Playing field Cryptocurrencies

HODLers vs TRADers: Which team are you in?

A short review

I can’t remember exactly why I started to be interested in crypto currencies in February 2017. After a three-month phase of orientation, I started investing slowly in the market around the end of April. This was at a time when the market was relatively calm. The Bitcoin, Ethereum and Litecoin were constantly increasing and it seemed to me that the time was right to make small investments.

Although the total capitalization in the crypto market rose from $30B at the end of April to mid-September 2017 to almost $180B, I could not feel this in my portfolio. On the contrary, up to this point I had been confronted with losses of up to 50% (Fig. 1).

Fig. 1: Total Market Capitalization from 2017–05–01 until 2018–08–12 on a logarithmic scale (source coinmarketcap.com)

From June to the end of the year was the great time of the ICOs. A new token was announced almost daily and many billions of dollars flowed into the market. In addition to funds from newcomers, billions of old crypto currencies also flowed to the new ones. This flow of money from old to new coins made the losses in my portfolio until September 2017.

From mid-September 2017 the bull market (a market in which prices continue to rise) of Bitcoin began. This bull market pulled all other coins with it from November 2017 and peaked at the end of 2017 and early 2018. On Sunday January 7th, 2018, the total market capitalization was $834B. Then the bears came (a bear market is a market in which prices continue to fall). Prices fell and they did so across the board in several waves. Within 10 days, half of the capital was withdrawn from the market. By mid-August 2018, market capitalization had declined by 77.2% and is now in the $200B range.

HODLers vs TRADers

What actually makes the difference between a HODLer and a TRADer?

TRADers love the thrill, they play in the market and try to make a profit through the most skilful transactions possible. There are professional traders, i.e. those who trade daily with large amounts of money and try to realise profits as quickly as possible.

On the other hand, the HODLers. They choose one or a few of their favourite coins, invest and wait for profit to set in after a while. This time is seen by most HODLers in the cryptomarket in the range of a few years. So invest today and collect in 5 years or so. Because HODLers love their coins and don’t like selling them, they may miss the best time to make a profit. To HODL until a coin has no value anymore, makes no sense. In this sense HODLers must always keep an eye on the development of their coins in the real world but also in the market.

These are the two basic types in the crypto market, although the boundary is of course fluid. But it should be said that real HODLers would never bet on a coin from which they do not hope to make a profit in the future. So to speak, the HODLers also take some of the tradable coins out of the market. The more HODLers have committed themselves to a single currency, the less of that currency can be traded.

In contrast, TRADers buy and sell their coins. They are not so emotionally tied to the individual currencies and they don’t mind selling a coin altogether, only to perhaps return later at a more favourable price.

Analyzing the market

In my daily life, I deal with numbers every day. I’m analyzing data and trying to find regularities. I try to understand the world by using various statistical methods. I would now like to take a closer look at the turbulent crypto year from August 2017 to August 2018. I have to say that I have little knowledge of stock market indicators and have acquired the little I have over the last 18 months.

If I have different variables and I want to understand their effects on themselves, on each other or on other variables, then I have to make these variables comparable. So I need to find a metric that allows me to compare or relate the variables.

In the case of markets, the most important variables are price changes and trading volume. The price changes are relatively easy to understand, they simply indicate by how much a traded object has gained or lost value in a certain period of time. The trading volume is expressed as the quantity that has been traded during the period to be determined. Usually a reference currency (e.g. USD) is specified for the volume. In a classic market this makes sense, especially when it comes to tradable properties whose total market capitalization are not always quite clear. This is slightly different for crypto currencies. The market capitalization of the individual currencies is always known. It is known how many Bitcoins (BTC), Ethereum (ETH), Litecoins (LTC) or IOTAs (MIOTA) are present. Together with the current average price, the market capitalization is calculated by simple multiplication.

However, the market shares of the individual crypto currencies in the overall market now play a role when we consider the various trading volumes. Let me give you an example: Take two crypto currencies with different market shares, for example Bitcoin Cash (BCH) with $9.3B and Ethereum Classic (ETC) with $1.5B. If we want to compare the trading activity of both currencies, it makes no sense to compare the simple trading volumes in USD. These are $416M for BCH and $467M for ETC. If we compare the two volumes directly, it seems that there is similar trading activity for both currencies. However, if we relate the volumes to the market capitalization, it becomes obvious that ETC is traded much more actively than BCH. In relation to their own market capitalization, 4.5% of the coins are sold within 24 hours at BCH and 31% at ETC. This is a huge difference (real data from August 16, 2018). Exactly this difference struck me on closer inspection and I would now like to come to my analysis.

I have taken from coinmarketcap.com the historical data of the 19 highest capitalized crypto currencies since market launch and calculated the daily volumes relative to their own market capitalization. I took Tether out of the top 20 because this is not really a crypto currency, but a currency linked to the US dollar. Since I myself have only been observing the market more closely for just over a year, I would now like to present the results from the period between August 3, 2017 and August 12, 2018.

Results

First, table 1 simply presents the minima, maxima and median values of the daily trading volumes relative to their own market capitalization. I choose the median here because peaks were observed for all currencies, which have to be considered as outliers. The central tendency is therefore better indicated with the 50% point in the distribution than with an arithmetic mean, which is distorted by extreme values.

