Paper Hands & Diamond Hands in Crypto Trading Explained

If you’re a fresh crypto investor who is still learning the ropes, you might be confused by all the jargon and buzzwords thrown around by other enthusiasts. You have coins that aren’t physical, and you have wallets that don’t store money. And as you join communities, you’ll hear the terms paper hands and diamond hands all the time.

Like many other phrases and concepts in cryptocurrency, these two also originated as memes. Over time, they grew into integral parts of the everyday vocabulary of DeFi enthusiasts, as both paper hands and diamond hands are used to label two different types of investors.

Let’s find out the exact meaning of paper hands and diamond hands!

What Are Paper Hands in Crypto Trading?

Paper hands in cryptocurrency trading is a humorous term used to describe insecure investors who often quickly sell their assets at the first sign of a price drop. Or in other words, it portrays people whose actions are generally driven by FOMO and fear—they can’t hold their positions since their hands are as weak as paper.

These investors are likely not familiar with trading and investment strategies and have a low risk tolerance, so they can’t withstand market pressure. As a result, they see every market drop as a potentially catastrophic event, which causes them a lot of stress. Eventually, it prompts them to sell their assets and exit the market before giving it a chance to recover.

It’s hard to pinpoint the exact origin of the term paper hands, but it’s been present for years on various online community platforms. The term is also not exclusive to the cryptosphere since it’s widely used in discussions regarding traditional financial markets. One place that made the term particularly prominent was the r/WallStreetBets subreddit.

During a 2021 meme stock craze, subreddit participants were using the term paper hands to playfully mock investors who exited their positions too early. On the flip side, those who were holding their positions with conviction, expecting greater returns, were being praised in a similarly playful manner and called diamond hands.

What Are Diamond Hands in Crypto Trading?

Diamond hands in crypto trading stand in contrast to paper hands and describe investors with strong determination and resolve. The term is used in the crypto community to characterize individuals who are resilient to a volatile market. They don’t crumble under pressure and resort to panic selling.

The word “diamond” is used due to the material’s hardness. The implication is that traders with diamond hands have the strength to hold their positions regardless of market movement and potential losses.

Much like “paper hands,” this phrase was also coined in the early 2010s and is commonly used on social media platforms. These are part of everyday conversations on Reddit and Twitter, not only in the DeFi environment but in TradFi ecosystems as well.

Still, since the cryptocurrency market is much more volatile than traditional markets, both phrases are used more often than in TradFi. That way, communities differentiate individuals who are panic selling from those who can manage their fear and remain level-headed.

Crypto enthusiasts often use the term diamond hands to express their optimism. As a result, the phrase can be seen more often in the bull market than in the bear market. However, even during periods of market downturn, eager crypto investors will use the term to embolden each other to persevere through price drops.

Finally, if the market (or even a specific cryptocurrency) recovers or experiences a massive price surge, the phrase will be used to praise those who endured the volatility and are now rewarded.

Why Do Paper Hands Lose Money on Their Investments?

The term paper hands encompasses a variety of investor characteristics and activities that make them lose money. Here are some of the key ones:

• Panic selling. The main way paper hands lose money on their investments is by panic selling whenever the price of their assets drops or they encounter bad news. By continuously buying and selling at small losses, investors can lose a considerable sum in the long run.
• No long-term strategy. Some of the biggest cryptocurrencies (like BTC and ETH) have seen substantial growth in the past decade. However, these digital coins can also see sharp and sudden short-term drops. Paper hands don’t take long-term growth into consideration and generally lose value by selling their coins during these price drops.
• FOMO. When it comes to investing, fear of missing out often leads individuals to make rash, reactive, and irrational decisions. They are driven by speculation and unsubstantiated news, with no fundamental or technical analysis backing up their decisions. That can result in buying assets at their peak, after which they generally drop.
• Emotional trading. Paper hands crypto investors allow fear to dictate their decisions beyond FOMO. Unable to handle volatility-induced stress, they don’t just sell assets to prevent further losses—they can also exit positions before hitting their targets. As a result, they miss out on potentially bigger gains by fearing the market might turn around.

Example of Paper Hands

Social media platforms, forums, chat groups, and other trading communities are filled with examples of paper hands losing money. While it’s challenging to find a real-life case due to blockchain’s privacy and security features, one can simply look at the cryptocurrency market’s price action over a long period of time.

Take Bitcoin as an example. When people first started trading it, the price of one BTC was just a few cents. In 2013, its price rose to more than $200, only to drop below $100 before the end of the year.

The asset has seen several such movements since then, always reaching a new higher high and a new higher low. Every drop in price means that there have been plenty of traders selling at a loss, a lot of them being paper-hand individuals.

An individual who bought Bitcoin at any moment prior to 2021—even for an at-the-moment all-time high (ATH) price—would still be profitable. A 2013 ATH price is still more than a hundred times lower than the current price of BTC, which is trading for tens of thousands of dollars.

Example of Diamond Hands

It’s far easier to find real-life examples of diamond hands than paper hands since people are more inclined to share success stories. One of the best examples of the diamond hands approach proving to be a better investment method is the owner of one of the biggest centralized exchanges (CEXs) in the world, Binance—Changpeng Zhao.

Commonly referred to as CZ, Changpeng Zhao started his career in 2005 by creating a fintech startup in the TradFi trading sphere. In 2013, a friend told him about Bitcoin over a game of poker, suggesting CZ invest 10% of his assets in this digital currency.

Realizing Bitcoin’s potential, CZ decided to go all in. He didn’t invest just 10% of his money; he invested everything he had, including selling his Shanghai apartment.

Today, his current net worth is estimated to be $10.2 billion. In addition to being the founder and owner of Binance, CZ is now one of the most prominent names in the crypto space and one of the richest people in the world, meaning his diamond-hand approach has paid off.

What Is Better in Crypto Investing: Paper or Diamond Hands?

When it comes to crypto investing, diamond hands usually yield better results than paper hands. They are associated with individuals who are level-headed and familiar with optimal trading practices.

Investors with diamond hands usually have a better grasp of the fundamentals behind cryptocurrencies and blockchain technology and know that volatility is part of the process. As a result, these crypto enthusiasts have long-term plans, and they don’t allow emotions to cloud their judgment.

The crypto market has proven time and again that holders who persevere often recover and even experience considerable gains. On the other hand, paper-hand investors driven by stress and fear generally lose money in the long run. Their strategy of selling at the first signs of price drops usually leads to a slow but steady decline in funds.

Still, that’s not to say that diamond hands are always the best strategy. When it comes to investing in extremely volatile small altcoins, short-term approaches may be the best. Many of these low capitalization cryptocurrencies see a few strong pumps before drastically falling in price. They almost never recover, punishing diamond hands that didn’t sell them when they should have.

Key Takeaways

As you can see, the DeFi environment is much more than digital currencies, blockchain, and cryptography. It’s a lively space with a community of passionate enthusiasts. Knowing how they communicate and taking part in conversations can vastly improve your chances of becoming a successful investor.

So, the next time someone calls you paper hands or diamond hands or you see the terms used in discussions, take the time to have a laugh and learn from it. Were you too quick to “pull the trigger,” or is someone praising you for enduring hard times?

Remember that cryptocurrencies constantly evolve, so learning, communicating, and staying informed is the best way to get out on top!