Trading or HODLing? A Look at Bitcoin User Behavior

The misspelled verb/acronym “HODL” (hold on for dear life) has been around for nearly seven years. It originated in a December 2013 BitCoinTalk Forum post, in which a user declared why he’s “HODLING” in the face of a recent market crash. The spelling was a typo, but it soon came to be used intentionally, defining a philosophy that placed holding onto bitcoin as its core principle.

But how popular is HODLing in reality? Turns out it’s very popular: since mid-December 2014 at least 51% of the total supply of bitcoin has been held for at least one year. The only exception to this (so far) has been the period between late September 2017 and mid-October 2018, when a small majority of traders sold in order to capitalize on aggressively rising prices.

Source: LookIntoBitcoin

HODLing onto bitcoin has become even more common: since late May, at least 60% of the total supply of bitcoin has been held for at least one year, according to data from LookIntoBitcoin. As of writing, the percentage stands at 63%, which is an all-time high.

While past market behavior is no guarantee of the future, it’s worth pointing out that peaks in HODLing have usually come before peaks in the bitcoin market. This makes sense: the smaller the supply of tradable/traded bitcoin, the higher the bitcoin price will be, assuming that demand remains stable (or increases).

The recent rise in held bitcoin has occurred in parallel with traders removing bitcoin from exchanges. According to data gathered by glassnode, such exchange outflows reached their peak in the weeks leading up to (and just after) the Bitcoin halving of May 11.

Source: Twitter

HODL When Low, Sell When High

Other data collected by glassnodes also suggests that withdrawals of bitcoin from exchanges was particularly high from March onwards, following a crash in the price. The crypto analysts wrote in a March blog, “The number of daily BTC deposits to exchanges hasn’t been this low since September 2016, 3 and a half years ago.”

In other words, HODLing bitcoin becomes even more common when the market dips. After the bitcoin price drops, more traders tend to buy bitcoin on the cheap and then withdraw it, reducing the supply and helping bitcoin to recover. Here are a couple of traders discussing this tactic on Twitter:

Source: Twitter

As the traders note, they buy extra bitcoin during market slumps, and then simply HODL it for a long term gain along with the rest of their coins.

The opposite is also true. When the bitcoin price skyrockets, even some usually devout HODLers succumb to temptation and sell a portion of their BTC. This is evident in the above LookIntoBitcoin chart, which shows that most bitcoin was not held for at least one year from September 2017 to October 2018.

The percentage in fact dropped to 41% in February 2018, when traders realized that the price of bitcoin was sinking fast from its December 2017 peak and probably wouldn’t recover (at least not for a while).

Net bitcoin inflows into exchanges hit peaks in late December 2017 and January-February 2018, as traders prepared to take advantage of rising prices to sell their bitcoin. The same happened in late 2018 and in July 2019, driven by a desire to either cut losses or cash profits.

Source: glassnode

Something very similar is happening right now, after bitcoin climbed from the mid-$9,000 range in late July to nearly $12,000 in early August. According to glassnode, net inflows into exchanges have hit a three-month high.

Source: Twitter

More traders (and also miners) are preparing to sell right now, in order to ensure profits before any potential drop in the price of bitcoin. This may not happen, of course, but the mere fact that holders are moving bitcoin to exchanges indicates that they are prepared to sell if certain market conditions apply.

HODLing Remains Popular

Even if a greater portion of holders do trade during market peaks and troughs, HODLing bitcoin remains common.

Even now, some 29.6% of the total bitcoin supply hasn’t been moved for at least three years. This is a 20-month high.

Source: glassnode

What this indicates is that, even though there is a degree of adaptability and flexibility in trader behavior, HODLing remains a very influential trading strategy. Many cryptocurrency investors dollar cost average into Bitcoin and then HODL that BTC long term. HODLers help ensure that the long-term trend for bitcoin’s price is upwards, and it also prevents this same price from falling too low during crypto market downturns (otherwise known as bear markets).

The bitcoin market therefore owes a debt of gratitude to HODLers. They may sometimes seem fanatical, but they’re the foundation on which bitcoin’s house is being built.