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What is a “diamond hands” investor?

What is a “diamond hands” investor?3 min read
  • March 31, 2023
  • by UH News

What should an investor do when the cryptocurrency they bought loses value? Hurry to sell it or (re)define their strategy? The answer to this question will help many readers to understand if they are among the “diamond hands” or the “paper hands”, phrases in the crypto vocabulary that define two very different types of investors. Binance explains that “paper hands” are those who buy or sell compulsively, driven more by their emotions than by logic. “Weak hands traders have predictable buying and selling behaviors as they are driven by fear, uncertainty, and doubt (FUD).”

This approach is a guaranteed way to lose money, according to Investopedia. This is because these investors “end up buying at the highs and selling at the lows” when influenced by bad news on social media or by the negative experience of “a friend of a friend” who lost everything.

These tend to be inexpert investors, and the predictability of their behavior means that experienced crypto operators can take advantage of them to make money. MapSignals explains that experts see the trends. “When no one wants to buy is a blissful opportunity. When times get tough, as an investor, you can choose to either strap on a helmet or hide your head in the sand. But, only one makes money over the long-run… significantly more than the other. ” Another definition of a “paper hands”’ investor is someone who only deals in contracts and acts more like a price speculator than an investor because their objective is not to hold the asset.

“Paper hands” and financial education

According to an expert consulted by CNBC, 63% of US residents have this kind of profile when it comes to buying crypto. "When the market is doing well, people are throwing their money at it. When it’s doing poorly, they’re keeping their money out. [That’s] doing the exact opposite of what you’re supposed to be doing,” one source notes.

And why is this harmful? Because history shows that after a fall, markets tend to recover and generate profits for those who had the patience and long-term vision to hold. This demonstrates that financial education is a basic requirement in order to make informed decisions because, while nobody can predict market movements for sure, everyone can decide how to manage the ups and downs. And if the market is down, do you not want to be there when it rises?

Elon’s hands

“Diamond hands” are investors that keep hold of their crypto even amid times of market volatility in order to meet their objectives. According to Cryptoholics, the term originated in the subreddit r/WallStreetBets, the forum that made GameStop popular at the start of 2021. In the same year, a tweet by Elon Musk saying that Tesla had diamond hands went viral bringing the concept to a wider public beyond the crypto sphere.

Investors defined as diamond hands, strong hands or smart money have a high tolerance of elevated risk levels and the patience to see their investments make money in the long term. In other words, they’re running a marathon, not a sprint.

One characteristic of diamonds is that they’re created under extremely high temperatures and pressure, comparable to what investors must cope with to hold on to their assets while the market falls. Binance specifies that “Typically, the assets held with diamond hands are highly volatile, such as crypto, options, futures positions, and meme stocks.”

In the financial world, many of the diamond hands are banks, companies, and funds with the capacity to maintain their investments without worrying about market fluctuations. As an example, a Bitcoin was worth less than a dollar until February 2011, so any investor who has held on to their crypto since then could have made a fortune when the currency reached its historical peak of $69,000 in November 2021.

And an investor without the diamond-hands vision could have spent 10,000 bitcoins on two pizzas at Papa John’s, which would have been worth $200 million had they waited. However, to have diamond hands can also have a negative connotation. Some use the term to refer to investors who keep hold of an asset when really they should have sold it.