There's a time-old debate over whether hodling or trading leads to better profits when it comes to buying into the cryptocurrency market. While both are great options, in the article below we look at the pros and cons of each option and weigh them up.
What is trading?
Trading refers to the buying and selling of financial instruments, assets, or commodities in financial markets with the aim of making a profit. Trading requires continuous monitoring of the charts and frequent study, whether in the crypto or stock market. Crypto trading involves buying and selling crypto at various intervals, whether minutes, hours, days, weeks, months, and years. Despite the greater risks involved, the potential for big percentage returns attracts individuals to trading.
If you want to trade crypto assets, it's essential to have a basic knowledge of the industry and how events in the news may influence Bitcoin's price. Remember to set stop losses and take profits so that you can protect your trade.
The pros of trading
- Potentially sizable profits
Crypto is known to be a volatile market and it's not uncommon to see price movements of 30% or above when crypto trading. With some strong analytical skills, one can observe, analyze and trade these waves and yield sizable profits.
- You're in control
Some people make a living trading part-time or full-time, particularly day trading. Day trading is where you enter and exit positions typically within a 24-hour period. Either way, you are in control of your own hours and workload, allowing you to take a break after you've met or exceeded your daily or weekly earnings targets.
The cons of trading
- Need to know trading fundamentals and technical analysis
Before you begin trading, you need to learn how to do fundamental and technical analysis of charts. This process requires dedicated effort and time investment.
- Need to be able to manage emotions
The prices of cryptocurrencies can change rapidly, making this a more risky proposition than long-term hodling. You must be prepared to sell a losing cryptocurrency when it's plunging or decide to hodl for it to recover. Anything might happen in this fast-paced market, so you must make wise decisions without getting emotional.
What is hodling?
The term first came about in 2013 from a misspelled word in a BitcoinTalk Forum. The inebriated trader made the now infamous typo, and the word stuck. Almost a decade later, the term "hodl" remains a permanent fixture in the crypto ecosystem. Some have since branded it as "Hold On for Dear Life".
The term refers to holding a particular cryptocurrency for long periods of time, ignoring market volatility and knuckling through a bear market. As a passive strategy designed for long-term time frames, hodling requires a trader to simply buy a cryptocurrency and hold it in a secure place for months or even years until it reaches your price target.
A popular strategy when hodling is dollar-cost averaging where you buy your favourite cryptocurrency at regular intervals. This term is associated with buying a small amount of Bitcoins weekly or monthly. For example, let's say you have $1,000 to buy over time. In this case, you might purchase $30 in Bitcoin each week or $50 worth every month. By staggering your buys like this rather than putting it all at once, you minimize the likelihood of price fluctuations having as much impact on the price per coin.
The upside to hodling
- Minimal effort
Hodling requires initial research into the cryptocurrency you wish to buy in (very important and crucial to do your own research). From there establish your budget and strategy.
- Minimal stress
The crypto market is known for its significant swings in value. Thankfully with hodling there is no need to time the market for entry and exit positions or watch the chart all of the time.
- Minimal trading fees
Save money on trading fees by conducting on a few transactions, versus the many you will need to do when day trading. Some countries don't charge tax on crypto gains after a certain period of time (but be sure to check this in your area).
The downside of hodling
- Need patience
As hodling is a long-term strategy approach it requires patience and mental endurance. If you decide to use a hodling strategy you'll need to manage emotions during tough market fluctuations and might need to wait years before being able to cash in on any ROI (return on investment).
- Funds are locked in
Because this is a long-term strategy, your funds would be inaccessible for an extended period of time. This might result in foregone opportunities to invest elsewhere in the crypto space or any other market.
However, this can be avoided by leaving your funds in a crypto interest account. Tap provides users access to yield-generating wallets that allow you to enjoy both the long-term price gains as well as the returns.
In conclusion: hodling vs trading
If you're a novice cryptocurrency investor, proceed with caution. There is no right or wrong answer to which of these strategies is "superior". You could always combine both methods depending of your risk appetite. Always keep in mind that before making any decisions, do your homework, research the asset you wish to purchase and consider diversifying your portfolio to reduce risk regardless of the strategy you pick. Consult a financial advisor if you are unsure.
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