Sunk Cost Fallacy in Crypto: When to Cut Your Losses

In the fast-paced world of crypto, where fortunes can rise and fall in a matter of days, the hardest decision isn’t always about buying in, it’s about letting go. As the market matures in 2025, with AI-driven trading, institutional capital flows, and stricter regulations reshaping the landscape, retail investors are still struggling with one timeless psychological trap: the sunk cost fallacy.

You’ve probably been there. You bought a token at the top, watched it plummet, and now you’re holding on, hoping for a rebound, not because it’s a rational decision, but because you’ve already lost so much. This article unpacks the psychology behind sunk cost bias, how it uniquely affects crypto investors, and most importantly, how to cut through emotion and make smarter financial decisions.

What is the Sunk Cost Fallacy?

The sunk cost fallacy is a cognitive bias that leads people to continue an endeavor, investment, or behavior based on previously invested resources like time, money, or effort, even when the future outlook is unfavorable. It’s the emotional equivalent of refusing to leave a bad movie halfway through just because you already paid for the ticket.

In traditional finance, this fallacy often manifests in holding onto declining stocks or businesses long past their prime. In crypto, where volatility is higher and emotional narratives are more intense, the sunk cost trap becomes exponentially more dangerous.

Emotional Attachment in Crypto: More Than Just Money

In crypto, investing often feels personal. It’s not just about profit and loss, it’s about belonging. Unlike traditional assets, which are typically assessed through earnings or performance, cryptocurrencies are frequently wrapped in stories, communities, and dreams of disruption. Buying a token can feel like joining a movement. Selling it can feel like giving up on a belief.

That emotional weight becomes even harder to shake because of three things: 

• First, many tokens don’t have clear business models or fundamental value. There are no cash flows to analyze, no quarterly earnings. Without concrete data, investors rely on hope, hype, and speculation. It’s easy to convince yourself to stay in, even when the project shows no progress.
• Second, there’s the culture around memecoins and viral tokens. These aren’t just assets, they’re symbols. People rally around them, joke about them, wear them like digital badges. Letting go often feels like walking away from a community, not just closing a trade.
• And third, the volatility. Crypto can crash 80 percent and still bounce back. Investors have seen it happen before Bitcoin, Ethereum, even some low-cap tokens. That history creates a powerful expectation that every drop might just be a setup for a comeback.

All of this makes cutting losses much harder. You’re not just making a financial choice. You’re untangling yourself from a story you’ve invested in, and that’s what makes the sunk cost fallacy in crypto so dangerous.

When Hype Replaces Value: The $LIBRA Coin Crash

In February 2025, Argentina’s president Javier Milei publicly promoted a meme coin called $LIBRA, presenting it as a tool to support small businesses and stimulate economic growth. The announcement came at a time when crypto hype was strong and political narratives carried unusual weight.

The reaction was immediate. Within 40 minutes, the token’s price exploded from nearly zero to more than $5, briefly pushing its market cap into the billions. For many retail investors, buying $LIBRA felt less like chasing profit and more like joining a movement tied to national pride.

Yet the momentum quickly reversed. The project’s creators, who controlled the majority of the supply, began selling heavily into the rally. The token collapsed by more than 85 percent, erasing an estimated $250 million in value. What fueled the rise was not fundamentals or utility but belief in a story, and when the story lost steam, so did the token.

Let’s take this case as a reminder of how powerful narratives can be in shaping investor behavior. The $LIBRA episode shows why many hold onto tokens long after the logic is gone: they are not clinging to numbers, they are clinging to hope. And that is where the sunk cost fallacy in crypto becomes most dangerous.

Why We Hold Losing Bags and What It Really Costs

Letting go of a bad trade isn’t easy. It’s not just about the money that’s already lost, it’s about what that loss represents. Selling a token at a steep discount forces us to admit that we misjudged, that we placed our trust in the wrong idea or narrative. In crypto, where markets are fast-moving and often fueled by emotion rather than fundamentals, this kind of self-confrontation becomes even more difficult.

At the heart of this behavior is loss aversion. Research in behavioral psychology shows that people tend to feel the pain of losing far more intensely than the pleasure of gaining. So instead of accepting a loss, we often prefer to hold, telling ourselves that a rebound is always just around the corner.

This emotional reluctance is further amplified by what’s known as the endowment effect. Once we own something, especially something we chose ourselves, we begin to value it more than we would if we were viewing it objectively. A token might no longer have any real use case or active development, but because it’s part of our portfolio, it feels worth keeping.

