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What Is Stop-loss In Crypto Trading?

By September 22, 2021March 29th, 20225 minute read

Wouldn’t it be great if all of our crypto tradings gave us quick gains with minimal losses? Whether you’re new to the crypto industry or have experience, you’re very unlikely to answer that in the negative.

Why? 

As humans, we’re wired to chase gratification. And in the financial arena, we call them profits. Now, we won’t go over the basic advice such as; Diversify your portfolio or follow bitcoin news! We’re talking about something different. We’re talking about automating your everyday trading routine. 

Sound neat? Well then, allow us to introduce you to stop-loss in crypto trading

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What is Stop-loss?

Just as the name suggests, stop-loss is a tool with one purpose – to ‘stop’ your current trade’s loss after a certain limit. The idea stems from stock markets where stop limit and stop-loss orders are common. The primary difference between the two is that a stop-limit order is automated to buy a stock at a lower rate than its current. Stop-loss, on the other hand, designates a set price to sell off your stock (in case of a price drop) as a normal market order. In both cases, you have control over the rate you wish to buy or sell. 

Coming over to crypto, stop-loss functions through liquidating your invested assets whenever a market touches a specific price. Stop-loss is usually inbuilt in cryptocurrency exchanges themselves. 

To give you a better understanding, try imagining a scenario; You’ve just bought 1 bitcoin for ‘X’ price and set the stop-loss limit to 5%. If Bitcoin’s value goes up, you’ll be profiting, but if it drops down, the stop-loss will sell your investment as a normal market order as soon as the loss percentage hits 5. 

So what’s the big deal? I’m still down by 5%, right?

True, you have no control over the initial loss, but what are the chances the price doesn’t drop even more? You could lose more than you even invested in one trade.

If you’re still struggling with getting to know stop-loss, just think of it as a last resort to minimize the potential damage you can take from a single trade or maybe even as the embodiment of being – better safe than sorry. 

There are also three main ways of using this piece of tech, but before we go there, let’s touch upon how stop-losses affect the crypto community.

Stop-losses and the crypto trading community

The evolution of cryptocurrency has sparked popularity significantly in recent years. The swift growth of these digital assets has attracted more and more investors. However, a recent survey by Cardiff states that crypto novices are not doing too much homework before they invest.  

In essence, the survey found that over 40% of cryptocurrency purchases are from beginners while also stating that about only 16.9% of investors who purchased crypto fully understood its potential and value. Although 33.5% of investors are categorized as having either no knowledge of the crypto space or considered their knowledge as “emerging”. 

Stop-losses and the crypto trading

Types of Stop-loss strategies

Now that you’ve got a basic grip on what stop-loss is, let’s dwell deeper into their different trading techniques. There are a total of 3 stop-loss orders which we’ll run you through. 

Complete

The name speaks for itself here. A complete stop-loss will sell all your traded assets after it reaches a set price that you choose. However, it’s more preferable to utilize this when dealing with stable cryptocurrencies rather than volatile ones. The reason being sudden losses. Stable crypto markets can remain low (and drop even lower) for long durations at any predicted price drop. 

Coming over to volatile markets, it’s a definite no-go since extreme price jumps (in either direction) is arguably an everyday occurrence news for Bitcoin and crypto. Sure, you may sell all your bitcoins at a loss that may have limited further damage. But if the market jumps back up, you’ll have to buy it back at a higher price, and you know there’s a saying down from the 17th century; “Don’t put all your eggs in one basket” (especially in volatile crypto markets)

Limited/Partial

Another type of stop-loss strategy is limited or partial. This margin sells just some of your assets after a price drop. The remaining assets here can reduce the overall loss and also assure profit from any potential price growth. 

This is indeed an effective pick when your crypto price prediction game isn’t at its best. Overall, there’s a 50-50 win-lose risk factor with a fair chance to gain profit too!

Trailing

One of the best and advanced versions of stop-loss is the trailing stop-loss. This crypto stop-loss strategy is never constant and changes as per price movements. It’s simple and easy to use as you don’t always have to manually make alterations after receiving any price change notifications. 

Moreover, it smartly minimizes the loss according to the current price, which is truly a flexible way to control and manage losses. A big drawback, however, is that at present, no major cryptocurrency exchange offers a trailing stop-loss order. Nevertheless, don’t lose hope. Crypto exchanges such as WazirX are constantly innovating to add new features. We may not be far off from trying this out ourselves!

Is a stop-loss worth using?

So the idea of a crypto stop-loss strategy sounds decent enough, but there’s one question that’s still bugging you; Is this thing worth it?

That’s a perfectly normal question, and yes, there are aspects of this tool that can be unfavorable for many traders. 

You see, the thing is, stop-loss in crypto trading is used when things don’t go according to your crypto price prediction. However, before you can improvise your current strategy during a loss, a stop-loss can simply sell your assets, forcing you to plan your overall strategy once again. For a lot of people, the thrill of trading is the most important part. 

