Don’t HODL the ₿ear!

The short to medium-term risks associated with holding cryptocurrencies.

Satwik Kansal
11 min readJun 17, 2021

Over the last 4–5 years, cryptocurrencies have seen a massive influx of so-called “retail investors”. I think a better term for most of the new entrants is “non-technical speculators”. They think of their coins as lottery tickets where they can increase their odds by entering earlier and hoping others will buy the ticket from them at a higher price sometime later with similar expectations for the future. Some of these people invest a significant amount of their savings into new projects expecting that it’d turn out to be massively successful and give Ethereum / Bitcoin / Chainlink / etc. like returns. They become religiously attached to the project and throw their rationality under the bus.

To be honest, I had similar behaviour during the 2k17 market rise. I was heavily invested in coins like Waltonchain, Modum (they changed their business altogether), and Civic. There were hundreds of reason given by the Reddit community members on why these projects had solid corporate partnerships and how they’re hidden gems that’ll hitch you a ride to the moon. And they did go to the moon! At some point, I was up 10–15x my initial investments in these coins. I sold some of my investments and reinvested them into newer coins with the same expectations. All those new coins tanked 95+% in the market crash (FunFair, Bounty token, Steemit, and Siacoin are some of those names), some of them are dead. I had few very nascent project coins in a third-class exchange named Cryptopia, which got hacked, twice (yikes). The company is still in the process of getting liquidated. Fortunately or unfortunately, the coins that I held there lost their values themselves, so it doesn’t hurt as much to me now. But I do feel dumb for being technically capable to figure out the feasibility these projects, instead I got drawn into the game of emotions.


HODL is a common verb that you’ll see floating around the community. People think that if they believe in the token’s vision and just hold their tokens till eternity, they can potentially retire with those returns. As wonderful as it sounds, it is intellectually lazy to think this way; there are plenty of things that can go wrong (or are wrong) with HODLing, some of which I want to discuss in this post.

Note: This post is focused on concerns about cryptocurrencies as an investment instrument and not on blockchain as a technology. I’m very optimistic about the future of the latter. Also, I have no intention to spread FUD; it just bothers me when I see some innocent people getting FOMOed into buying some random token because of marketing gimmicks. If this post makes even a single-digit number of people aware of the risks of what they’re getting into when they’re investing in cryptocurrencies, I’d consider it as a time well spent :)

So here we go,

The point of failures

One of the salient promises of decentralisation is that there’s no single point of failure or even concentrated points of failures. Technically, this statement is true for cryptocurrencies because blockchains are distributed databases organized through clever consensus mechanisms. However, I have much less confidence in the applicability of this statement when it comes to the existing cryptocurrency markets.

People can argue that the ecosystem doesn’t have a single point of failure, but it can’t be denied that the ecosystem does have several “concentrated” points of failures. The consequence is; while the bitcoin network is here to stay for a long time, I don’t know if a single bitcoin would be worth 40k USD or more a few years from now, and similar arguments apply to other cryptocurrencies.

The Bitcoin dominance

Although ingenious and the first of its kind, Bitcoin has been the dominant coin of the market. It’s only recently that the tide is shifting in a big way in favour of other projects, but the bitcoin dominance is still around 40%. The thing is, BTC has weak parts too. Many people have highlighted them in the past; here are a few of them;

  • Scaling issues; It’s widely known that the throughput of the Bitcoin network isn’t great, and it’s not practical to use Bitcoin for micropayments because of the high transaction fee.
  • Application-specific design; Bitcoin was initially invented to be digital money. But due to the scaling issues highlighted above, the narrative shifted to Bitcoin being the “digital gold,” i.e. store of value (more on this later). The thing to be aware of is that newer projects have better application-specific design than Bitcoin. Some of them are more secure, some provide more anonymity, some offer Turing completeness, some are more environment friendly, and almost all of them provide better throughput and scalability. For example, one of the early use-cases of bitcoin was on the dark web as it was hard (but not impossible) to trace Bitcoin. Now, more privacy-focused cryptocurrencies like Monero and Zcash are seen as potential modes of exchange for such scenarios. Similarly, there are now more environment-friendly consensus mechanisms than Proof of Work.

