Stuck Holding the Bag? How to Avoid Crypto Bagholder Traps and Trade Smarter

We’ve all had this experience. You purchase a cryptocurrency at (what you perceive) as just the right time, only to find out that it is falling flat (and much more so). Soon after, you may find yourself holding a loss of 40%, and telling yourself “it’s going to come back” sooner than later. 

Welcome to the world of being a bagholder! But don’t fret; you don’t have to remain a bagholder. In this article, we will provide you with further insight into the term bagholder, review how you have become a bagholder, and, most importantly, provide tips to help prevent you from becoming a bagholder again.

What Is a Bagholder in Crypto Trading?

When you are a bagholder, you have an asset that's decreasing in value that you either cannot or choose not to sell. Your capital becomes trapped, and you are continuously losing value every day. Psychologically, the reason you are a bagholder is due to the combination of being stubborn and having hope. Essentially, you do not want to accept the loss, and therefore, you tell yourself that the market will eventually recover, while your money is just sitting in the asset doing nothing. 

Think of it like this - if you purchase a bunch of snacks and leave them sitting in your cabinet because you can't bear to throw them away; even though they are now expired, you continue to hope that they will magically become fresh again. They will not. 

As an example: Suppose someone bought Bitcoin at $60,000 in April 2021 and in June it had gone down to $30,000. Instead of cutting their losses, they continued to hold, and their investment subsequently dropped by 50%. That person is now a bagholder. 

The main difference between bagholders and active traders is that active traders have an exit strategy (plan) while bagholders have excuses.

Why Do People Become Bagholders?

Being stuck in a trading position is a result of psychological factors and the undercurrent of market forces that are sabotaging you.

The Psychological Factor

Loss aversion is an actual thing. We value the loss of money over the gain of it, hence, when the price of an asset drops, your brain is saying "do not sell for a loss" to you, even though selling may be the right thing to do.

Also, consider the "herd mentality". The majority of traders buy a particular coin and all tweet about it, so to fit in with the group, you buy in because of FOMO and when the price drops, all of you are now stuck holding onto the coin.

This is similar to high school; in high school, the trend was to wear certain brands of sneakers, so everyone wore those expensive sneakers because they were "in". Now, they are "out", but they continue wearing them because they do not want to admit they wasted their money.

The Market Factor

The volatility of crypto is well-known, and the introduction of leverage only exacerbates the volatility. The potential for a 10% decline in ETH price to completely wipe out leveraged positions at 3x leverage is extreme, as shown by many of the leveraged traders caught in the 2022 crypto bear market, who borrowed money to try to maximize their profits but were unable to exit quickly enough when the market turned against them and their assets became illiquid.

In addition to providing an alternate view on the nature of leverage and how to correctly use it, you should also consider why you are feeling stuck, and how to break free from that feeling, as your brain is working against you, but the market has no emotions about you or your situation.

How to Spot Bagholder Behavior

Are you starting to become a bagholder? Signs that will help you identify this include:

 

• You're holding an asset and that asset is down 30%, 40%, 50% or more and you do not have a plan to sell it. The price is declining.

• You are ignoring your stop-loss order because you think the asset will eventually come back. You have written off your losses and believe in the long run, the asset will gain value.

• You're justifying your holding of the asset by saying "I bought this asset for the long term," when you actually intended to trade it for the short term.

• You check the price of the asset frequently but never actually take action to do anything with the asset.

• You're actively participating in "Stuck-Trader" support groups on social media sites.

 

Example of a snack analogy: You know there are expired snacks sitting in your drawer. You can see them each day. Yet instead of throwing them away, all you do is close the drawer.

 

Example of a professional investor: An investor purchased an NFT project for 5 ETH during the NFT hype of 2021, and today it is worth 0.3 ETH. They haven't sold it, purchased more NFT's, and are spending a lot of time on Discord waiting for their investment to gain value again (the next pump).

 

If you recognize these early warning signs, you can avoid losing thousands of dollars by acting sooner rather than later, making it harder to make a rational decision about the asset.

The Real Cost of Being a Bagholder

Staying stuck can hurt you in two different ways: Too much money is tied up in a losing position and psychologically.

Financial Damage

The financial loss is because your money is stuck in a losing position. It creates:

• A lack of liquidity - You can't get at that money because it's tied up in that asset.

• An opportunity cost - You could have been using the money to invest in a winning trade while waiting on that asset. While you wait on that asset you are missing out on future profitable trades.

• Compounding losses - Interest fees can accumulate and keep building on top of each other and compound your losses if you use leverage.

High school level: You are going to have old snacks in the cupboard that you can't eat. You cannot purchase your favorite snack because you have spent all your money on old snacks.

The real world is: You have a position on BTC that is down 40%. At the same time, a new coin has just launched and is running up 200%. You do not have any money to invest in the new coin.

The psychological damage of being stuck is more damaging than the financial damage:

• The constant anxiety from checking the price

• The paralysis of making a decision (should I sell or hold?)

• The shame and remorse of holding a bad position

• The stress to your other investments as a result of the anxiety.

Examples of the above can be seen during the 2022 Market Crash. Those who were leveraged experienced liquidation as well as complete loss. Those who were long-term bag-holders did not lose their coins but still went through the same emotional distress and incurred serious financial damages.

How to Avoid Becoming a Bagholder

The best cure is prevention. Here's how to stay out of the trap:

1. Establishing a Stop-Loss and Target Price

Before opening a trade position, you must always establish where you want to take your profit and where you will cut your losses. Stick to your plan regardless of the emotional impulse to do otherwise.

2. Diversity in Portfolio

Do not place all of your capital on one particular sector or coin. The goal is to disperse your risk amongst multiple assets. Should one asset decline; your entire account will not be wiped out.

