Disclaimer: This article might come across as a bit condescending or ‘I told you so’. It’s not intended that way, but more frustration that people threw their money away without knowing what they were getting into.
Cryptocurrencies exploded into the mainstream in 2017 after a few years of slow, quiet growth and accumulation by those in the know. That loudmouth in your office who never seems to do any work at all suddenly became a professional wall street trader, and the taxi driver gave you his hot tips on some obscure altcoins which probably went up, because hey, everything went up. And then… all these people went a bit quiet as cryptos mostly died in early 2018, led by Bitcoin dropping 50% from it’s all time high of $20,000 USD. Maybe they will recover, as people who look at charts from previous years tell themselves with fading hope while prices slump further by the day and low end shitcoins tend to no longer triple overnight for unexplained reasons. That’s right folks, we’re in a bear market whether you want to admit it or not.
Cryptos also became a meme during the last year. Rollercoaster gifs, To Da Moon, Lambos and HODL!
HODL makes me frustrated. It became the desperate cry of every newbie trader-turned-‘investor’ overnight once they bought Ripple and Tron at the peak and lost 2/3 of their money. As an amateur trader with a few years of share market participation who would describe myself as around an intermediate level of charting and using/devising trading systems, my experience shows that blindly holding and letting hope be any part of your strategy, is pretty much deliberately throwing money away and no part of any real, structured trading plan. It might often work with actual businesses that have income and growth, where eventually the earnings will increase and the price catch up, but let’s be honest, nobody has done any analysis on the cryptos they bought. Beyond the 3 letter code and the logo, anyway. You have no way to fairly value a crypto because it’s usually little more than a vague representation of an industry sector with the word ‘blockchain’ slammed on the end. Maybe they have an almost-functional wordpress website with broken English and a whitepaper you didn’t read. You cannot perform any sort of analysis and say it’s worth $x million or billion because there is no revenue yet and no clear plan how they’ll be getting any, so that leaves only hype holding up the price. And when everyone moves on, the price slumps over a very long time.
The above chart is a great example of a trap you can easily find yourself in if you don’t sell out while you have a chance (and you always have a chance). That was an ASX listed company which had a whole lot of hype around it, and announcements that turned out to be false (partnerships with major NASDAQ companies which mysteriously never happened). At it’s current stage, the company has no money, no product, and a high level of spending by management on overseas trips. It really can’t last even another year before running out of money. Would you buy it now? I hope not. Then why would you hold it as it turned a $100,000 investment at the peak, into $3000 today? If you are ‘investing’ you need to research and commit your money *before* everyone is in a frenzy (or when the security can be valued based on some sort of financial model with minimal guesswork), and if you’re ‘trading’, you need to buy when there are buy signals and sell when there are sell signals. If you don’t know what those are, you are not a trader. And if you are a trader, you can’t change into an investor when the price drops.
So why have people decided to HODL? It’s the blind leading the blind, in a way. You can tell in discussion groups and forums that newbies don’t even know what it means, but everyone is saying it, so they go along with it because they don’t know what else to do. Everyone else appears to them to be an expert because they are (were) already making money by making any random purchase, so they are looked to for advice. Dangerous.
Everything about ‘HODL’ is an example of trading psychology – but the psychology of the masses, or the herds of lambs being led to the slaughter. That’s what you don’t want to be a part of. And contrary to what you might believe and what blockchain ‘gurus’ say (gurus who only entered the scene 3 months ago, meaning they have no qualification on the matter), cryptos are not a way to escape ‘the banks’ or wall street – they’re perfectly capable of using millions or billions of dollars to manipulate prices, in fact given the often small amount of actively traded coins, its actually even easier for them to do so than with a large publically listed company. So if you’re HODLing, you probably just walked into the trap, and prefer to leave your leg stuck in there while you bleed to death rather than chop your leg off and escape alive.
Most newbie investors jump into something when it is at an all time high, at the crescendo of the hype and frenzy. Often this is accompanied by calls of ridiculous impossible prices being reached this month or this year, such as the calls I saw of $100 or $1000 for Ripple, or $100,000 or $1million on bitcoin. This immediately shows a lack of understanding of anything, as these prices assume both insatiable demand continuing indefinitely even when the price has already been climbing vertically (clearly unsustainable), and market caps which would rival the entire GDP of larger first world nations. It’s simply impossible for such figures to happen, unless fiat currency was removed overnight. I assume you agree with me on how ridiculous that sounds.
So the calls of $1million and similarly ‘this is definitely the next Google/Apple/Microsoft/Paypal’ are actually clear red flags and ‘GTFO right now’ signs rather than a sign of confidence in the market. It is only fresh faced newbies punting their rent money who are still buying at this point, and those who entered early are happily selling to them because they know it can’t last and they’re fine with taking 400% profits. Then of course, things start to falter as the demand wanes, and the price starts to slide. Gripped by fear, HODL gets repeated. Death by 1000 cuts feels better to the inexperienced trader than taking say a 10% loss. For many people HODLing, the loss becomes 30-50%, especially if their portfolio was dominated by shitcoins that rose several times in price before they purchased and had a long way to fall.
Rises and falls have played out millions of times in all financial markets, since anything was available to be traded. The following chart which gets posted regularly almost always end up the same. If you find yourself saying ‘it’s different this time’, well, sorry but that phrase alone is a dire warning about your knowledge levels. Human psychology hasn’t changed since the tulip mania in the 1600’s.
Uh-oh – don’t say you didn’t have plenty of warning! Which is better, 10-20% loss or 70% loss?
There is another catchphrase uttered far too often that says ‘you only lose money if you sell’. Not really. You haven’t got the original money. There is no way you can get it back now. The market says you can have whatever the current value is. Of course, sometimes the market recovers and even goes on to reach all time highs, but the fact it has happened before is no guarantee. You can point to previous corrections in Bitcoin, but I can point to Detroit property prices, huge companies that went from multiple billions of dollars to bankruptcy, and other similar examples where chance of a recovery is near enough to impossible. Plenty of industries boomed and busted, such as the vast majority of Dot-Com boom startups. I hope you aren’t waiting for one of those to come back from their 2001 liquidation and become the next Facebook.
An astute trader would take a small loss if things turned sour, and then assess for re-entry later. But even then, a declining stock will often wallow at prices low enough to make you cry, and for much much longer than the short lived pump/rise, even if they do recover. So ‘HODL’ing not only ensures you are turning your original wealth into little more than a handful of spare change, but you’re also locking away what little you have left for months at a minimum or sometimes years (or forever), hoping, praying, when you could have stopped out and continued on to find other promising opportunities in the meantime.