Things To Consider: Is Holding Deterimental To Cryptocurency Adoption?
The concept of tightly holding onto one's assets is held by some as a practical long-term financial strategy and by others as a personal philosophy resembling something close to a religion. Despite your position or your attachment to your assets, I'm pretty sure that if you have taken any time to explore the crypto-space, you have come across the term "HODL".
This week's topic is on holding and what economic role it plays in a free market of rabid speculators and technology enthusiasts. We'll go over some ideas in economic theory and what currency actually is before considering and debating what cryptocurrency is today versus what it actually should be moving forward and determining how far off we are to achieving some of the technological potential that the blockchain has to offer.
Does holding hurt the overall growth of the technology? Does holding promote a healthy attitude towards investing? Do we have the right attitude about cryptocurrency or are we still to attached to economic notions from a pre-blockchain world? These are some questions to consider over the course of this discussion both in the post and the comment section below.
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A currency can be generally defined as any object or representational object that is used as a medium of exchange. For this to work, a currency has to hold its value and it's value needs to be shared by a large enough community of users that use it as a medium of exchange. To boil that down, you need people willing to spend it and people willing to take it in return for something else of value.
Currencies ideally are store of values but stores of value aren't necessarily currencies. Not a lot of folks really use gold or oil to buy groceries. There are several reasons these commodities aren't used as currencies. They aren't practical to carry around and their value fluctuates too much in such a way that one of the sides of the exchange breaks down. Often everyone wants to give it away or everyone wants to hoard it.
Given that we live in economies centered around inflation and growth, stores of value are useful to defend against value erosion in local fiat currencies as government print more to pay debts, deficit spend, and artificially stabilize their economies. With growing distrust in centralized governments, the demand for holding stores of value is higher than ever.
We face a sort of a holder's dilemma. Should people spend their tokens despite the possibility that they might increase in price? What if the best way of increasing the value of the token is spending it? Regardless of this idea, most seem to be holding on to their coins as it is in their own self-interest but it may be detrimental to the overall health of the asset as an actual currency.
Of course one approach is simply to disregard cryptocurrency as currency and simply use these secure ledgers as stores of value. Which some would argue should be the purpose of such assets. But one could also reason that taking such a position means that things like speed matter little compared to elements such as security. Bitcoin is a good store of value but the popularity of other tokens has shown it's weaknesses of being an effective medium of exchange.
But on the other hand, holding is still better than some alternative forms of investing that resembles that more of gambling rather than exchanging value for goods and services. The proportion of speculators versus those that engage and actually use tokens is still skewed heavily towards the speculator. A lot of folks are speculators waiting for the capability to come online as much of the technology is still early in its infancy.
But perhaps some of that capability is waiting for people willing to it and waiting for the market to mature. It seems that we might be stuck at the moment waiting on something big to restart the roaring engine of progress that has slowed down significantly (or perhaps feels like it has slowed down significantly) since the hype begin dying off at the beginning of the year.
But I now hand the floor to the audience. What are your thoughts on holding, investing, and the disconnect between those willing to take the tokens versus those willing to spend them? I have listed my thoughts above and hopefully leave you with some interesting ideas to consider.
Indeed! No one ever talks about the negative effects of holding. Holding makes the price of crypto more volatile because there are less liquid assets on the market. The volatility of crypto makes people afraid to accept it as payment and is a huge hindrance to mainstream adoption.
Surprisingly enough, buying low and selling high is actually the best thing you can do for yourself and for the blockchain revolution. Buying low stops it from going lower and selling high stops it from going higher. This strategy lowers overall variance.
Unfortunately, this assumes everyone knows what the value of a particular coin is worth, and no one really does because of the massive speculation of underdeveloped assets.
If we look at Bitcoin there is some hope though. During spikes Bitcoin dominance goes down while during corrections Bitcoin dominance goes up. This means that Bitcoin is becoming less and less volatile because it's becoming more and more popular.
As more blockchain projects start to deliver real results and more people enter the space we'll see the fear of volatility melt away because the values of the top coins will be much more obvious.
That's actually a very astute observation. Another issue is that we have a lot of inexperienced investors in the space that embrace positive volatility and panic in negative volatility which makes the variance worse and why we see such wild swings all of the time. Good investing principles would lead to a more stable and reliable asset but a lot of folks are emotional investors.
I think we will be reaching a huge "judgement" period in the next 6-18 months that could see a giant swing towards blockchain technology that is contingent on results rather than hype and promises. The chains that deliver could be the big winners.*
*This could be significantly magnified during an economic downturn which could materialize as traditional markets seems a little overoptimistic and kind of "toppy".
I think the key is not just selling it, but having a market for direct exchange between the currency and a product or service which makes it useful in that way, which is to spend it, not sell it. Regular fiat is mostly spent in exchange for goods or services. We need to keep spending it and not holding, or else there are problems.
Crypto might see that potential when more people start accepting it in exchange for goods and services, then spending it might be more beneficial to it's value. But for now, selling is not so good, holding is better, as the supply reduces and demand make the price higher, usually ;) But there are always ppl willing to sell it. If there aren't enough willing to sell it low, then others are selling at a higher price, and the demand will buy it if it's in demand.
You shouldn't necessarily sell your crypto holdings, but if you ever have an opportunity to use in lieu of other currencies, its makes more long term sense than holding even if the price goes higher because you are:
If everybody HODLed, these things simply wouldn't happen. If you want to see something used, you have to champion it yourself.