Are Bitcoin Stop-Loss type functions being abused?

in bitcoin •  2 years ago

The cryptocurrency market took a dip recently and I many people are glued to the charts of their coins right now. I know many people have lost money in this dip and I am one of them. We all want to protect our investments, but sometimes losses are inevitable. I wanted to take a couple minutes to explore the most common way investors use to protect themselves in bearish market conditions like we are seeing now.

Stop-Loss Orders

The most common way cryptocurrency traders and investors protect themselves is the "Stop-Loss" order, which automatically sets up a sell order when a coin reaches a certain price level. For example if someone buys Bitcoin at $2600, they may put in a "Stop-Loss" order at $2340 to make sure that if the market dips, they don't lose more than 10% of their invested money. This is a very useful function very many traders use and abuse.

What many cryptocurrency traders don't realize is that the function is not perfect and could be abused by other traders and groups of people who want to short the market. When you set a "Stop-Loss" order to sell after the market dips to a certain level and that order gets triggered (like so many did last night), what the system tries to do is sell at the next available price. That could be a real problem during bearish market conditions and actually cause more harm than good because the next available buy maybe way below your "Stop-Loss" position.

By definition, a bear market causes investors to panic and allows the prices to drop in big proportions while speculators wait to see where the market lands. So, even if you put in a "Stop-Loss" order to trigger after your coin drops 15%, it may not actually find a buyer until it drops to over 50% or more! Which means that your "Stop-Loss" order really didn't save you from the big dip or crash at all!

Are Stop-Loss type functions causing more harm than good?

The last few months there has been a lot of excitement and fear surrounding the cryptocurrency market. Some people think the market is set for a crash, others disagree. But all can agree that the market is very volatile. A volatile market can be very profitable and I know many traders have been raking in the coins the last few weeks.

Because the market is so volatile, more and more new traders coming into the cryptocurrency world want to find ways to protect themselves. If you google the best ways to protect your investment the common answers you get tell you to diversify, educate yourself, and use "Stop-Loss" or "Limit" orders for your high risk ventures.

I believe that the over use of the "Stop-Loss" type order is being abused and too many people are relying on it too heavily. This mechanism was NEVER designed for a very volatile market like cryptocurrency and many stock traders will tell you about the potential harm it can cause. My intuition is driving me to consider that there may be groups of investors abusing the "Stop-Loss" functions to short the market in their advantage. If you can figure out the average "Stop-Loss" order point, it's not too difficult to use it do your advantage in terms of taking a short position.

My opinion is that people should be very careful about using"Stop-Loss" orders. It seems to me that this function is becoming so over used that people who are interested in shorting the market can use it to their advantage.

I would love to hear what the community thinks on the topic of "Stop-Loss" orders and how much they influence the market flow. Please post your ideas below and please don't be afraid to let me know if you think I am wrong.

Thank you for reading and please upvote, follow, and resteem if your enjoyed my article. Or at least upvote 😉

Intro Pic:
Crypt0.Critic Images: CleverCat

This blog is written for informational and entertainment purposes only. As the author, I can honestly say that I am in no way associated with any blockchain based company. My opinions are my own and are offered freely. My opinions and suggestions and are NOT INVESTMENT ADVICE! Please do your own research before considering any high risk investments.

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Stop-losses can be good, but they also screw you over when there is a sharp rebound. Really need to pick spots with them. Cheers