I'm not exactly sure about this, so take anything I say with a grain of salt. Based on my hold letter at Harvard, it seems like my app was just put to the side, but is still active. If they do not fill up the admitted students list with newer applicants, then the rest of the seats on that list will be filled with people from the hold list, and the rest will most likely move to the waitlist.
For the waitlist, let's pretend a school has 200 seats, and you are number 50 on the list. If the school has 200 admitted students return their deposits, then noone from the waitlist will get in. If they get 199 deposits from the admit list, then they will also offer the first person on the wait list a seat. The only way for you as number 50 to get into the school is for the 1L class to still have at least one seat left after WL student number 49 has been offered admission.
As for which is better, I think hold is, since I've heard (although this is totally unconfirmed) that most people on hold just move onto the wait list, making hold a sort of waitlist + a slight chance of outright admission.