3. Controlling Position Size

Limit the maximum amount of capital at risk on one single trade to 2-5% of your trading account size. This basic rule will limit your risk and prevent you from incurring devastating losses.

4. Managing Your Psychology

Accept that loss is a normal part of the trade adaptation process in the trading arena. Losses occur for every professional trader in the adaptation process; however, very few professional traders suffer long term financial setbacks due to excessive losses. In fact, the major difference between professional and amateur traders is that the professionals will eliminate their losses as quickly as possible and move on to the next opportunity.

Example of a Student: With your limited funds, buy snacks. Don't spend all of your allowance on one large, expensive item because if it doesn't work out you will be broke.

Example of a Professional Trader: A trader of Tradewill uses Risk Management tools to set up automatic stop losses at 10%. Therefore, if and when BTC hits the 10% level, that trader will automatically exit the position thus eliminating the emotional factor and/or hesitation from closing the position.

5. Knowledge of Risk Management Tools

Websites like Tradewill provide the following tools:

• Automatic stop loss and take profit contracts

• Position Size Calculators

• Risk/Reward Ratio Calculators

Using these tools will help you eliminate as much emotion as possible from the investment process. An example of this is during the 2021 DeFi Boom; many traders who used stop-loss orders protected their capital from the substantial price corrections that occurred after that boom. Conversely, many traders failed to utilize stop-loss orders and were left holding large amounts of worthless crypto tokens after that boom.

Traders who actively manage their portfolio have consistently generated greater returns than traders who simply hope for the best.

Already Stuck? Here's How to Get Out

You’re stuck with a bad investment; therefore there are several ways to manage it.

Option 1: Cut Your Losses: 

Recognize that it’s a horrible feeling to sell an investment at a loss, but you’re going to free up cash to invest elsewhere with more potential for gain. 

Option 2: Reduce Your Position Slowly:

If you don’t like the thought of selling all your shares due to having a bad stock, then slow down the process by selling off some of them slowly until the price has stabilized.

Example for students: Throw away old snacks by batches. You don’t have to throw them all out at once. Start clearing up space.

Example for professionals: Say you have a position with BTC. You bought it when it was $60,000, but now it’s down to $30,000. Sell 25% of your position; that way you will lock in some liquidity. If it continues to drop, you will have reduced your exposure, and if it rebounds, you still have 75% in the market.

Option 3: Hold Until Recovery (with Conditions)

If you are a strong believer in the asset for the long term then 'waiting or holding' is a good option. But you will need to set up clear conditions:

• What price will you sell at?

• What Timeframe will you give it?

• If the price continues to go down, what actions will you take?

Use Hedging Strategies

If you have no plan to sell, you could use Hedging. Hedge by taking a short position in a different asset to offset any potential losses you may incur. Using Hedge on your position is very advanced, but it will allow you to reduce your overall risk and give you the ability to wait for the asset to recover.

Use a Case Study

For example, during the decline of BTC in 2022, astute traders reduced their BTC holdings by stages. They did not panic and sell everything at the bottom but instead ensured that they had some upside potential left to enjoy, this way they reduced their losses while keeping a little exposure open.

By taking action, the trader is able to relieve some of the stress and loss and not just sit idly while the losses accumulate. The worst thing you can do is nothing!

Real-World Bagholder Cases from Different Crypto Markets

Consider the real-life case studies from the different markets:

1. Bitcoin and Ethereum Bagholders:

After BTC experienced its April - June 2021 crash, many were left holding the bag after purchasing their BTC position near its peak price of $64,000 and experiencing its drop to approximately $30,000 in just a few short weeks. Although many have since recovered their losses after the end of 2021, using leverage to acquire BTC left many with nothing after being liquidated.

2. NFT Project Collapses: 

NFT projects created "bagholders" during the 2021 "NFT boom." Many projects sold for over 10 ETH at the height of the market, but are now selling for 0.1 ETH or less. Most people that continue to own these NFTs won't sell them at a 90% loss, but instead, they're hoping for another bull run that will never happen again.

3. DeFi Token Crashes:

 Token prices shot through the roof in the DeFi market from 2020 to 2021. Since then, DeFi tokens have lost between 95% and 99.9% of their original value. People that purchased DeFi tokens at their peaks still wait for their investment to recover.

High school analogy: If you remember the old trend of trading cards when they were popular; once the trading card fad ended, many of your classmates continued to hold onto the valuable trading cards even though their value would ultimately remain much lower than when you purchased them. The point is that all markets create bagholders.

Bull markets create mass bagholders; when there are bear markets, you will see all of those bagholders. By having an understanding of how your investments will work over time, you can prevent yourself from becoming a bagholder. 

Final Thoughts: Trade Smart, Not Stuck

Being a bagholder does not indicate success or accomplishment; rather it shows your lack of a proper risk management strategy.

Things to keep in mind.

• Place stop-loss orders prior to entering a trade.

• Diversify your options.

• Accept losing trades as “normal” and part of trading.

• Utilize automated tools to assist with risk management.

• If you are currently holding onto a bagholder, act now to start recovering.

It is important to note that: Active traders who utilize appropriate risk management within the cryptocurrency market are rewarded, whereas passive investors are only hoping for miracles!

Stop letting emotions control your trades. Join Tradewill.com today and access professional-grade risk management tools that help you:

• Set automatic stop-loss and take-profit orders

• Track your portfolio performance in real-time

• Trade with confidence using advanced analytics

• Learn from expert insights and market analysis

Don't be a bagholder. Be a smart trader.

Start Trading on Tradewill Now and take control of your crypto portfolio.