What Is Paper Loss?
A paper loss (or unrealized loss) is a decline in the value of an investment that hasn't been sold. If you bought ETH at $4,000 and it's now trading at $3,000, you have a $1,000 paper loss. The loss is "on paper" because it only becomes real (realized) when you sell. If the price recovers above $4,000, the paper loss disappears.
How Paper Loss Works
The distinction between paper and realized losses is both real and psychological. Practically, a paper loss doesn't trigger tax events (no capital loss to offset gains) and preserves the possibility of recovery. Psychologically, it enables the dangerous "it's not a loss until you sell" rationalization that keeps traders in deteriorating positions far longer than they should.
Why It Matters for Traders
Paper losses need the same analytical rigor as realized losses. Ask: "If I didn't hold this position, would I open it at today's price?" If no, the paper loss is real — you're only holding because of sunk cost fallacy. If yes, the position is still valid regardless of the unrealized loss. Treating paper losses as real losses in your mental accounting leads to better decision-making.
