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Crypto Stop-Loss Strategies & Risks

A stop-loss is an order type you can use on exchanges like Binance and GDAX to limit potential losses. If coming from stock market trading you may have used these, if not you may not have heard of them. This guide explains what they are, how to use them on Bitcoin/cryptocurrency exchanges, and why they should be used differently in crypto vs the stock market.

This guide doesn't cover margin orders, we've posted a separate guide explaining this.

What is a stop-loss order?

When you buy a cryptocurrency, say Bitcoin, you'd buy it at a certain price - $4000 for example. If the price goes up, you earn money; but if it goes down you lose it. The idea of a stop-loss is to place a sell order at a lower price than when you bought it to avoid losing too much money on this one trade. If for example you bought some Apple shares just before they released a new phone, expecting the price to go up, you might place a stop loss 5% lower than when you bought it in-case something very bad happens and the price drops unexpectedly. In the case of Bitcoin you might buy in at $4000, and set a stop-loss sell order at $3800.

In principle this is very good practice and is used very widely. But in the cryptocurrency world it isn't always a good idea as, unlike the stock market, most cryptocurrencies aren't regulated. The effect of this is market manipulation by individuals/groups holding large amounts of currencies, which can cause the price to go up/down by large amounts intended to trigger stop losses. A good example of this occurred on GDAX, on 24th June 2017, where an account placed a multimillion dollar sell order at the market price and caused hundreds of stop losses to be triggered, and numerous people to lose money.

Sometimes stop-losses aren't needed

Most cryptocurrencies with a high market cap are already widely used in the real world, and so unlike new coins released in ICOs - it's less likely that their price will drop to 0 after some bad news (still possible, just less likely). With this in mind, they do still have significant price swings - dropping as much as 80% in some cases after some bad stories in the news. If you had even very low stop loss orders at 20% of the original value, they would have been met and you would have lost 80% of your money. Then unlike people who didn't use stop-losses, you wouldn't still have your coins after the recovery.

Many people use crypto coin trackers as a middle ground, which allow you to monitor holdings across several exchanges/wallets in one place, often offering notifications for large price movements. This gives you visibility into which coins might be dropping in price, where you can then manually sell those coins if you want. We have a Crypto Coin Tracker of our own if you'd like to try it!

Scenarios where stop-loss orders are less-risky

For the most part, stop-loss orders should be avoided completely in cryptocurrency; but there are specific scenarios where they can be useful, and the risk can be decreased:

  • Some exchanges/brokers allow you to modify your stop-loss after opening an order. This allows you to set a very low stop-loss at say a 95% loss, but then if your trade goes positive - you can change the stop-loss to be positive. This functionality means you can limit your risk to small amounts of money at any one time (where you invest say 5% of your money each time, setting positive stop losses as prices go up, and not investing any more if prices go down). Be aware of slippage though, where the price may go slightly below your stop loss, so avoid setting it lower than 3% or 4% above your entry price.
  • When trading altcoins short-term, there are a number of different approaches. For those with the goal of earning more fiat (USD) short-term, they may use small trades between dollars and altcoins. If you do use this approach, try to never use more than 5% of your holdings on any one trade; and don't use margin! A stop-loss however can be useful. If for example you expect the price to go up, set your take profit order and a stop loss order around 1/2 or 1/4 of that value. For example you might buy at $100, have a sell order at $120 and a stop loss at $90. In this case if you get it right half the time - you'll make some money (this isn't as easy as it might sound, often people get it wrong far more than 50% of the time).
  • When trading altcoins long-term, it might be better to use a different approach. If you're expecting the value of a coin to go up long-term, rather than placing sell orders at small profits of 10% or 20%, you might want to only sell if it goes up say 1000% or more. In this case a much lower stop-loss order might be a good idea when trading coins with a small market cap. Unlike coins with a high market cap, these aren't as widely used so given the right conditions of perhaps bad news and a big hack/theft, the price could drop all the way to 0; causing a total loss of all your money. In this case you might want to set a very low stop loss, of say 20/30% of the price when buying it.
  • An alternative approach is to use a technique called dollar cost averaging. Generally this term means investing x money at a set interval, say $1000 on the 1st of every month. But the same principle can be used on specific trades. For example if you have $1000 to invest in a coin, rather than just buying $1000 of that coin straight away - you'd buy $500 worth at the market price, and set several buy orders at lower price prices, for example one at 5% lower, one at 10% lower, etc. This way if the price goes up - you've made a bit of money, and if the price drops - your average buy price will go down.

