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Home > Fundamentals > HODL vs Staking What is the best strategy?
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18 January 2021
Basic min reading
Know what HODL and STAKING are and choose the best savings strategy for your cryptocurrencies and crypto-financial assets.
En the world of cryptocurrencies, Users of them have various ways to make them bring them great profits. Some choose the riskiest path: that of trading within the platforms of centralized exchanges and decentralized (DEX) that exist. However, there are two slightly less dangerous options to achieve a very similar goal, we are talking about HODL and Staking. But what exactly do these two words mean? Well, you will find out below.
What is HODL?
The word HODL (from the English HOLD, but misspelled), is very frequent among cryptocurrency users and investors, mainly Bitcoin. This word specifically refers to to the firm decision to acquire an asset and keep it over time. In Bitcoin, this decision is seen as an investment philosophy, especially used by the most believers in Bitcoin or in the cryptocurrency that is being saved, and that, with any luck, will allow them to multiply their assets exponentially in the future.
In other words, the HODL strategy is based on investing in the purchase of cryptocurrencies, generally at low prices, so that, as the value of this cryptocurrency increases, you can obtain a good profit on your investment.
In fact, the HODL has proven to be one of the investment strategies that can offer the most profits to a Bitcoin user. The proof is that if, for example, you had invested $1000 to acquire 1000 BTC (when it was at the price of $1 / BTC in April 2011), in 2020 you would have approximately $32.000.000 in your possession, and all of this in just 9 years of keeping those cryptocurrencies. There is no question why the HODL is seen as a savings strategy, one that can bring big profits.
What is Staking?
The staking for his part, It is the process of acquiring cryptocurrencies and keeping them locked in a wallet in order to receive profits or rewards. It is a process very similar to the HODL, only that at stake the balances are blocked and you cannot use them freely, in favor of receiving a certain annual interest for said practice.
Of course, there are systems that use staking for mining operations, like the ones we can see in Proof of Stake (PoS), Delegated Proof of Stake (DPoS) o Proof of Authority (PoA). In these systems, the user blocks a certain amount of coins in order to be enabled as a transaction validator and thereby earn a certain reward for their validation work.
In any of the cases, staking offers you rewards that are adjusted to the amount of blocked coins, and they add more value in token over time.
HODL vs Staking
As you can deduce, the purpose of these strategies is exactly the same: offer the coin holder a significant economic return over time. The difference is the way in which this end is achieved. However, at this point we can make a very interesting comparative chart about these two strategies:
- The HODL does not increase in coins and the bet is that the coin will take on greater value over time. While staking, it seeks to add more coins that in the end add more value to the user. This sum of coins is generally given by a reward mechanism for keeping said coins locked within a system designed for that purpose.
- Those who make HODL retain the mobilization of currencies, sometimes decreasing the economic dynamism of the cryptocurrency. For their part, those who do staking do the same. In fact, the retention impact of staking is greater than that of HODL. This is because the higher the staking, the higher the reward value is obtained and the greater the subsequent impact on the dynamism of the cryptocurrency.
- HODL's strategy is a very long-term strategy. In fact, there are Bitcoin HODLERS who have immobilized coins for more than 10 years and with it, the gains they have made have been immense. For its part, staking is a shorter-term strategy, since generally the currencies that apply these systems carry much higher inflationary systems that reduce the potential increase in the value of their tokens.
- Another difference between HODL and staking is security. Those who do HODL generally do so by making use of hardware wallets, full wallet purses or other secure wallets in which they have absolute control of the coins. However, staking is only possible using hot wallets that may or may not be under the absolute control of the user. This leads to a security risk that could lead to theft of funds if proper care is not taken.
- By doing HODL you will not grow in the number of cryptocurrencies you have in your possession. That means that you will only win if the cryptocurrency grows in price. On the other hand, in STAKE the price could lower the coin, but have more coins thanks to staking, resulting in a higher value.
- HODL is a simple strategy to apply compared to staking. In fact, staking today has so many options that we could well see it as an advantage and a disadvantage. For example, staking a liquidity provider like Uniswap It may be something that many consider positive, except that the security risk of doing this is quite high, due to the chances that Uniswap could be hacked and your funds stolen. The latter is not at all unusual, especially considering the recent security record that has tainted the world of decentralized finance (DeFi).
Without a doubt, these keys about HODL and STAKING will help you choose what type of strategy you want to follow with your cryptocurrencies. Just let us tell you to choose wisely, and to maintain and strengthen your position in order to get the most out of your assets.
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Author
Nil Diaz
B2M Token Strategy Leader
Nil has a degree in Business Administration, Business & Management from Pompeu Fabra University, with honors in "Market Research and Analysis"; certified by the University of Berkeley in "Bitcoin and Cryptocurrencies" in addition to "Blockchain Technology".
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As a seasoned expert in the field of cryptocurrencies, blockchain, and decentralized finance (DeFi), I bring a wealth of knowledge and hands-on experience to the table. My expertise extends across various aspects of the crypto space, including trading strategies, investment philosophies, blockchain technology, and the intricacies of different cryptocurrencies.
In the provided article on "HODL vs Staking: What is the best strategy?" I can break down the concepts and provide a comprehensive understanding of the content.
HODL (Hold On for Dear Life): HODL is a term widely used in the cryptocurrency community, stemming from a misspelled word "HOLD." It refers to the strategy of acquiring a cryptocurrency asset and holding onto it for an extended period with the expectation that its value will increase over time. The primary goal of HODLing is to benefit from the potential appreciation of the cryptocurrency.
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Investment Philosophy: HODL is considered an investment philosophy, particularly prevalent among Bitcoin enthusiasts. It involves buying cryptocurrencies at lower prices and holding onto them as their value increases, aiming for substantial profits in the long term.
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Long-Term Strategy: HODL is a long-term strategy, with some individuals holding onto their cryptocurrencies for more than a decade, resulting in significant gains as seen in the example of Bitcoin's price growth over the years.
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Security: HODLers often prioritize security by using hardware wallets or secure wallets where they have absolute control over their coins.
Staking: Staking involves acquiring cryptocurrencies and locking them in a wallet to receive profits or rewards. This process is similar to HODLing, but in staking, the balances are locked, and users receive annual interest for keeping their coins locked.
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Reward Mechanism: Staking offers rewards based on the amount of coins that are locked. It is commonly used in systems like Proof of Stake (PoS), Delegated Proof of Stake (DPoS), and Proof of Authority (PoA).
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Shorter-Term Strategy: Staking is generally considered a shorter-term strategy compared to HODLing. Cryptocurrencies using staking often have higher inflationary systems, potentially reducing the long-term value increase of their tokens.
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Security Risk: Staking requires the use of hot wallets, which may pose a security risk compared to the more secure hardware wallets used in HODLing.
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Growth in Number of Coins: Unlike HODLing, staking allows users to grow the number of cryptocurrencies they possess over time, even if the coin's price decreases. This is due to the additional coins earned through staking.
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Complexity: Staking can be more complex than HODLing, with various staking options available. For example, staking as a liquidity provider on platforms like Uniswap may offer benefits but comes with security risks.
In summary, both HODLing and staking aim to provide economic returns to coin holders, but they differ in their approach and the mechanisms through which they achieve this goal. Choosing between HODL and staking depends on individual preferences, risk tolerance, and the desired investment timeline. It's crucial for investors to make informed decisions and carefully assess the pros and cons of each strategy.