In all fairness, there are ongoing attempts to solve some of the inherent issues with Bitcoin, but I still see them as somewhat shallow fixes. The projects released later have solved some of these issues at the lowest layer and have more scalable designs. So, although I’m impressed by the ingeniousness of Bitcoin, I don’t see a reason why it should stay the first choice for digital money or digital gold when there are better alternatives. This, I feel, is one of the risks. When a lot of people internalize the fact that the value of bitcoin might not stick forever, they’re going to cash out, and how the markets have behaved till this date, if Bitcoin crashes hard, the other projects crash even harder.

Skewed distributions

Most cryptocurrencies projects market themselves to be more egalitarian, but the reality is they aren’t (especially the new projects that are launching these days). A lot of token supply is held by the founding team. A lot of the portion is sold to VCs at a preferential rate and then to early investors. Finally, the token is made available to the general public through DEXes and centralized exchanges. Most retail investors participate at the very last stage when the coin is listed on a popular centralized exchange like Binance or Coinbase. Until this point, the price has already been inflated by several multiples. Now here’s the problem, since the founding team effectively minted the token for free, and the VCs and early investors got in early at cheap prices, they can still sell at a no-profit-no-loss price if the markets crash heavily, which is what happened with most scammyish projects in the 2018 crash. It’s the retail investors who take the burn.

Even bitcoin, which has been around for a decade and has chances of more egalitarian distribution, has 95% of total supply held by just 2.1% addresses! Maybe some of them are irrecoverable too.

When I first discovered this fact, it was surprising because I used to believe that Bitcoin is people’s money and is somewhat more egalitarian than real-world money. If Bitcoin ever reaches higher prices, it’ll be a wealth transfer for sure, but I guess we’ll just be making a new set of people much wealthier than the rest of the world.

The USDT dominance

One of the innovations that happened in the crypto markets was the introduction of stablecoins. These are digital tokens that are pegged to real-world assets. Tether is the most famous stablecoin and is used by many investors to store their “purchasing power” on the exchanges. Before tether, the exchanges used to have BTC as the base currency of markets of all the other altcoins, and the problem with that was an investor either had to hold bitcoin or altcoins at any point of time, both of which were highly volatile. The other option was to cash out to fiat (or trust your exchange if they have a fat wallet), which was a bit expensive because you had to pay fee at multiple points to convert to fiat. Stablecoins solved this problem to a lot of extent. But they introduced another problem, centralization. Tether tokens are issued by Tether Limited, a Hong Kong company controlled by a popular centralized crypto exchange Bitfinex. Tether claims to maintain pegging to all the stablecoins it has minted. Presently, the total value of circulating tethers is 62.5B. Of course, it is not practical (or feasible) to keep that many USDs as a reserve, so most pegging is done by bonds and similar instruments, which gives an icky taste to some of the investors.

Most investor these days leave their purchasing power lying on the exchanges in the form of stablecoins. However, if there’s a severe market crash and everyone wanted to sell these stablecoins and get back their fiat, they’ll have to do it at not-so-stable prices!

Real-world applications beyond finance and speculation

Many claims that most cryptocurrency projects are either solutions looking for a problem or solutions to the problems generated by cryptocurrencies in the first place. There is no doubt there is news about commercial interest every now and then when it comes to companies investing in cryptocurrencies (mostly bitcoin) or announcing some collaboration with emerging crypto projects. I observed hundreds of such news during the 2k18 cycles, most of which have turned out to be nothing more than a marketing gimmick. All the cool coins I hodl don’t serve any purpose other than speculative instruments.

For most of the last decade, Bitcoin has been debated to be an alternative store of value. But due to the kind of volatility Bitcoin has, it’s tough to imagine it as a store of value. The same logic applies to other cryptocurrencies; bitcoin is one of the least volatile cryptocurrencies out here (excluding the stablecoins, of course). And not to mention that Elon Musk, though he bought some Bitcoins for Tesla, had severely impacted the case of institutional bitcoin investment by highlighting that it’s not such a good asset when looked at from a perspective of carbon footprint and hence environment friendliness.

