Crypto market is in a weak phase
HODL strategy not a sound investment strategy
Important difference between average return and actual return
The crypto market is currently in a decided phase of weakness. While Bitcoin was able to set a new record high of almost $70,000 in November last year, it is currently hovering around the $20,000 mark. Many investors have been hit hard by this new crypto winter. Nevertheless, many are pursuing the “HODL” strategy, i.e. holding their crypto holdings – come what may. The term “HODL”, which stands for holding cyber currencies, goes back to a user post in a Bitcoin forum, in which a user used the incorrect word “hodl” instead of the English term “hold” and thus went viral. Since then, the term has found a permanent place in the cryptoverse.
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“Buy and hold” – all-round carefree?
The “buy and hold” investment strategy is not only popular with cryptocurrencies. In phases of weakness in the stock market, in particular, there are always various experts who point out to investors that they would benefit in the long term if they simply waited out the slowdown and stayed invested. RIA Advisors strategist Lance Roberts criticizes this in an article on the company’s website. In it, he describes how he recently received the following advice from a Wall Street firm: “Despite the drop earlier this year, investors shouldn’t panic. Over the long term, investors who have been patient in the market have been rewarded. Since 1900, investors have received an average return of nearly 10 percent each year, our advice is stay invested, avoid sharp moves in your portfolio and ignore volatility.”
HODL strategy tempting during bull market
However, Roberts says there are some problems with this advice, noting that it’s not as simple as buying something and then forgetting about it and leaving it. While this might be tempting in a bull market, it has more to do with speculation than sound investment strategy. This has been shown clearly in recent years, as the market expert explains in an article for Advisor Perspectives. Thus, during the Corona pandemic, “sports players” would have focused on the stock market, cheered on with the help of trading apps like Robinhood. Stock selection has become a game. However, as with any kind of speculation, this trend has now come to an abrupt end.
Difference between average and actual return
But what is the problem with the HODL strategy? As Robert argues, there’s a big difference between the average return on an investment when you look back at its price and the actual return. The market expert explains this based on the advice he received from the Wall Street company. So it is correct that the market-wide US index S&P 500 has yielded around ten percent annually since 1900. Adjusted for inflation, however, this rate would already have fallen to 8.08 percent. Nevertheless, investors must also take into account that there are years in which ten percent was not achieved, but five percent was given up instead. Just one year after such a slump, however, a 30 percent rise in the index would be necessary for the annual return of 10 percent to be achieved at all. However, the market participant must be able to sit out such a weak phase and remain invested in the market. Accordingly, investors should be very cautious about promises of returns that are based on a long period of time in the past and not rely exclusively on the “buy and hold” strategy.
Exactly this kind of speculation has become the norm in recent years. And not just for cryptocurrencies. The flood of IPOs and SPACs in recent years and the hysteria about meme stocks have also contributed to the excesses on the stock market, as have the tech-heavy ARK ETFs from the house of star investor Cathie Wood.
No time to waste
Now that the bull market has given way to a bear market, many investors are facing the ramifications of their excesses, Roberts writes: “While ‘HODLing’ works during the growing bull market, individuals have now realized that holding during a ‘bear market’ can be devastating.” Because while it is possible to recoup losses during a downturn in the long term and achieve a positive return, what is lost in between is time. And according to Roberts, time is “the most valuable commodity that investors own.”
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