The five ways people actually lose money in crypto

There is a comforting story in which losing money in crypto is the result of a bad call — you thought it would go up and it went down. That story is comforting because it makes the problem sound like a skill you could acquire.

It is mostly not what happens. Being wrong about direction, at a sensible size, costs a small percentage and teaches you something. What actually removes accounts is structural, and the five mechanisms below are all fixable by decisions made before any market opinion is formed.

1. Size: the position was too large for the account

The most common and the most avoidable. The asset does something ordinary — a 40% decline is an unremarkable event in crypto — and because the position was a large share of the account, an ordinary move becomes an unrecoverable one.

The reason recovery is so hard is arithmetic, and it is worth seeing rather than being told:

Loss taken	Gain needed to get back to even
20%	25%
50%	100%
75%	300%
90%	900%

At the top you are inconvenienced. At the bottom you are finished, because a 900% gain is not something anyone can plan around. This asymmetry is why avoiding large losses matters more than catching large gains, and why drawdown is the number experienced traders watch instead of returns.

The fix, which requires no forecasting: decide what percentage of the account you can lose on one position before you open it, and let that plus your invalidation level determine the size. How to size a crypto position goes through it, and our position size calculator does the arithmetic.

2. Leverage: no room to be temporarily wrong

Leverage does not make you wrong. It removes the time to be right.

At 10x, roughly a 9.5% adverse move liquidates the position. At 25x, about 3.5%. At 100x, about 0.5% — which is ordinary noise, a widened spread, a single wick. So a correct view held with high leverage is routinely liquidated before the view is vindicated, and the outcome is identical to having been wrong.

There is a second, quieter drain. Funding on a perpetual is charged on notional rather than margin, so a typical 0.01% per eight hours is roughly 110% a year against your margin at 10x. The full arithmetic is in perpetual futures explained.

The fix: know your liquidation price before opening, and treat it as a real number that ordinary volatility will reach. If your idea needs weeks to work and your leverage gives it hours, the leverage is the problem.

3. Costs: the drain nobody totals up

This one is invisible because it never arrives as a single event. Each trade costs a commission, half the spread and some slippage — realistically around 0.23% one way on a venue advertising 0.10%.

Twenty round trips at 0.46% each leaves 0.9954 to the power of 20, which is 0.912. Nearly 9% of the account, gone, with no losing trade required. Someone trading several times a week can spend a quarter of their capital on costs in a year while believing they are roughly break-even.

The fix: trade less, and measure what you actually pay against the mid price before each trade. The real cost of a trade has the method.

4. Custody: irreversible, and usually not dramatic

These losses rarely involve a market at all. A seed phrase lost or never written down. A transfer to a wrong address. Sending an asset over the wrong network. An exchange that fails while holding the balance, or freezes an account.

What unites them is finality. There is no support desk for a blockchain transaction, and no reversal for a valid transfer. A market loss can be recovered from; a custody loss is permanent.

The fix: test everything at trivial size first — a small withdrawal, a small transfer on each network, and a wipe-and-restore of any wallet before it holds anything meaningful. Then split holdings so no single venue’s failure and no single mistake can reach everything. What “not your keys, not your coins” really means covers both sides.

5. Theft: engineered, not opportunistic

Crypto theft is overwhelmingly about persuading you to authorise something, not about breaking cryptography.

The recurring patterns: a “support representative” who contacts you first and needs your phrase; a wallet application downloaded from an advertisement rather than the official source; a transaction approval that grants unlimited access to your holdings rather than the single transfer you expected; a phone number transferred away from you so SMS codes arrive at someone else’s device; and an unsolicited message about an opportunity, which is never anything else.

The fix: use an authenticator app rather than SMS. Never enter a seed phrase anywhere except restoring your own wallet. Read what a transaction approval actually grants before signing it. And treat every unsolicited approach as an attempt, because the base rate is close to one.

What is not on this list

Being wrong about an asset. It belongs in a different category entirely, because at a sensible size it costs a few percent and produces information. Every mechanism above turns a survivable error into a terminal one — which means the useful question is not “how do I predict better” but “what would make being wrong survivable”.

That question has answers, all of them available to anyone, none requiring any view about where prices go. It is also, unhelpfully for anyone selling anything, extremely boring: size sensibly, avoid leverage, trade rarely, test transfers small, and never type your seed phrase. That is most of it.

Nothing here is financial advice, and none of it is a promise that following it produces gains — it will not. Crypto assets are volatile enough to lose your entire position regardless of process. See our disclaimer.