Memory plays a role too. Many investors remember that one time they sold too early and missed a massive rally. That single experience can shape future decisions far more than it should. Even if the current situation is fundamentally different, we hesitate, worried we’ll make the same mistake again. What follows is a kind of emotional loop: the longer we hold, the more invested we feel, not just financially, but psychologically. And the harder it becomes to let go.

But while we’re stuck hoping for a comeback, something else is happening. Our capital is trapped. It’s no longer working for us. Every dollar tied up in a dying token is a dollar that could be earning elsewhere, in assets with stronger momentum or actual fundamentals.

Consider what happened to many investors in 2023. One example stands out: an individual who bought $10,000 worth of LUNA at $90. After the collapse, they refused to sell, even when the price fell to just $1, convinced that a recovery was only a matter of time. Meanwhile, Ethereum rebounded 40 percent during that same quarter. If they had reallocated even half of their capital, they could have regained a meaningful portion of their losses. But they didn’t. They held, and watched the value of their portfolio continue to erode.

Making one emotional decision doesn’t ruin a portfolio. But repeating that behavior across several positions does. When hope replaces analysis, and emotional investment replaces discipline, the long-term cost becomes far greater than the original loss.

Sometimes, the smartest move isn’t to wait. It’s to step back, reassess, and act. Letting go isn’t a weakness. It’s clarity, and in crypto, where the line between conviction and denial is often thin, clarity can make all the difference..

When Holding Becomes Riskier Than Selling

In crypto, knowing when to cut your losses can be harder than deciding when to buy. What starts as conviction can slowly turn into avoidance. You might tell yourself you’re just being patient, but often, you’re waiting for something, anything, to justify not selling.

This turning point rarely happens all at once. It usually arrives quietly, through subtle signals that the project you believed in is beginning to fade while you continue holding, hoping it will somehow turn around.

Here are a few signs that should prompt a closer look: 

• No roadmap updates for months
  When a team stops publishing updates or sharing any sign of progress, it’s often a red flag. In crypto, where innovation moves fast, extended silence can mean the team has lost direction or interest.
• Founders selling or disappearing from social media
  If the core team quietly exits public communication or is seen offloading tokens, it’s time to question their long-term commitment. Founders typically have the clearest view of what’s really going on. If they’re stepping back, there may be more happening behind the scenes than the community is being told.
• A fading community
  Engaged communities are the heartbeat of any healthy project. If conversation slows down, support wanes, or the tone shifts toward frustration, it often reflects deeper issues. When people stop showing up, it means they’ve stopped believing.
• Inactive or toxic Telegram and Discord channels
  These platforms usually reflect the real-time health of a project. If they’re filled with spam, complaints, or simply go silent, it shows that both community and moderators may have checked out. A lack of moderation is often a sign the team has already disengaged.
• No visible product usage despite time passing
  If the project still hasn’t delivered anything usable months after launch, or if user activity remains low, it’s a clear sign that traction is missing. Ambition without execution is one of the most common red flags in crypto.

One of these signs on its own might be explainable. But when several show up at once, it’s hard to ignore. If you find yourself making excuses for a project instead of looking at what’s actually happening, it may be time to reassess.

The question to ask is simple. If you didn’t already hold this token, would you buy it today? If the answer is no, then staying in may not be a sign of belief, it might just be reluctant to admit it’s time to move on.

The Comeback Argument and Why It Often Falls Apart

Some assets do come back. Ethereum is a popular example. During the 2018 bear market, it dropped from $1,400 to just $80, only to climb back above $4,000 in the years that followed. But that kind of recovery didn’t happen in a vacuum. Ethereum had a strong developer ecosystem, consistent network activity, and growing interest from institutional investors. There were real signals that it still had room to grow.

Most tokens don’t have that kind of support. Many are launched during hype cycles, without a clear product, and without any sustainable user base. When those projects collapse, what’s left behind is usually a thin community clinging to a narrative, not a functioning ecosystem.

Holding a failed token simply because it once had potential isn’t a strategy. It’s a bet without evidence. If the team has gone silent, the product remains unused, and the community is fading, expecting a return to all-time highs becomes increasingly unrealistic.

In markets like crypto, where attention moves fast and cycles are brutal, hoping for a miracle rebound without any data to back it up is not a plan—it’s just delay dressed up as belief.

