The importance of loss cutting in Bitcoin investment is essential for capital preservation, psychological stability, and long-term investment success.
Volatility Management: Preventing Rapid Decline Risks
- Bitcoin is famous for its high volatility. It can drop sharply by 20-30% or more in a short period, which can lead to unexpected large losses if a stop-loss price is not set.
- Example: In April 2021, it plummeted 76% from $65,000 to $15,000 in November 2022. Without a stop-loss, recovery could take years.
Preventing Emotional Decisions: Protecting Investment Psychology
- As losses grow, you are more likely to be swept away by FOMO (Fear of Missing Out) or wishful thinking, leading to irrational decisions (additional purchases, indefinite holding).
- Stop-loss is a planned strategy that blocks emotional intervention and encourages cool-headed judgment.
Capital Preservation: Securing Reinvestment Opportunities
- Protecting remaining capital through stop-loss allows you to respond flexibly to new investment opportunities.
- Example: After a 30% stop-loss, the remaining capital can be used to buy at a lower price or reallocate to other assets (Ethereum, stocks, etc.).
Establishing a Long-Term Strategy: Risk/Reward Balance
- Stop-loss is a key tool for risk management. A risk/reward ratio of 1:3 is generally recommended (e.g., 10% loss risk vs. 30% profit target).
- Saving capital is essential for the compounding effect. Prevents the need for a 100% return after a 50% loss.
How to Establish a Stop-Loss Strategy
- Technical Analysis Based:
- When breaking through the support line (e.g., 200-day moving average), set it to twice the ATR (Average True Range).
- Personal Risk Tolerance:
- Allow a 1-5% loss of a single investment portion compared to total capital.
- Event Response:
- Immediately respond to news such as strengthening global regulations and exchange hacking.
Common Errors and Precautions
- Ignoring Stop-Loss Price: Abandoning the plan with the belief that "it will rise someday" increases the risk of bankruptcy.
- Excessive Stop-Loss: Frequent stop-loss due to being swayed by volatility results in accumulated transaction fees and lost opportunities.
- Trailing Stop-Loss: Stop-loss after a large loss has already occurred loses its meaning. Prior planning is essential.
Practical Example: Stop-Loss Application Case
- March 2023 (Banking Crisis): When Bitcoin broke the $25,000 support line and fell to $22,000, an investor who stopped the loss at $24,000 preserved capital when it fell further to $16,000 and used the opportunity to repurchase at $17,000.
Conclusion: Strategic Stop-Loss = Law of Survival
In Bitcoin investment, stop-loss is not admitting failure, but smart risk management. Since the market is unpredictable, setting a stop-loss price in advance and thoroughly complying with it is the key to long-term success.