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Why "Buy and Hold" Strategy Works Best For Bitcoin Trading

Michiel Mulders
March 10, 2021
a person holds a physical coin the resembles bitcoin

The discussion of whether the “Buy and Hold” strategy works better than active Bitcoin trading has been a wildly discussed and researched topic. The Buy and Hold strategy, also called "the Bitcoin HODL strategy", assumes you buy Bitcoin and hold it for a longer period of time. Some people prefer to periodically buy Bitcoin and store it until their investment reaches a particular profit margin.

Yet, the Bitcoin “Buy and Hold” strategy is not a foolproof method. This article discusses the following topics:

  • What are the different implementations of the HODL strategy?
  • Why do so many investors prefer the Bitcoin “Buy and Hold” strategy?
  • What are the pitfalls of the HODL strategy?
  • When should you opt for Bitcoin trading?

What are the different implementations of the HODL strategy?

The Bitcoin HODL strategy describes that you buy a certain amount of Bitcoins and store it for a longer period of time. Most people prefer to store their Bitcoins for at least a year, up to three or four years. You want to store your Bitcoins long enough for them to attain a higher value. It’s best to set a profit level you want to reach. Otherwise, it’s not easy to find the right moment to sell your Bitcoin stash. 

Many people believe that the price of Bitcoin will continue to rise in the future because of two reasons:

a.) A limited supply of Bitcoins, capped at 21 million Bitcoins

b.) People lose access to their wallet, so the Bitcoin supply shrinks year by year

Now, it’s essential to understand you can implement the HODL strategy in various ways. First of all, you can pick a random day to invest all your money in Bitcoin. This strategy is not that great as you might be buying Bitcoins at a very high price, which means you’ll have to store them much longer to reach a certain profit level. 

Therefore, the periodic buying strategy is preferred. This strategy says you should buy a small number of Bitcoins every week or month. For instance, you have a budget of $12,000 for which you want to buy Bitcoins. You can use this budget to buy $1,000 worth of Bitcoin each month on a random day. It’s a strategy that helps you mitigate the risk of buying Bitcoins at a very high price. By buying monthly, you ensure you buy Bitcoins at different price levels and reduce the impact of volatility by spreading your purchases over time.

Why do so many investors prefer the Bitcoin “Buy and Hold” strategy?

The Bitcoin “Buy and Hold” strategy is one of the easiest methods to implement. You don’t have to worry about setting up your trade, like adding a take-profit or stop-loss. You simply have to buy Bitcoins and safely store the private key to access your wallet. 

If you are periodically investing in Bitcoin, you also don’t have to worry about timing the market. Timing the market can be one of the most stressful experiences of crypto trading. When is the right moment to buy Bitcoin? It’s a question that causes a lot of concerns and stress. 

On top of that, people who actively trade Bitcoins have to look for a new entry position each time they sell their position. This approach is more stressful and requires more time. Often, you don’t find a good entry position. Therefore, you have to wait for the market to evolve to find a good buy-in opportunity. 

And lastly, as mentioned before, trading induces a lot of stress and emotions. People are bad at managing their emotions when trading, especially beginners. Whenever they notice that the market is changing, they sell their position. When trading, it’s key to control your emotions. It’s good to remember that the market will turn positive at some point.

So, what are the pitfalls of the Bitcoin HODL strategy?

Pitfalls of the Bitcoin HODL strategy

Many new Bitcoin investors adopt the “Buy and Hold” strategy, which is great! Yet, most beginners join the market during a bull run. This isn’t a great moment to start your “Buy and Hold” strategy as the price of Bitcoin is already inflated. You’ll have to store your Bitcoins much longer to reach a certain profit level. On top of that, a market correction may leave you with significant losses.

The best moment to start your periodic investing strategy is when there’s a bear market. This strategy allows you to accumulate Bitcoins when the price keeps falling. The idea here is that you can reach a profitable position much quicker than when buying during a bull market.

What is a bear market? A bear market is when a market experiences prolonged price declines. It typically describes a condition in which prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.

Another pitfall is selling strategy. Bitcoin HODL’ers often don’t know when to sell crypto. They often break their long-term holding rule whenever they see any significant profit by selling some or all of their Bitcoins. It’s best to determine a selling strategy upfront.

For instance, the best selling strategy is gradual selling (percentage-based selling). You determine different price targets at which you want to sell a piece of your crypto position. 

Here’s an example strategy:

  • Sell 50% when reaching a price of $45,000
  • Sell 25% when reaching a price of $50,000
  • Sell 15% when reaching a price of $52,000
  • Sell remaining position at $60,000

This way, you have a clear strategy that tells you when to sell your position and secure profits. 

Next, should you consider Bitcoin trading besides the “Buy and Hold” strategy?

When should you opt for Bitcoin trading?

More experienced Bitcoin users should opt for Bitcoin trading if they can manage their emotions. On top of that, it’s important to have some level of understanding about the crypto industry and how different types of news can impact the Bitcoin price.

For instance, when Elon Musk recently announced that he would invest $1.5 billion in Bitcoin through his company Tesla, this was a great moment to open a long position for Bitcoin. This type of news positively affects the price of Bitcoin. Yet, there are many other Bitcoin trading strategies besides news-based trading.

On top of that, you also have to think about protecting your trade, calculating the profit-loss ratio, and setting a take-profit or stop-loss. Bitcoin trading is more than just opening trades in any direction.

If you are familiar with all of the above terminology, it’s worth looking into Bitcoin trading. I encourage you to start with a demo account that allows you to safely experiment with Bitcoin trading and learn how to protect trades. 

Trading vs. HODLing: A Conclusion

In this article, you’ve learned the benefits and pitfalls of the “Buy and Hold” strategy. While periodic investing might reduce the risks of investing in Bitcoin, market timing still plays an important role in success. When you buy Bitcoin during a bull market, you can still acquire significant losses when the market starts to fall. Therefore, you need to hold on to your Bitcoin position much longer to reach a meaningful level of profits. In other words, it’s better to start your “Buy and Hold” strategy when the market experiences a big hit or enters a bear market.

The biggest problem with crypto beginners is that they join the market when there’s a lot of hype around Bitcoin or other cryptocurrencies. Therefore, if you want to get started with periodic Bitcoin investing, make sure to evaluate the current market stage. 

More experienced users can look at different trading strategies like news-based trading in combination with periodic investing. If you aren’t comfortable with your trading capabilities but want to experiment with Bitcoin trading, you can open a demo account on YouHodler that allows you to experiment with Bitcoin trading safely.

About the Author
Contributor

Michiel Mulders is a blockchain developer with a passion for the crypto space. His interests include blockchain, entrepreneurship, marketing, and carefully crafted beers. Cheers!

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