When Hodling Fails

Like with poker hands, you need to know when to hold on to your investments and when to throw them away
“You got to know when to hold ‘em,
Know when to fold ‘em,
Know when to walk away,
And know when to run.”
Kenny Rogers, The Gambler

The term “hodl” is ironically used as a way to refer to holding onto a cryptocurrency no matter what happens to its price. For those not in the know, the term “hodl” is an intentional misspelling of the word “hold” and the term originated from THIS post. Perhaps a better description of the term “HODL” is “Hold On for Dear Life”

The term “hodl” is used in the following two instances:

  1. The price of the cryptocurrency they’re referring to has risen significantly
  2. The price of the cryptocurrency they’re referring to has sunk significantly

In the first instance, “hodl” is used as a way to say something like “hold on to your investment, as it could gain even more value in the future and you’ll lose out on even more profits”. However, “hodl” is most often used in the second instance. It’s often used when a cryptocurrency price has fallen significantly and investors have to convince themselves to continue holding onto the coin because they know that their fundamental investment thesis is correct and ultimately they will be redeemed with being correct (and hopefully massive returns). However, it’s important to distinguish between this and when you’re experiencing the sunk cost fallacy.

Sunk Cost Fallacy

To explain the sunk cost fallacy, I’d like you to imagine that you’re hungry and decide to buy a reservation for an upscale restaurant that you heard was very good. You haven’t done much research into it, but you trust others’ opinions on it, especially because they’re rich and should know “high-class”.

However, a day before you decide to go online and actually research the restaurant. You read reviews and realize that this isn’t actually a place you want to go to at all: the patrons are stuck up, the food is too small and — worst of all — the waiters ask for your order in French. You decide you want nothing to do with the place but, because you’ve already bought the reservation, you feel obligated to go anyway. That is the sunk cost fallacy.

This is why hodling isn’t always a good thing. You’re looking for something to invest in. You decide to invest in some obscure cryptocurrency you’ve never heard of, but maybe you repeatedly heard people online say great things about it, or maybe you saw its price pump recently and wanted to get in on the action. Of course, you don’t exactly understand why somebody would wan to invest in it, you just know that if you don’t invest in it you’re going miss out.

Eventually, you see the price sinking. So you decide to do an in-depth review of the cryptocurrency from examining various sources. Maybe you realize the cryptocurrency isn’t as star-spangled awesome as you first thought it was. It’s got some glaring flaws in it. But you convince yourself that you need to “hodl” it because… because…. Because what? Maybe you can’t come up with a good answer that to that question. But you tell yourself that you’ve already invested in it, so you might as well continue to “hodl” in the off-chance that your investment ever blasts off to the moon due to some whale putting money into it. This is where hodling fails. Don’t do this.

Conclusion

I’m not saying holding your investments when it goes down in price is a bad thing, but you have to know WHY you’re holding your investment. You should have a clear investment thesis when investing. Not having a clear investment thesis when investing in cryptocurrency is a bit like sailing in murky water without a map and a spyglass to guide you: eventually you’re going to get lost or, worse, hurt. Holding an investment for no other reason than the fact that you hope you make your money back is when hodling fails.

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