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The term “HODL” began with the misspelling of the word “hold” in an online cryptocurrency forum in 2013. Readers quickly embraced the typo, and it gained its own definition: HODL refers to the strategy of holding onto digital assets amid extreme price changes. The word continues to be used within the crypto community and has since been used as an acronym that playfully underscores that idea: "Hold On for Dear Life."
Blind faith in a product or idea might seem like a poor quality for an investor — like somebody refusing to give up an investment position in Blockbuster when companies like Netflix were on the rise. But according to financial planners and analysts, it’s also a rational response to a market whose ups and downs are exceedingly difficult to predict.
“The holding part of it is important because it’s a nascent industry, and as a retail investor you are not well-equipped to be able to capture the volatility and to trade the assets,” says Theresa Morrison, a certified financial planner in Tucson, Arizona.
Indeed, the original HODLer in 2013 had no illusions about their ability to play the market. But the post conveyed a confidence that time would improve Bitcoin’s fortunes.
“WHY AM I HOLDING? I'LL TELL YOU WHY,” their message read (this time spelling “hold” correctly). “It's because I'm a bad trader and I KNOW I'M A BAD TRADER.” The post went on to say that while professionals stand a chance to make money in the short term, particularly in a bear market, the poster was better off doing nothing.
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HODLing as an investment strategy
The utility of HODLing, like any investment strategy, has its limits. Even a long-term cryptocurrency investor would be well-served to articulate clear goals and to monitor the emerging space for systemic risks.
But in general, the idea of investing for long-term, rather than short-term, gains is not a new one. One time-tested guideline for investing in the stock market is to put money in only if you’re willing to keep it there for the foreseeable future — say, at least five years — rather than trying to time short-term peaks and valleys.
With cryptocurrency, Morrison says, the importance of patience is even higher. The volatility is more extreme, but the long-term gains have been quite appealing.
If you invested $1,000 in Bitcoin on the day of the original HODL post, it would be worth much more today. But there are countless people who have lost money trading Bitcoin in the meantime, buying it when it was high and bailing out after a disappointing fall.
Many long-term HODLers take the examples of successful gains as a validation of a strategy that at times can border on zealotry. In online forums devoted to cryptocurrency, users can be shunned for liquidating part of their holdings even after significant long-term gains.
“There is nothing wrong with locking your profits,” one user on Reddit’s CryptoCurrency message board lamented recently. “Don't let anyone make you feel bad about it. Even if you lock your profits at 50%, you are still 50% up.”
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HODL and cryptocurrency
The devotion among HODLers comes from the culture surrounding Bitcoin and other cryptocurrencies, says David Duong, head of institutional research at the cryptocurrency exchange Coinbase.
For some, cryptocurrency represents a vision of economic change that is bigger than themselves.
One of the distinguishing features of so-called blockchain technologies such as cryptocurrencies is that they could theoretically be used to create “decentralized” products and services free from the costs and controls imposed by authorities such as bankers and regulators.
“The people who are in the space very much have a belief about the transformative nature of the technology itself,” Duong says.
Your decision: Is HODL for you?
You don’t have to be a cryptocurrency disciple to learn something from the HODLers. If you believe in the value of your investments, you might be less likely to panic in the face of market turmoil.
A good strategy, Morrison says, is to have a strong idea of why you’re investing in something when you buy it. And when you’re tempted to sell it, a key question is whether something about your analysis has changed.
That doesn’t mean it’s risk-free to keep your investments forever. Cryptocurrency and blockchain technology are still relatively untested, and they may not pan out as the revolutionary innovation their supporters envision. There are also times when it may be prudent to sell, such as cashing out some gains when you’ve met your goals.
But HODLing can be a helpful default.
“As a buyer of crypto, you definitely want to have an investment policy statement. You definitely want to know what is going to change your mind to sell,” Morrison says. “Otherwise you should be a HODLer.”
Neither the author nor editor held positions in the aforementioned investments at the time of publication.
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A version of this article, written by NerdWallet, was originally published by The Associated Press.