In India, cryptocurrency is still in the nascent stages. The value of Bitcoin started to grow exponentially in 2012, and that sparked the curiosity of many Indians. Today, buying cryptocurrencies is easy. The tricky part is to use prudent strategies to manage cryptocurrency portfolios, just like any other investment.
Among tried and tested strategies of cryptocurrency investments, HODLing and staking are some of the most prominent methods that have a long-term horizon.
Let’s understand both these strategies.
The term ‘HODLing’ was coined from a typographical error of the word ‘holding’. HODLing refers to the holding of a particular cryptocurrency for a long time. An example of HODLing could be buying Bitcoins today and not using them for the next 10 years.
Investors using the HODLing strategy are unaffected by the fluctuations in the market value of the cryptocurrency. They believe in the long-term appreciation of the currency’s value and consider reselling it at a higher price in the future. To put things into perspective, if one purchased 1 Bitcoin at BTC 1 = USD 1,100 in December 2013, its value in October 2021 would approximately be USD 57,000.
Understanding how staking works requires knowledge of the ecosystems of cryptocurrencies. Without getting into complex technical details, staking is locking a certain portion of cryptocurrencies for a defined period and gaining cryptocurrency units in return. You lock in your tokens to process cryptocurrency transactions and infuse the supply of fresh currency by adding blocks. In simple words, staking works like a Fixed Deposit in a bank.
You commit a certain amount of money for a fixed period and earn interest on the invested amount. While the exact process and the rewards mechanism of staking may differ across cryptocurrencies, there could be a lock-in period on such ‘staked’ units.
Staking applies only to the cryptocurrencies that operate on the proof-of-stake transaction validation mechanism. Therefore, you can’t stake Bitcoin or other first-generation cryptocurrencies.
HODLing v/s Staking
A comparative analysis of HODLing and staking highlights the differences between them.
- HODLing gives returns only through value appreciation. Staking gives returns through value appreciation and reinvestment.
- HODLing requires lesser monitoring of the currency’s market value. Staking requires a more in-depth understanding of the crypto’s price movements.
- HODLing preserves the liquidity of the currency. Staking is less liquid as it may require a lock-in period.
- HODLing applies to all cryptocurrencies. Staking applies to only select cryptocurrencies.
Both HODLing and staking are long-term strategies with a positive outlook on the cryptocurrency’s future price movements. HODLing is a relatively simple strategy by itself. Staking can be simplified by investing in staking pools, a concept akin to mutual funds.
If you prefer liquidity, HODLing is the strategy you should follow. If you prefer higher returns, staking may be the better strategy for you.