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Dear investors,
We’re happy to present the HIVE HODL Report. It details how long-term thinking can be beneficial for crypto investors. We highlight research showing the effects of adding a small allocation of bitcoin to your portfolio, and how holding long-term can compound your returns by deferring taxes.
HIVE is a long-term oriented company, and we believe this type of outlook is important for investors, and companies. Let’s get to it.
The HIVE HODL Report
By: Adam Sharp
Historically, long-term holders of cryptocurrencies such as ETH and BTC have been rewarded. Here are some reasons to consider long-term thinking in cryptocurrency
The term “hodl” originated in December of 2013, when an (admittedly drunk) user named GameKyuubi on Bitcointalk.org wrote a post titled “I AM HODLING”. Here’s an excerpt.
“BTC crashing WHY AM I HOLDING? I'LL TELL YOU WHY. It's because I'm a bad trader and I KNOW I'M A BAD TRADER.”
The typo, and the message resonated with the Bitcoin community. HODL became an important part of crypto culture. It has become a sort of mantra which has served the community well.
In this report, we will go over the potential benefits of holding crypto assets over long periods. These benefits can include:
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Tax efficiency
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Fee minimization
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Volatility avoidance
Fidelity’s Crypto Research
In September of 2020, Fidelity Digital Assets released a report titled “Bitcoin’s Role as an Alternative Investment” (PDF).
The report’s author, Ria Bhutoria, showed how a traditional 60/40 portfolio (60% stocks, 40% bonds) would perform compared to very similar portfolios that own a small amount of bitcoin (1%, 2%, 3%).
Over the period between January 2015 and September 2020, a modified 60/40 portfolio with a 3% Bitcoin allocation would outperform a normal 60/40 account by 49% per year.
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Traditional 60/40: 6.83% annually
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3% bitcoin, 58.5% stocks, 38.5% bonds: 10.24% annually
The results of adding a 1%, 2%, and 3% Bitcoin allocation are summarized in the table below.
Fidelity Digital Asset also presented the data in a bar chart which shows the strong historical results of adding a 1%, 2%, or 3% Bitcoin allocation to a hypothetical portfolio.
In the past, adding even a small allocation to Bitcoin has produced notable performance enhancements.
Past performance does not indicate future results, but Fidelity’s research is noteworthy. On the day the report was released, Bitcoin’s average price was around $11,429 according to CoinMarketCap.com data.
The full Fidelity Digital Assets research report is 29 pages, and it’s packed full with interesting data. You can access it here as a PDF.
The report includes a thought-provoking quote from Chamath Palihapitiya, founder of venture capital fund Social Capital.
“The conventional approach to investing for retirement was 60% equities and 40% bonds. If your goal was 10% a year, this mix got the job done in the 80s, 90s and 00s. Not anymore… Now, bonds return zero. So does 40 go to zero with it?
What do we replace bonds with? One idea could be to increase exposure to alternative assets. Crypto, cars, art, baseball cards, etc. Most people have 0-5% in alts. This allocation will probably change if bonds remain at 0...it’s just the math.”
NYDIG Research on 5-year Holding Period Returns
In July of 2021, NYDIG, a large institutional Bitcoin investment firm, released a report titled “Bitcoin’s Long-Term Compounding Effects”.
In this report, NYDIG’s head of research Greg Cipolaro analyzed the annualized returns of Bitcoin over every 5-year period starting on 1/1/2011. Here’s an excerpt.
"There are some important takeaways from this analysis that may not be obvious to investors. Yes, bitcoin has historically exhibited high annualized returns, but it is the range of returns that we find most interesting, particularly the worst-case return of 28.8%. This says to us that even if investors had bought at cyclical or local tops, but held for 5 years, the worst they would have compounded their investment is 28.8%."
The bar chart below compares the range of annualized returns over 5-year periods among various asset classes.
So historically, even those who purchased at the highest price during a bull market, but held for 5 years still earned a 28% annualized return. Of course, hindsight is 20/20, but this report still provides an interesting perspective on the benefits of long-term crypto investing.
While the research we cite here relates primarily to Bitcoin, Ethereum’s performance has been even stronger over the past 5 years.
Tax Efficiency
In Berkshire Hathaway’s 1989 shareholder letter, Warren Buffett famously made the case for long-term investing. He laid out a hypothetical scenario which shows the large effect that capital gains taxes can have on compounding.
Imagine that Berkshire had only $1, which we put in a security that doubled by year end and was then sold. Imagine further that we used the after-tax proceeds to repeat this process in each of the next 19 years, scoring a double each time.
At the end of the 20 years, the 34% capital gains tax that we would have paid on the profits from each sale would have delivered about $13,000 to the government and we would be left with about $25,250.
Not bad. If, however, we made a single fantastic investment that itself doubled 20 times during the 20 years, our dollar would grow to $1,048,576. Were we then to cash out, we would pay a 34% tax of roughly $356,500 and be left with about $692,000.
The sole reason for this staggering difference in results would be the timing of tax payments.Interestingly, the government would gain from Scenario 2 in exactly the same 27:1 ratio as we - taking in taxes of $356,500 vs. $13,000 - though, admittedly, it would have to wait for its money.
In this hypothetical example, Buffett showed how holding long term holding can result in a 27x greater return due to the effect of paying taxes on each transaction. By holding investments long-term, investors can defer paying taxes for many years, creating a far stronger compounding effect.
Additionally, in the United States and some other countries, there are federal tax benefits for individuals who hold investments for more than 1 year. The long-term federal capital gains tax rate is typically 15-20%, depending on a person’s income level. However, gains on assets held for less than 1 year are taxed at the normal federal income tax rate, which can reach 37% for higher income brackets.
By holding assets long-term, investors can benefit from both a stronger compounding effect and a lower tax rate.
Transaction Fees
Trading commissions on cryptocurrency transactions can range from 0.1% to 1.5%. These fees can negatively impact returns, especially for frequent traders.
To demonstrate this point, let’s look at a study by Terrance Odean, a finance professor at the University of California Berkeley. Professor Odean examined the effect of stock trading fees and their impact on investment returns.
The study, published in April of 2000, was titled Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors.
In an interview with the American Association of Individual Investors, Professor Odean discussed his results.
"We divided investors into five groups based on how actively they were trading. Our prediction was that the more active traders, who are also likely to be the more overconfident traders, would trade too much and end up with lower performance after paying their trading costs. And that’s exactly what we found.
We found that the buy-and-hold investors, after trading costs, were outperforming the most active investors by about six or seven percentage points a year."
While this study examined the results of trading in the stock market, the results are relevant for cryptocurrency investors as well.
The Rewards of Long-Term Investing
In summary, buy-and-hold investors can receive significant benefits across many asset classes. In cryptocurrency these benefits could potentially be greater due to the difficulty of market timing in such a volatile asset class.
In the past, long-term holders of cryptocurrencies such as Ethereum and Bitcoin have been rewarded. Whether that remains the case in the future is unknown, but we believe these assets continue to offer an attractive risk/reward equation.
HIVE Blockchain Technologies Ltd. is a long-term oriented company. We are planning years into the future. We are building our own crypto mining data centers which we believe will continue to produce value for shareholders for many years to come. We are investing heavily in new mining equipment, and building our crypto reserves.
If you made it this far, thanks for reading! HIVE trades on the Nasdaq and TSX under ticker: HIVE. To learn more about HIVE, visit our website, HIVEBlockchain.com. You can also follow us on Twitter, and Youtube.
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