Every space bears a specific term or jargon that is used to refer to a certain concept, person or even an aspect. The term can either be informal or formal. Likewise, in the cryptocurrency genre, we have a term that is most commonly used but at the same time many people do not exactly know about the term. Well, we are talking about the term crypto bag holder.
In this article, we will talk about the bag holding meaning in detail and know the reason a person becomes a crypto bag holder. So without further ado, let’s get in.
What Is A Crypto Bag holder?
A bag holder in cryptocurrency is an informal term that is mostly used to describe an investor who holds a position in a security that loses in value until it becomes almost zero. In most of the cases, a bag holder retains its holdings stubbornly for an extended period during which the value of his holdings become zero.
As per a website Urban Dictionary, the term “bag holder” (bag holder urban dictionary) comes from the great depression where the people on the soup lines held potato bags that were filled with only their possessions. After that the term has emerged as a part of the contemporary lexicon.
A bag holder in crypto terms refers to an investor who holds a bag of stock symbolically that has gone out of worth over time. For instance, an investor invests in 100 shares of a new startup. Although, at the preliminary stage, the price will rise owing to the Initial Public Offerings (IPO), it will in no time start to drop as soon as the analysts start to question the veracity of the business model.
The subsequent poor earnings gives a clear signal that the company is struggling and that the stock price will consecutively fall again. An investor who deliberately hangs onto the stock irrespective of the ominous sequence of events, is certainly a bag holder. Often the bag holders succumb to the disposition effect or the sunk cost fallacy that causes them to cling to their existing positions for relatively long periods.
Reasons Behind Being A Crypto Bag Holder
Below are some of the most important reasons analyzed why some investors turn into a crypto bag holder.
- A couple of investors generally do not follow the concept and strategies required to be a part of the market.
- The bag holders often possess a strong belief that in future, their bags might be valuable if it is not now.
- Probably the investors lack adequate time to analyze a particular cryptocurrency’s performance in the market.
- Probably the investor is not aware of the under-performance of the asset or coin in the market.
- The disposition effect can also be a reason for an investor to bag and hold crypto assets for longer until the value completely drops. The disposition effect points out to an investor who, being aware chooses to hold the bag bearing less value and hoping for the recovery while selling the bag that has an increased value. Thus, it can be stated that the disposition effect comes from human psychology where it states that an individual hates it when they lose more than enjoying their win. This results in making abrupt decisions.
- It has been analyzed that the sunk cost fallacy proves to be one of the reasons that makes an investor go bag holder. The concept is when an investor holds the asset owing to the unrecoverable expenses that he or she has made. In this scenario, the investor waits for the least time so that they can make a profit in a decent or the initial investment price.
- Prospect theory could also be a cause where the investor makes a decision on the basis of the perceived or the potential gain rather than the losses.
How To Not Be A Bag Holder
If an investor wants to remain an investor and not turn into a crypto bag holder, then it is important for them to consider the above mentioned fallouts in addition to learning and analyzing from the market on their own. An individual not turning to a cryptocurrency bag holder must take into consideration that what is lost is lost and thus, they must try to measure the further preventive steps. Additionally, the investor can also take the help of the financial expert for gaining better insights and advice.
Speaking practically, there are a couple of ways to determine if a stock is a likely bag holder candidate. For instance, if a company is cyclical, where the share price is likely to fluctuate along with the disruptions in the economy, then there is a fair chance that riding out through rough patches might result in a share price turnaround.
However, if the fundamentals of a company is crippled, the share price might never recover. The consequence is that the sector of a stock might signal its chances for outperformance in the long run.