Even if the thrill of trading isn’t your thing, a stop-loss can still stir up problems for you. As mentioned earlier, if you’ve set a crypto stop loss percentage at around 5% (which can be typical daily movement for many crypto markets), your assets get sold immediately, leaving you in a worse position than before. Crypto ‘whales’ also cause shifts in the price at times and recover it just as quickly too. 

Put simply, stop-loss is a good backup tool if you want to give it a try, but we wouldn’t recommend using it for every single trade regardless of one’s experience in crypto trading. 

Conclusion

To conclude, before making use of stop-loss in crypto trading, you must be fully aware of its procedures and how it can be operated efficiently. We hope you’ve at least got a basic overview of how stop-loss in crypto works now. Keeping in mind that profits are a priority for any trader, it’s crucial to acquire proper knowledge before applying these trading techniques. Let us know if you think stop-loss is worth a try and if you’ve got other trading strategies up your sleeve!

Further Reading:

Will crypto markets get less volatile?

Best Bitcoin Trading Platform in India 2021

How to Buy Bitcoin in India in 2021

12 cryptocurrencies you should buy and hold in India 2021

All you need to know about scalping or scalp trading in crypto

A Guide to Crypto Margin Trading: Definition, Pros, and Cons

What is a Cryptocurrency?

Frequently Asked Questions

Is Ethereum Safe To Invest?

The Bitcoin market is unquestionably more volatile than the stock market. This may not be the market for you if you are incredibly risk-averse. Ethereum, on the other hand, may be a terrific investment for you if you're a diamond-handed investor who won't lose sight of short-term losses. Ethereum is a relatively safe investment as it is also based on blockchain.

How Safe Are Cryptocurrencies?

Cryptocurrencies can be safe, but your crypto wallets can be hacked if proper security steps are not performed.There are also dangers and uncertainties associated with investments, and we cannot declare any virtual currency investment risk-free. Buying and selling cryptocurrencies does not have to be dangerous if the trader is well-versed in the market and treats his coins with care.

Is Pi Cryptocurrency Safe?

Pi Network captured the crypto community’s interest even before it officially debuted. Its innovative mobile mining approach and user-friendly design simplify crypto adoption for a broader audience.Some users see this as a chance to get engaged in the crypto from the beginning and profit in the future, similar to how early Bitcoin adopters made huge profits by mining and keeping the coin. Other users have compared Pi to a worthless multi-level marketing (MLM) scheme.

Which Cryptocurrency Is Best To Invest In 2021?

Many altcoins are flourishing to invest in. Some cryptocurrencies with great potential are Ether, Ripple, Tron, and more. Investors are trying to diversify their portfolios and are flocking to the leading cryptocurrencies. Many growing businesses are already accepting cryptocurrency as acceptable payment methods.

How Many Cryptocurrencies Are There?

There are over 5000 other digital currencies available on the internet in addition to Bitcoins. The only problem is that they haven't gotten the users' attention. Besides Bitcoins, a few other digital currencies have gained popularity among users. It's been more than ten years since Bitcoins were first released, and now they've achieved new heights thanks to their phenomenal success.

Is Crypto Legal In India?

Cryptocurrencies are legal in India, and anyone can purchase, sell, and exchange them. It is currently uncontrolled, as India lacks a regulatory structure to oversee its operations. Per the Ministry of Corporate Affairs, companies must now record their crypto trading/investments within the financial year. In cases where a person receiving the gains is an Indian tax resident, or the cryptocurrency is regarded as domiciled in India, cryptocurrency transactions have been taxable in India

How To Invest In Cryptocurrency Stocks?

Cryptocurrency can be purchased in two ways: through mining or exchanges. The process of confirming and adding transactions to the blockchain public ledger is known as cryptocurrency mining. Cryptocurrency exchanges are another option. Exchanges make money by charging transaction fees, but there are alternative platforms where you may communicate directly with other cryptocurrency traders.

Are Cryptocurrencies Legal In India?

In India, cryptocurrency is legal, and anyone can buy, sell, and trade it. Because India lacks a regulatory system to regulate its operations, it is presently uncontrolled. According to the Ministry of Corporate Affairs, companies must now document their crypto trading/investments inside the financial year.

How To Invest In Cryptocurrency?

There are two ways of investing in cryptocurrency, mining and via exchanges. Cryptocurrency mining is considered the procedure of verifying and adding transactions to the blockchain public ledger. Another option is via cryptocurrency exchanges. Exchanges generate money by collecting transaction fees, but there are alternative websites where you can interact directly with other users who want to trade cryptocurrencies.

Is Cryptocurrency Banned In India?

No, cryptocurrency is not banned in India. India has seen its ups and downs in the crypto sector concerning its legal status. The Reserve Bank of India (RBI) issued a circular in April 2018 advising all organizations under its jurisdiction not to trade in virtual currencies or provide services to assist anyone in dealing with or settling them. A government committee proposed outlawing all private cryptocurrencies in mid-2019, with up to ten years in prison and severe penalties for anyone dealing in digital currency. The Supreme Court overruled the RBI's circular in March 2020, allowing banks to undertake cryptocurrency transactions from dealers and exchanges.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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