Stop losses have long been a staple in the traditional financial markets, offering traders a safety net against significant losses. By automatically selling an asset when it reaches a predetermined price, stop losses can theoretically limit an investor's downside. However, when applied to the world of cryptocurrencies, this traditional risk management tool reveals several inherent flaws, and there are a number of unintended consequences to using them.
The first and most glaring issue is the extreme volatility of the cryptocurrency market. Price swings of 10-20% in a single day are not uncommon, and "flash crashes" can trigger stop losses, selling off assets at low prices only to see them rebound shortly after. This volatility can lead to premature selling, locking in losses instead of protecting gains.
In a fast-moving market, a stop loss order might not execute at the desired price if there aren't enough buyers. This "slippage" can result in selling at a much lower price than intended, exacerbating losses instead of mitigating them.
Stop losses can also encourage more emotional trading. Setting the stop loss level requires making a prediction about the market's future behavior, which can be influenced by fear of loss or greed for gain. This emotional decision-making can lead to poor risk management decisions.
A significant drawback of using stop losses for crypto risk management is the necessity of keeping your assets on a centralised exchange.
This requirement contradicts one of the fundamental principles of cryptocurrencies: decentralisation.
Centralised exchanges, while offering a range of trading tools including stop losses, come with their own set of risks, and that’s not to mention when your crypto assets are stored on an exchange, you don't truly own them.
Instead, the exchange holds the private keys and, therefore, has ultimate control over your assets. This arrangement exposes users to the risk of the exchange freezing their assets, either due to regulatory pressure or internal issues.
Given these challenges, it's clear that a more robust and reliable risk management solution is long overdue for the crypto market.
Enter Bumper, an innovative DeFi protocol designed to fill this gap. Offering a risk market designed specifically for the unique characteristics of cryptocurrencies, Bumper’s novel approach to risk management allows users to protect their tokens from price drops for a set period of time, safe in the knowledge that if the market bombs, the value of their crypto wallet won’t.
Bumper debuts in August 2023, launching on the Ethereum chain, and will allow users to protect their tokens from downside volatility with more efficient pricing than any options desk.
Find out more about Bumper: Join our Discord community and be one of the first to use the most novel crypto risk management tool in the world.
EDIT: Bumper's August 2023 launch has been postponed until 7 September 2023.
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In this article, we compare using Bumper with Put Options and examine its advantages for DeFi traders wanting to trade volatility with more flexibility.