Letting Go Requires Clarity, Not Coldness

Letting go of a losing position isn’t about cutting off your emotions. It’s about seeing the situation for what it is, rather than what you hoped it would be. When the reasons you entered a trade no longer hold, staying invested becomes less about strategy and more about reluctance to admit it’s time to move on.

Clarity begins with simple, consistent habits. For some investors, it’s setting predefined exit points before buying. For others, it’s regularly asking a hard but essential question: if I didn’t already hold this asset, would I still choose to buy it today? The answer, when approached honestly, often makes the next step obvious.

In traditional markets, these habits can help refine discipline. But in crypto, they’re essential for survival. The nature of this space—the pace, the hype, the lack of clear fundamentals, makes emotional decision-making not only common but almost inevitable.

To fully understand why the sunk cost fallacy is especially dangerous in crypto, we need to look beyond psychology. The structure of the market itself makes it easier to fall into these traps. A comparison with traditional finance highlights just how different the two worlds are, and why emotional mistakes in crypto can escalate so quickly.

How to Protect Your Portfolio from Emotional Traps

Changing how you think about losses takes more than just reading market trends. It requires self-awareness, consistency, and a system that can keep you grounded when emotions try to take over. Crypto moves fast, and when things go wrong, the pressure to “just hold” can feel overwhelming. That’s why having a clear framework matters.

Here are four habits that can help you make better decisions and avoid getting stuck in positions that no longer serve you:

1. Review your portfolio on a schedule
Set fixed times to look at what you’re holding. Once a month is often enough. Ask yourself what’s still aligned with your strategy and what feels like it’s there out of habit. Regular check-ins give you a clear view of whether your portfolio reflects your current thinking or just your past decisions.

2. Automate what you can
When possible, use tools that take the weight off your emotions. Trailing stop orders, limit sells, or rule-based smart contracts can help you exit without hesitation when your conditions are met. These tools aren’t about removing control—they’re about supporting it when your judgment feels cloudy.

3. Limit your exposure
Decide in advance how much of your capital you’re willing to risk on any single token, and stick to it. It’s easy to get swept up when something’s trending, but staying disciplined with sizing protects you from oversized losses when the hype fades.

4. Define your exit before you enter
Before you buy, be clear about what would make you sell. It might be a missed milestone, fading community activity, or a shift in leadership. When those signals appear, don’t delay. The longer you wait, the harder it becomes to act objectively.

None of this is about being perfect. It’s about making fewer emotional decisions and giving yourself space to respond instead of react. In a space as volatile as crypto, that small shift in mindset can make a long-term difference.

Future Implications: AI and the Amplification of Bias

In 2025, artificial intelligence (AI) will become deeply embedded in the way crypto markets operate. From personalized trading dashboards to influencer content optimized by algorithms, most investors now experience the market through curated layers of information. But not all of that information helps them make better decisions.

What many don’t realize is that AI doesn’t just reflect what you’re interested in, it often anticipates what you want to believe. If you’re holding onto a failing asset, you’re more likely to be shown signals that support staying in. The optimism feels organic, but it’s often the result of filtered data and targeted content trained to keep engagement high.

For example, trading bots may highlight short-term patterns that suggest a rebound while ignoring long-term trends that point to decline. Community managers or influencers may lean on AI to surface comments or narratives that sustain confidence, even when key fundamentals have already broken down.

Over time, this kind of environment can blur the line between analysis and affirmation. It becomes harder to distinguish between your own conviction and the feedback loop designed to sustain it.

This is what makes emotional discipline in crypto more complex than ever. The challenge isn’t just internal. It now includes recognizing when the information around you is quietly reinforcing a bias you should be trying to escape.

Conclusion: Cut to Survive

We have to face one thing: The sunk cost fallacy isn’t a crypto problem, it’s a human one. What makes it more dangerous in this market is the speed, volatility, and constant narrative reinforcement. Investors aren’t just exposed to price swings; they’re immersed in communities and content that reward holding, even when logic says otherwise.

In 2025, protecting your portfolio means more than picking the right tokens. It means knowing when something no longer serves your goals. Selling isn’t an admission of failure. It’s a recalibration of priorities: choosing clarity over comfort.

You don’t need to wait for confirmation from the crowd or for a project to prove you wrong. Often, the data has spoken long before your emotions catch up. The strength of a decision lies not in how long you held, but in how honestly you assessed the cost of holding on.

Every trade is a choice between what was and what could be. Don’t anchor to past losses. Anchor to future possibilities.