Bitcoin Investment Strategy (2020): HODL vs Trading

If you’re thinking of investing in cryptocurrency, then there are two main investment approaches you can take: HODL and trading.

In this post, I cover what the characteristics of the HODL and trading investment strategies are. I’ll also touch on the approach that I take, which is a mixture of both HODLing and a little bit of trading for fun.

Important: I am not a financial advisor and this is not financial advice. Read my disclaimer here.

Cautions

Before I go into the two main Bitcoin (BTC) investment approaches you can take, I need to caution you on a few things:

  • It’s not a good idea to borrow money via loans to invest in Bitcoin (BTC) or other cryptocurrencies. It’s an even worse idea to purchase cryptocurrency with credit cards, as they will charge you cash advance fees (and sometimes a higher interest rate).
  • Don’t invest money that you can’t afford to lose. It’s worthwhile to pause and imagine that you’ve already lost the money you’re thinking of investing. If you can’t handle the feeling that arises, then you’re probably over-exposing yourself.
  • The majority of cryptocurrencies (90%+) aren’t going to survive. If you’re invested in a cryptocurrency that goes to zero, you’re not going to get bailed out. Conduct extensive research on the coins you’re looking at and be careful of recommendations you find on social media.
  • Make sure you’re keeping records of what you’re doing. There are lots of options, but one of the most well-recommended options is CoinTracking (it’s a little expensive, but worth it).

HODL: The Long-Term Strategy

What is HODLing?

HODL itself is cryptocurrency slang which originated when an (evidently drunk) BitcoinTalk user made a post where they misspelt “HOLD” in the face of falling Bitcoin (BTC) prices in 2013.

HODL is essentially a long-term approach where you purchase and hold Bitcoin (BTC) and other cryptocurrencies without regard for the short-term fluctuations in price. It involves:

  • Investing in one-off or regular sums of Bitcoin (BTC) and other cryptocurrencies.
  • Holding the investment for a long-term period (e.g. 1+ year) or until another condition is met.

This is the lowest effort and easiest strategy to adopt. It’s based on the assumption that the price of Bitcoin (BTC) and some other cryptocurrencies will see a rise in real-value over long-term time periods.

This approach completely ignores short-term volatility which is an inherent feature of the cryptocurrency markets. Even if the price of Bitcoin (BTC) drops off a cliff, investors committed to the HODL strategy shouldn’t do anything unless the fundamentals have changed.

Once you’ve set yourself up with HODLing, this is a passive investment strategy.

Simple, But Not Stupid.

Despite its simplicity, HODLing shouldn’t be goal-less. You might want to consider the following points.

1. What cryptocurrencies are long-term winners?

As I’ve already touched on, most cryptocurrencies (90%+) are going to collapse. Their solution might become redundant, another cryptocurrency might do a better job, critical members of the team might level the project, etc.

If you’re intending to HODL a cryptocurrency for the long-term, you need to be confident about where you’re putting your money and have a rationale for why it’ll increase in value.

2. How are you going to invest?

You have a few options to consider here:

  • You could invest in chunks whenever you want, regardless of what the price is doing.
  • You could determine price levels you’d be happy to buy-into your cryptocurrencies at (i.e. ‘buying the dip’).
  • You could setup automatic regular investments into your chosen cryptocurrencies (i.e. dollar-cost averaging).

You don’t have to pick one path; you could do a combination of all the above.

3. What are your conditions for pulling money out?

When you invest money into anything, you likely have aspirations that it’ll grow in real-value.

But when are you going to cash out and realise those profits? Are you going to cash-out in 5 years? 10 years? Or is there a specific price point where you’ll cash out instead?

You can also determine what percentage (or fiat value) you draw out under certain conditions.

Your cryptocurrency investment could go the other direction too. If you’re not prepared to lose all of your investment, then do you want to pre-defined conditions where you exit the market?

Why Might You HODL?

Here are just a few reasons you might decide to take a long-term (i.e. HODL) investment approach:

  • You don’t have the time (or motivation) to actively invest in cryptocurrencies and you just want to easily gain some long-term exposure to projects you care about.
  • You want to invest in some cryptocurrencies which you think have strong long-term potential.
  • You aren’t confident in your technical analysis ability and have no interest in learning how it works.

How Can You HODL?

If this is the approach you want to take, how do you actually invest in Bitcoin (BTC) or any other cryptocurrency you’re interested in?

I’ve previously covered the best places to buy Bitcoin (BTC) in the UK. There are plenty of places in the UK where you can get Bitcoin (BTC) without paying more than 2% in fees.

