The cryptocurrency market is currently a nearly 2 trillion dollar industry and will hopefully become a 3 trillion dollar industry by next year. As per research done by Binance in 2021, the confidence in cryptos is at an applaud worthy 97% and is seen as a good investment option worldwide. But the age-old question that has often gripped equity investors, has jumped into the crypto arena as well. A beginner crypto enthusiast definitely wonders the following: Which investment strategy should I apply?
And this is where ‘day trading’ and ‘HODLing’ come into play. Both are popular investment strategies in the crypto and equity market. So let’s start with the basics and deeply analyse each of them to find out which one suits you the most.
What is Day Trading?
Just like in the equity market, day trading is an investment strategy where a trader constantly buys and sells crypto assets every day. The goal is to buy low and sell high. So a day trader makes a profit out of the regularly fluctuating price of the cryptocurrencies.
What is HODLing?
HODLing is usually seen as a typo when discussed on online forums. But let me assure you that that is far from the truth. And here’s why.
HODL is a deliberate misspelling of HOLD and is a quirky acronym for ‘Hold on for Dear Life’ among crypto enthusiasts. Who said that the crypto community can’t have some fun?
So, hodl or hold, as the name suggests is an investment strategy focused on holding on to your asset for an extended period. The period can range from a week to even decades. Usually, serious investors hold the asset for a year or two before making any move.
Analysis of Day Trading
Although day trading seems simple, there’s much more to it than simply buying low and selling high. The price of cryptocurrencies are constantly swinging and a day trader needs to make the most out of it to maximise their profits. So day trading needs an in-depth analysis of both the coin and market history to identify when to enter and exit. This is something that can take some time for a novice trader to grasp. Frankly, a day trader can work without having any technical knowledge and can rely on intuition or industry sentiment to place their bet. But again are you willing to risk your money every day simply on nudges, or will you like your actions to be well-informed?
For a normal day trader, selling a crypto asset 10–15% higher is a normal scenario. The cryptos are such a volatile asset that whenever you refresh the screen the asset has changed its position.
Usually, traders identify and set low and high price points at which they would sell their coins. Similar deliberations are also done when buying a crypto asset.
A day trader requires the following to work smoothly:
- A reliable cryptocurrency exchange or trading platform where the trader can operate hassle less.
- A trustworthy network to keep a tab on the market happening and get genuine news.
- Specialized software to vet the market fluctuations to predict the next price swing.
- Undivided attention and a significant amount of time, only if an individual is serious about the profession.
A day trader often struggles with the taxation scenario, because taxes tend to take a good portion from what a trader makes every day. Again, this is crucial for traders in countries where cryptos are taxed, and traders in others can overlook this aspect.
Analysis of HODLing
Hodling is a game of patience. An investor buys certain cryptocurrencies at a certain point and then simply holds on to them. This is just like buying jewellery or investing in real estate, where you are not hoping to sell it the next day or week to earn money but instead let the market mature and maximise your returns. An individual that goes for hodling is referred to as a ‘hodler’.
Hodling is a lot less risky than day-trading because here you have the power to outlive the bear market by simply holding on to your crypto assets. Veteran investors often recommend hodling to beginners so that they get a chance to understand the market and use a portion of their asset to experiment with day trading if that is the route the beginners would prefer to take next.
Hodling is easy but it is important for a hodler to-
- Research about the cryptocurrency they wish to invest in along with the overall usability of it in future.
- Invest in more than one crypto asset, to amplify their profits and use other crypto assets to further divide the risk of losing on their investments.
- Do not make any quick judgements and actions based on a bear market, unless the company or a crypto asset is not fraud you don’t have to worry about anything.
- Keep a tab on what the team or company behind the crypto asset is doing or what new upgrade will the cryptocurrency undergo. These are the moments the asset displays the most volatility.
Comparing Day Trading and HODLing
Every investment strategy comes with its own set of pros and cons. As evident by our discussion above you might have identified some of the advantages and disadvantages of both strategies by now. Now, let’s elaborate on those aspects and much more:
# Long-term performance
A 2021 post by Market Insiders, highlights the chances of losing money through day-trading as an Industry norm! While the post is based on the equity market, the trends can be extended to the crypto market as well.
While hodling, cryptos tend to perform better. For example, Bitcoin touched its all-time high in November 2021, at USD 68,000. The event could have generated a profit of a couple of thousand dollars for a day trader(again this is a highly stretched assumption). However, if you had opted to hold on to BTC from January 1, 2021, to January 1, 2022, you would have made a nearly 60% profit on your bet, earning about USD 17,000!
But again holders often have a very poor exit plan with greed for more returns that often brings their existing profits dramatically down.
# Time investment
Obviously, day trading needs you to be on your toes when you are studying the market or trading. Hodling is an extremely relaxed strategy compared to it.
Hodling comes with a risk of getting your entire investment wiped out if you invest in a bogus cryptocurrency. Also, your investment can tumble down during a bear run. Again the key is to patiently wait after analysing the reason behind what’s triggering the bearish market.
Day trading is extremely risky on the other hand. If a trader lets the emotions take control over wits then the consequences are quite drastic.
Here’s What you Need to do
Both day trading and hodling offer ways through which you can get the best out of them. The discussion of those is out of the scope of this guide.
As discussed above, day-trading is extremely risky. Here, traders and especially novice traders often lose their money. However, by putting in the effort to study the market and training under a trusted mentor you will develop the skills and acumen to even beat a hodler in returns!
On the other side, hodling is evidently a safer option. However, it is important to have an exit strategy beforehand and also the discipline and will to put that to practice. You don’t want to kill the returns with your greed.
Now, whichever investment strategy you go for, make sure that your crypto wallets are secure and offer the best encryption and protection.