Table 1: Minima, maxima, median values and number of observations of daily volume in percent of market capitalization

For the further considerations I have excluded the data of Tezos (XTZ) due to the very short observation period. The individual distributions of the remaining 18 currencies are visualized in Figure 2 by box plots. The box of the box plot shows the area of the middle 50% of the distribution. The bold horizontal line in the box indicates the median (i.e. the 50% point) of the distribution. This means that 50% of the observed values are below and 50% above this limit. About 90% of all values fall within the whiskers. Outliers are marked with circles and extreme values with asterisks. This display allows you to compare different distributions with each other.

The currencies are sorted in the graphic in descending order of the median. Currencies on the left side of the distribution are those that are traded with relatively high voumes relative to their own market capitalization. Currencies on the right side of the graph are those that are traded with modest volumes. Scaling on the y-axis is logarithmic.

Fig 2: Distributions of daily volume in % of market capitalization for to 18 coins

What is striking is that there are clear differences in how the individual currencies are traded. From ETC, for example, on about 187 days since August 3, 2017, more than 10% of the total market capitalization went over the counter, well understood per day!

For MIOTA this was only 1.5% and for XEM only 0.71% and more of the market capitalization per day in 187 days.

In the next figure 3 I show only the medians and insert two horizontal lines for better readability. The red dotted line at 5% separates the high-volume currencies I classify as TRADER currencies (ETC, EOS, TRX, ZEC, LTC, BNB) from the rest. The lower black dashed line at 2.5% separates the currencies with minimal trading volume, which I classify as HODLER currencies (XEM, MIOTA, XLM, XRP, XMR, ADA), from the rest. In the middle are hybrid currencies, which are used both as TRADER currencies and as HODLER currencies (BTC, OMG, BCH, ETH, NEO, DASH). Scaling on the y-axis is linear.

Fig. 3: Median of daily volumes in % of market capitalization

If we now look at the influence of the relative trading volumes of the respective currencies on their exchange rates, we see that exchange rates can certainly be influenced by high relative volumes. Figures 4 to 6 show the price trends of TRADER, HYBRID and HODLER currencies (green line, logarithmic scale) together with the daily trading volume in % of their own market capitalization (black line, linear scale) and total cryptomarket capitalization (blue line, logarithmic scale) over the period from August 3, 2017 to August 12, 2018. The red vertical line is the culmination point from January 7th, 2018, respectively. The time when the bull market ended.

Fig. 4: Daily relative trading volumes and price chart of TRADER coins together with total market capitalization

The TRADER currencies show high daily volumes measured by their own market capitalization. If we compare the price fluctuations of the TRADER currencies with the total market capitalisation, we notice that the fluctuations are more extreme (ETC and ZEC) or that fluctuations in the total market capitalisation are not reflected in the price of the currency (e.g. BNB and EOS from January 2018). The last two examples of the BNB and EOS in particular show large volumes during a period of market decay, probably to support their own currency. EOS alone, for example, reached its all-time high (ATH) on 29 April at $22.89. It should also be noted that EOS’ ICO ran for an entire year (the ICO ended on 2 June 2018) and the tokens were already tradeable on the markets during the ICO. It therefore made sense to keep EOS price artificially high at least until the end of May, as EOS thus also achieved a correspondingly higher price at the ICO. EOS’ trading volume has been declining since 2nd of June. The price is also falling. The future will show whether EOS is a viable alternative to Ethereum and whether or not the price collapse of EOS is due only to the entire market.

Fig. 5: Daily relative trading volumes and price chart of HYBRID coins together with total market capitalization

The prices of the HYBRID currencies show a much clearer correlation with the total market capitalization. Here too, high volumes lead to a sometimes steep rise in prices, for example for OMG, BCH and NEO in mid-August 2017 or for BCH and DASH in mid-November. The resulting price jumps are significantly steeper than those in overall market capitalization. What is interesting here is that with BTC, ETH and DASH there are currencies that have been on the market for some time. BTC and ETH are considered trading currencies, i.e. the currencies with which trading in the crypto market is easiest. Because they have this status, they are also popular with HODLers.

Fig. 6: Daily relative trading volumes and price chart of HODLER coins together with total market capitalization

The exchange rate fluctuations of the HODLER currencies are also very similar to the fluctuation of the total market capitalization. However, in the case of the HODLER currencies, the somewhat rarer high volumes measured by their own market capitalization have a much more extreme influence on the price. With a few days of high trading volume, MIOTA, for example, managed to quintuple the price from $1 to $5 in December 2017 within a very short time, the same applies to ADA and XRP over the same period.

Conclusion

No matter to which team you belong, the HODLers or the TRADers, or whether you even have something of both in you. It is important that you do your homework and make the right decisions when you decide to buy crypto currencies for HODL. Other currencies fluctuate much more and you can also take advantage of these price fluctuations by cleverly setting stop limit purchases and sales. However, this requires continuous observation of the markets, only in this way can an individual make a profit.

As an IOTA fan and HODLer, I am happy to bet on this currency. According to the above analysis, IOTA clearly belongs to the HODLER coins. The confidence of IOTA HODLers in IOTA is high (see e.g. this Reddit post). Let the gamblers play with their currencies. Once the crypto market arrives in the real world and a lot of money will flow into the market, those currencies with most real world adoption will benefit immediate and most.

Disclosure

The Author declares that the content of this article is his own perspective on the topic. The author is member of IOTA Evangelist Network IEN and holds some investments in IOTA. The content of this article shall by no way be an investment guide. The author encourages the readers to do their own research (DYOR) especially when it comes to invest into cryptocurrencies.

IOTA donations are welcome (even tiny ones, which is possible with IOTA because there are no fees):

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