashes and investors never recover from the loss.
With the introduction of some 2,000 altcoins, it has become more challenging to select a crypto asset and profit simply by sitting on it. There are tools being developed using AI-based algorithms to continuously analyze more than 1,000 crypto coins and apply factors to process signals and provide a highly sophisticated index of the top 100 coins. These tools will assumably work much like market indices such as NASDAQ, S&P 500, and others with the potential to outperform the market. Historically, indices have been known to perform better than most individual trading strategies, but there is always a risk that new indices are nothing more than an HYIP (high yield investment program). In other words, a risky, unsafe scam.
The truth is that until Bitcoin is recognized for what it is, HODLing in conjunction with a prudent entry plan of dollar cost averaging remains the safest strategy. Bitcoin is currently a speculative investment for early adopters. It is the digital asset with the longest chain, secured through proof of work (POW), with a limited, fixed supply that is unconfiscatable, and is the sole crypto asset today that meets the standard requirements to have a chance of becoming sound money.
Many agree that bitcoin is unique in that it operates intrinsically without being subject to any jurisdiction, meaning intinsic value has arisen because of the characteristics named above, so long as the HODLer owns the private keys.