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HODL in Peace! Playing the zero-to-one game

HODL in Peace! Playing the zero-to-one game

Explainers Trading

08 Mar 2021

If you’re investing in Bitcoin, there are quite a few decisions you will need to make beforehand and along the way.

  • How much do you intend to invest?
  • What will be your purchasing method?
  • How long do you intend to hold for?
  • What’s your target?
  • Do you intend to trade actively or hold your funds in cold storage?

The list goes on...

In this article, we want to talk specifically about the question whether it is best to diversify your portfolio or instead focus your capital allocation asymmetrically and go all in on Bitcoin.

Remember, this is educational and meant as entertainment. This is not financial advice.

Trading vs. HODLing

For some traders, Bitcoin is primarily of interest due to its volatility. Such traders might not even hold Bitcoin but instead seek exposure through derivatives like options or perpetuals. More sophisticated traders might venture into arbitrage to take advantage of market inefficiencies.

It’s important to understand, however, that trading the market is a conscious choice that comes with additional risk. On-Chain Analyst, Willy Woo, explained it well in a recent podcast, where he said that ‘HODLing’ is basically a zero-to-one game. If you believe in long term growth, then you logically also expect the value of your investment to appreciate. Trading, however, is a zero-sum game, meaning there is always just as much money gained in the market as there is lost. Johnny can only win 1, if Romero loses 1. If you’re not a top trader, you may win with luck, but you are likely to also see losses.

In our discussion then, we’re going to assume the safer option and think about diversification from a long term HODLing perspective.

From Paper to Diamond Hands

HODLing sounds incredibly simple: you buy, you hold, you don’t sell. However, the psychology involved is anything but simple. One of the best ways to illustrate the complexities involved in HODLing is this sophisticated model from the Twitter-sphere.

To be able to HODL in peace, while prices fluctuate and indicators turn bearish, you need to know why you’re invested in Bitcoin. This exercise is a filtering process where we usually see differentiation between so-called ‘paper hands’ (weak) and ‘diamond hands’ (strong).

Those who are invested in Bitcoin to make a quick buck will actively be looking to sell the top and are more likely to exit the market during periods of increased volatility.

Chances are, in this bull market, many such traders will be anticipating some type of major trend reversal to occur towards the end of 2021. Some might even start de-risking in advance. This strategy does not necessarily mean these investors are not HODLers; rather it’s best seen as a re-balancing act with the potential that when the market turns bullish, capital is re-allocated to Bitcoin.

We should note that this is not a sure-fire tactic. Macro conditions are very different now, compared to the 2017 bull run, and across the crypto community (including among the institutional investors), there is some expectation that this bull run may continue well into 2022, perhaps never seeing 90%-killer-drops again.

Strong HODLers look at much longer timeframes, and while there may be minimal derisking, these HODLers generally do not sell. Whenever the price plummets, they will rush into the market to buy the dip, and they are not interested in selling local tops.

The long term HODLer doesn’t look at price the way a typical speculator might. Instead they look at the adoption rate, the bigger narrative and next to technical price analysis, they are more interested in the deeper fundamentals that can be tracked on-chain.

This is a useful chart by Murad Mahmudov which exemplifies looking at price through the lens of adoption.

To be a strong HODLer, you need to have conviction, driven by vision.

For inspiration, you might want to check out a podcast with the same Murad Mahmudov, where he makes one of the biggest bull-cases for Bitcoin, pointing out how ridiculous it is that even in the Western World wealth preservation requires investors to diversify across equities, bonds, small caps, commodities, FX, derivatives, and that art and real estate are merely accidental stores of value. He expects trillions upon trillions of dollars to find their way to Bitcoin eventually, simply because it is the best store of value that has ever existed in the history of the world.

As we learn from Mahmudov, for a network to be a good store of value

  1. It needs to be highly secure, preferably with no single point of failure
  2. There needs to be a credible or fixed monetary policy in place
  3. The network/ asset needs to be deeply liquid with proper infrastructure in place
  4. The network needs to be adaptable, benefit from community support and advocacy, and play out simple game theoretics

Any long term investor, who is looking to hold Bitcoin for 10+ years, will be tracking Bitcoin's progress across these factors.

Tip: In this context, it’s good to learn more about the Lindy Effect.

What is the Lindy Effect?

The Lindy Effect is the idea that the older something is, the longer it’s likely to be around in the future.

See: Antifragile: Things That Gain From Disorder (Nassim Nicholas Taleb).

Allocating Conviction

Whether you put 1% or 99% of your capital into Bitcoin is completely up to you. Eventually it comes down to your level of conviction.

If you believe Bitcoin will continue to absorb global wealth to eventually function as the universal storehouse, then depending on how certain you are, diversification may make no sense. Modern Portfolio Theory says otherwise, but some investors see current macro conditions to be so clearly in favour of Bitcoin that holding gold, bonds or even stocks is simply inefficient.

Of course, going all-in on Bitcoin does not mean you sell all your belongings and live on the street until Bitcoin ‘makes you rich’. Rather, going all-in means committing to Bitcoin over the long term with the understanding that Bitcoin is more like a savings account and rather than “selling for profits”, in the future, the only reason you would sell your Bitcoin would be when you need it pay for something or if you want to purchase something, like a house (or a Lambo).

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