Sure, there are projects like Ethereum which can unlock several use-cases for blockchain in future, but these are at least a year away. So even if I’m somewhat convinced that Ethereum will have a bright future (which I think it would), I struggle with believing that the price of 1 Ether would be higher than 2.5k USD (the current price) 1 year from now. Driving this point further, last but not least,

The trouble in arriving at a fundamental value of a cryptocurrency

When I started investing in stocks, there were various indications available to conclude the current valuation of a stock (i.e. decide if it is overpriced, rightly priced or underpriced). But in the crypto world, it doesn’t seem possible to look at a project and then put a price value to its token with even approximate accuracy. Try this yourself, take a new crypto project, don’t look at its price or token supply, and then try to figure out the market cap. There are high chances that you’ll be way off. There are no earnings; heck, most projects don’t even have a live product, just a fancy whitepaper, a bunch of famous names, and a rough roadmap. Also when you own an asset like stock, you own ownership / voting right in a company. What do I actually own in case of most cryptocurrencies?

The whole thing seems like layers of marketing with nothing but a bunch of promises about a rosy future at the core. Consider the project which is literally named “Internet Computer Protocol” (ICP) and was launched last month. Within 2 days of launch, its market cap was 45B USD, to put into perspective the market cap of Barclays is 42B USD. It doesn’t take much effort to figure out who owns most of the ICPs, who made a profit from this grand launch, and in which direction did the wealth transfer took place. And we all know about the Dogecoin, 14.4M of which are minted daily, which means it needs a sufficient influx of buying to keep upward pressure on prices, which is unlikely to sustain in long run. Yet I know there are people who believe that Dogecoin is still the best investment opportunity they can find.

Most investors resort to arrive at the fundamental price of a project coin is relative pricing to other coins. Just because BTC is worth 50k and has a market cap of X, people think Ethereum would be worth 10k. But no one knows why BTC would be worth 50k one year from now? Similarly, if a defi project like uniswap is worth X, sushiswap would be worth at least Y, and so on. It’s all relative.

Warren Buffet, in several interviews, has drawn parallels to the tulip mania and has shown a high degree of conviction that the cryptocurrencies will have a bad ending as they’re not so productive assets for society. Several other famous figures, including Ray Dalio, Charlie Munger, and Nassim Taleb, don’t hold optimistic opinions about Bitcoin. I’m not here to say that these people are right or wrong, but I know that some retail investors have a similar level of understanding of crypto projects as these people, and they choose to believe the opposite story to delusion. Please don’t be that person.

Regulatory heavens

Even if there’s a way to approximately arrive at the fundamental value of a crypto token, the central authorities aren’t going to be keen to let the world use these tokens for all your transactions too easily.

All it takes for someone to accept most crypto tokens as payment is to generate a private-public key pair. If you do it offline, there’s no way to know that the wallet generated from these keys is yours. This is like having the power to open up infinite number of bank accounts without KYC. You can ditch your currency and start accepting payments from your work directly to your crypto wallet. You might have to through “regulated” exchanges to convert those tokens to fiat currency, but you don’t have to do that. The reason being if you have enough people in your circle who accept crypto payments, you can use those tokens to pay for you expenses, and people receiving tokens can do the same, thereby bypassing central oversight and taxes altogether.

If crypto becomes mainstream, there will be many much circles where you don’t need to spend fiat, and tokens keep circulating from one wallet to another. Central authorities currently have control over taxes, ability to detect fraudulent transactions and freeze bank accounts, control over how much money is minted, and so on. With crypto, we just take that power from them. I have a very hard time imagining why governments and central banks would allow this shift to happen? Why won’t they create their own digital money instead like the digial Yuan?

I have only covered a few of the risks here. There are more risks to cryptocurrencies prices like, projects getting hacked, ponzi schemes, regulatory crackdowns, and so on. So it helps to be aware of them and understand than just believing in the vision. Persistently HODLing might not be enough. It sucks to lose most of your savings in retrospection (just browse Reddit posts of people after the 2k18 crash to know how terrible it is), so please only invest what you can afford to lose, and see certain projects for what they are, speculative instruments with high risks!

PS: This post contains arguments which I used to make one of my acquaintance rethink about selling their stocks and investing all that money into Bitcoin. I’m a freelance Software Developer by profession, and somewhat familiar with blockchain. I have seen several scammy projets during my freelancing stint, some of them made quite a good money by shilling and spreading false promises to people who are not so fluent with technology. I’m still invested in some cryptocurrencies, but unlike 2k18, this time I know I’m only speculating and have reduced my holdings to the amount that I’m comfortable losing :)