Time to panic and sell your intangible assets? Perhaps not. This is the halfway point in the year, so here’s a review of the financial markets and we’ll look into why Bitcoiners are continuing to “hodl” during times of turmoil.
The uncertainty of financial markets was exemplified in the first blog of 2022 whereby a section was dedicated to weighing up Risk-On Vs Risk-Off assets. Crucially, the blog leaned in favour of risk-on assets due to its performance in fighting high inflation at the time of writing. However, what we have witnessed since January has been a series of strict monetary policies as a means of tackling soaring prices. For example, inflation has reached multi-decade highs of 9% and 8.6% in the UK and US respectively. Consequently, both countries have significantly raised interest rates, effectively putting a handbrake on the economy. Moreover, to say risk-on assets didn’t respond well to the new quantitative tightening measures would be a sheer understatement. For instance, Bitcoin and other Cryptos have dropped over 30% in a single week and the stock market has officially entered a bear market with the S&P 500 falling over 20% year-to-date.
The outlook for the immediate future is somewhat painful as we look more likely by the day to be in a period of stagflation coinciding with a recession. Without overcomplicating things, stagflation is a toxic combination of low GDP and high inflation & unemployment. Having said that, despite all the negativity surrounding Bitcoin and its price, there remains a collective will by some to continue to hodl through the bad times. Here’s why.
Bitcoin has dropped to an 18-month low at $18,000 with no real sign of slowing down thanks to the Fed’s intention to maintain interest rate hikes through to 2024. Whether or not that’s believable is another debate, but what is clear-cut is that there are many Bitcoiners not only holding but looking to accumulate more during this flash crash. This can largely be put down to the strong hodling mentality many have.
The word “Hodl” or “hodling” originated during the early days of Bitcoin’s history, whereby someone mistakenly spelled ‘hold’ on a Bitcoin forum. Other people claim that is an acronym for “Hold On for Dear Life”. Regardless, it is now the staple term for defining a Bitcoiner. But, what does it actually mean to be a Bitcoin hodler?
Bitcoin is an asymmetric bet, otherwise known as a high risk, high reward play. In addition, Bitcoin is undoubtedly the riskiest asset for many reasons. Firstly, it’s had a small existence of fewer than two decades. Secondly, it’s small in market capitalisation and is now less than $500 Billion, which is smaller than some of the biggest companies in the world. Thirdly, it’s an emerging technology with a great number of people speculating in the asset class without actually having done the necessary homework. Lastly, it’s not for the faint-hearted. For example, have you ever wished you bought Amazon stock back in 2000? The chances are that even if you did buy it, you wouldn’t have held it. That’s because the stock saw regular drawbacks in its price in the 80-90% range. This shares similarities to Bitcoin and indicates that whilst the asset class hasn’t matured, it will continue to be considered a speculative play. However, if you managed to “hodl” your Amazon stock, you would likely agree that the drawbacks were more than worth it for the astronomical upside returns.
There is a saying “never marry your investments” and that is very apt. Once you become emotional over an investment, you are likely overinvested and risking more than you can afford to lose. Similarly, another previous blog on conviction stressed the importance of taking the time to do your own research. The many Bitcoiners that continue to hodl are the ones that have done the required research, which in turn gives them the conviction to continue investing and accumulating in the asset. In fact, at a certain point, you become numb to the price action and instead feel grateful for such a discount.
History doesn’t repeat, but it does rhyme
Bitcoin has been here before, many times. Likewise with Amazon, Bitcoin has repeatedly had drawbacks of over 70% in the past. It can be painful to see your portfolio drop in half, but if history is any indication (it does not guarantee future results), weathering the storms and hodling ultimately rewards you. So far in Bitcoin’s history, albeit a short one, no investor has been in a loss after investing for 4 years. Therefore, in summary, hodling for the long-term makes you an investor with conviction. If you are buying Bitcoin with less than a 4 year time horizon, not only do you not understand Bitcoin, but you are also a trader.
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