I’ve also put together buying guides for some other cryptocurrencies:

If you want to setup automatic regular purchases of Bitcoin (BTC) or Ethereum (ETH), then I would recommend my Vimba review.

Trading: The Short-Term Strategy

What Is Trading?

Trading is a short-term approach where you’re looking to maximise your returns and beat any gains which could be achieved by just holding cryptocurrencies.

This is a high effort approach which can be time-intensive. It embraces the volatility of the marketplace, as price fluctuations offer the opportunity to profit from drastic changes in prices over short time periods. This is the opposite of the long-term strategy I defined above, which looks to evade short-term volatility.

In order to trade, you need to have some level of technical analysis ability. There are some automated tools like 100eyes which might help, but you need a firm understanding of how it all works.

You also need to put time into monitoring the markets and searching for opportunities you can take advantage of. Because cryptocurrency markets are fast-moving and always-on, it’s also reported as something that’s quite stressful to do.

Clear Goals

If you’re taking this approach, it becomes even more important to clearly specify what your goals are.

You might want to consider:

1. Where’s the opportunity?

You need to look for what cryptocurrencies have short-term and medium-term potential.

But the cryptocurrency market is massive. There’s more than 1000 projects listed on CoinMarketCap. Think about whether there are specific criteria you’ll set for any investment you make. That might be based on things like volume, total market capitalisation, or the purpose of the coin.

2. What are your conditions for pulling money out?

As in the HODL investment approach, you should probably think about the conditions under which you’ll buy and sell any cryptocurrency that you’re interested in trading. This shouldn’t just be random numbers either, it should be informed by your research and technical analysis.

You also have to consider that, even if you do awesome research and have wizard-like technical analysis skills, you could be wrong about a trading opportunity. When will you accept losses and move on?

3. What are your profit targets?

Do you have a realistic daily, weekly, or monthly amount of money you want to make? Remember: the goal of trading is to exceed the returns of a passive investment. If you can’t beat holding a simple basket of cryptocurrencies, then this might not be the investment strategy for you.

You should probably have a number to aim towards so that there’s some point when you can justify ‘switching off’.

Why Might You Trade?

Here are just a few reasons you might decide to take a short-term (i.e. trading) approach to cryptocurrency investment:

  • You’re confident in your own technical analysis ability and want to leverage it to generate swift ROI.
  • You have lots of spare time to search for opportunities and monitor fast-moving cryptocurrency markets.
  • You’ve got a decent amount of capital which can be leveraged to generate sizable gains from small percentage movements.

Unless you have previous experience, I think it’s a waste of time trying to day-trade.

How Can You Trade?

If you’re looking to trade, then you’ll want to use a cryptocurrency exchange which provides you with access to lots of cryptocurrencies but also has low fees. Check out my roundup of the best cryptocurrency exchanges to find an option which suits your needs.

Ensure that you turn on two-factor authentication whenever you register on a new cryptocurrency exchange. Most places do support this.

“So what should I do?”

What is right depends on your circumstances, motivations, and goals. What’s right for one person is the exact opposite of what another should do.

Here’s what I’m doing:

  • I hold about 70% of all my investments passively in cryptocurrencies that I think have long-term potential and are ‘safe’ bets. It’s mainly just Bitcoin (BTC). I’m not looking to do anything with this bunch for a few years, regardless of what happens.
  • With the other 30%, I make short to medium-term bets on coins which are undervalued or volatile. If I think a cryptocurrency is overvalued, I might take everything out and keep it liquid so that I can take advantage if/when the market corrects.
  1. Store your cryptocurrency in your own wallet. Do NOT leave substantial amounts on exchanges. Hardware wallets (like the Ledger Nano S) are strongly recommended by the community.

What else should I do?

  • Share this post with those it could help (see below links to do that).
  • Use a hardware wallet to store your cryptocurrency whenever possible. I’ve reviewed and compared the best hardware wallets in a recent roundup.
  • Read my CoinTracking review. It’s a little expensive, but it allows you to easily keep track of everything you’re doing (and clearly see how much money you’re making/losing).

2 thoughts on “Bitcoin Investment Strategy (2020): HODL vs Trading”

  1. A great starting point on things to consider when investing. I’m thinking of beginning to invest in cryptocurrency, some food for thought.

    Reply
    • Thanks for reading and glad you found it useful!

      Do check out my other post on cryptocurrency related resources if you’re interested in the space, as it’s a good starting point ). If you do have any questions, please don’t be afraid to get in touch – happy to help newcomers.

      Reply

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