Best exchanges for stop-loss orders?

Any links to exchanges below are affiliate links, so we'll get some money if you sign up via them.

In practice, when setting up a stop-loss order on an exchange you'll have a 'Stop Price' and a 'Price'. The 'Stop Price' is the value when a limit order is placed at 'Price', so if you wanted to close a trade if the value dropped below $1, you might set a 'Stop Price' at $1 and a 'Price' slightly below that at say $0.95 (as there could be a drop/increase between when the 'Stop Price' is triggered and when it creates the order at the 'Price').

Some exchanges that support stop-loss orders:

  • Binance is a popular crypto-crypto exchange, offering what they call 'Stop-Limit' orders (where the stop price is referred to as 'Stop').
  • HitBTC, another popular crypto-crypto exchange, has a user-friendly tick box on market & limit orders to enable a stop loss (they refer to it as a 'Stop').
  • BitMEX, an exchange more useful for advanced traders as it offers up to 100x leverage, has an option for 'Stop Limit' orders (they refer to the stop-loss as 'Stop Price'). Beware using higher leverage on this exchange as it's very risky, see our guide on trading with margin/leverage for information on these risks.
  • CEX.IO is a popular exchange allowing fiat deposits. It has a margin trading feature which allows a 'Stop loss price' to be set. When trading with margin there's a risk you can lose more money than you put into a trade, so a stop loss is even more important. See our guide on margin trading for more info.
  • GDAX offer a 'STOP' order type, which if you toggle on the advanced option allows you to specify a 'Limit Price'.
  • Coinigy is a possible alternative. It's a platform that allows trading on multiple exchanges via their APIs, and has built-in stop-loss functionality (they also refer to these as 'Stop Limit' orders). This works different to an exchange, where the stop-loss order is only sent when the price reaches your stop-loss price. A benefit is that the order is kept off the order book (so a malicious person won't know when to trigger it), but a concern is that if the exchange API is down when the stop-loss is triggered, it might not close you out of a bad trade (although there's always a risk of this on the exchanges themselves, it's just much more likely in this scenario, so many argue that the risk/reward is too risky in this case).

Best broker for stop-losses?

In the past, our favourite broker for using stop losses was eToro, as its user interface was beginner-friendly. In December 2017 they removed this functionality for crypto, so we looked for an alternative.

A broker called IQ Option is our favourite. They offer a wider range of cryptos than eToro, and continue to offer support for stop-losses (and even better functionality, for example overlaying stop-losses on price charts). One negative is that they charge very high fees though.

We posted a guide comparing brokers and exchanges here.

DISCLAIMER: This site cannot substitute for professional investment or financial advice, or independent factual verification. This guide is provided for general informational purposes only. Bitcoin Kit is UK-based and not regulated by the FCA (Financial Conduct Authority). The group of individuals writing these guides are cryptocurrency enthusiasts and investors, not financial advisors. The ideas presented are our analysis, learning & opinions on a range of cryptocurrency topics. Trading or mining any form of cryptocurrency is very high risk, so never invest money you can't afford to lose - you should be prepared to sustain a total loss of all invested money.

This website is monetised through affiliate links. Where used, we will disclose this and make no attempt to hide it. We don't endorse any affiliate services we use - and will not be liable for any damage, expense or other loss you may suffer from using any of these. Don't rush into anything, do your own research. As we write new content, we will update this disclaimer to encompass it.

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