One of the major perceptions about the cryptocurrency market is how complicated and technical it is, from its unique technologies to the intricate process of trading various crypto assets. These issues have led many away from trading various crypto assets. However, to solve this problem, copy trading is a technological solution existing in the traditional market, introduced into the crypto market.
Copy trading is an automation strategy used to simplify trading by making buying and selling cryptocurrency easier through copying trades of other traders under certain conditions. This innovation, since introduced into the cryptocurrency space, has made trading a lot simpler for traders, especially novice traders who are yet to understand market dynamics to maximize their output.
In this article, we’ll discuss all there is to know about copy trading in crypto and how it works.
Understanding Copy Trading
Copy trading is an automated trading technique employed by several traders. The process involves a trader selecting another profitable trader’s trading position on various assets based on their strategies, profitability, or other factors. The benefit of this is for the trader to increase their profitability without actual involvement in trading activities or learning the ropes of the cryptocurrency market before making a profit.
For instance, if a principal trader opens a long position to buy $100 ETH, which accounts for 10% of their portfolio, a trader who has automated their trade using copy trade software will have an equivalent of 10% of their account used to open the same position.
Copy trading isn’t peculiar to the cryptocurrency market; in fact, this form of investment or passive earning has been around in other markets, including forex and the stock market, dating back to 2005. During this period, traders simply shared their algorithms used to execute trades and trading history for others, which eventually morphed into social trading.
The benefit of copy trading lies in the flexibility it offers traders, allowing them to be actively involved in other activities that require their attention instead of studying charts or engaging in technical or fundamental analysis, saving them screen time. This isn’t restricted to only novice traders; experienced traders can also get involved and actively trade the market through this method.
How Crypto Copy Trading Works In General
To get started with copy trading, the first step is to find the software that you provide. Then you’ll essentially link this software to your cryptocurrency exchange through an application programming interface (API). Once completed, you’re set to be a copy trader. This process is typically straightforward and requires a few steps to be finalized. Once this is done, your trades are automated to start taking trades based on other successful traders.
Once this is done, you have several options at your fingertips. From the software, you have a list of successful traders usually on the marketplace of the copy trading software where you’ll choose. You can set rules, and these rules vary from platform to platform. Typically, you should be able to select a custom amount set for each trade, a certain percentage you choose to dedicate to each trade, and even decide to close trades ahead of the principal trader. This added flexibility comes in handy, especially in situations when your bias doesn’t completely align with theirs.
As you might have observed, the process of copy trading, while automatic by default, involves a level of trader input to properly maximize the trade based on your discretion and observation. It’s essential to be aware that some cryptocurrency exchanges run their in-house copy trading, simplifying the process. This means you don’t have to go through the rigorous step of copying API from one platform and linking it to yours. Similar to the software, you can set your details like stop loss, leverage, and margin, among other variables.
Some cryptocurrencies incentivize users to engage in copy trading, especially those with little knowledge about how the cryptocurrency market works. Here’s an example:
Copy Trading Vs. Social Trading
You’ve probably come across social trading, and while both terminologies are sometimes interchanged among traders, there’s a clear distinction between them. Social trading is more focused on providing an enabling environment for traders to come together to share ideas on trading strategies, discuss market conditions, and exchange ideas related to the market. In this way, traders directly engage themselves, learning how the market works, and more, to stay profitable.
Unlike copy trading, social trading isn’t automated and requires active involvement to participate and engage with others to learn about how the market works and pick up profitable strategies from interactions. This process can be challenging for novice traders due to the potentially unfamiliar language and terminology used. Overall, the process is time-consuming and can be difficult for both new and experienced traders.
The entire process of crypto social trading is usually very informal, and these groups or communities are available on several social media platforms, from X (formerly Twitter), Instagram, Facebook, Reddit forums, etc. Like crypto copy trading, social trading can also be an inbuilt feature of some exchanges, making it a single super app for traders.
Sometimes, the sharing of ideas or knowledge regarding a token can have a huge impact on token price movement, either long or short on a crypto asset. In other cases, these groups come together to crowdsource the purchase of a crypto asset.
Pros and Cons of Social Trading
- A good way to learn about the crypto market and how it works.
- Builds a trader’s network with other traders, contributing to their growth and more.
- Under the right social group, it’s a good and easy way to stay profitable without much knowledge of market dynamics.
- Under the wrong social trading group, it can lead a trader into serious losses. Caution is essential.
- For novice traders with less knowledge about the market, engaging in such groups can be difficult, leaving them confused or lost.
- It’s a time-consuming activity, requiring constant active participation to catch profitable traders.
- It isn’t automated and requires a high level of manual involvement, which can be tedious.
Benefits and Risks of Copy Trading
As you might have guessed, while there are several benefits of copy trading, there are also associated risks. In this section, you’ll get to understand both the pros and cons of copy trading.
Benefits of Copy Trading
- It’s a simple way for new traders with no market experience or knowledge of how cryptocurrencies are traded to start earning. This provides a head start while they focus on trading.
- The process of copy trading allows the trader to save time on other activities that require their attention, considering the fast-paced nature of trading cryptocurrency.
- Copy trading provides a simpler way to approach the market in regards to earning passively without active involvement in trading.
- Copy trading provides you with performance tracking, offering details on how a trader you decide to follow performs. By analyzing these details, you can decide whether or not you’re following the right trader.
- You’re less involved in conducting market research, and the bulk of the work is left to the principal trader.
- Copy trading allows a trader to focus primarily on acquiring knowledge of how the market works and functions, becoming an independent trader who understands the market more and makes better decisions.
- It’s a way to get involved in diversification since traders can diversify how they use their funds depending on multiple traders with different strategies, asset focuses, and risk levels. This way, they have a high chance of longevity in trading, and the risk threshold isn’t easily broken.
- Another benefit is the flexibility it provides traders. You can start or stop copying a trader, change the amount allocated, or switch to a different trader at any time, among other features. This adjustment can vary based on your personal strategy, like risk management.
Risks of Copy Trading
- One of the major risks you will face is the performance risk. There are no guarantees that traders with excellent track records of successfully trading the market will continue to do so in the future, and there’s the possibility of making losses.
- As a copy trader, you’re likely going to face market risk. This is because the cryptocurrency market is inherently volatile, meaning even successful traders can’t accurately predict the market direction in the case of market manipulation and fluctuation.
- Copy trading provides you with the opportunity to save time, but you also face the risk of losing to the market since you don’t have complete control over your trades and can’t respond in real time to market conditions, risking losses.
- As a copy trader, you’re less likely to invest in developing and honing your trading skills because of the benefits you’re getting from this approach to trading. This lack of independent learning can greatly jeopardize your career as a trader.
- While you might have selected a trader based on certain criteria like alignment of strategies with yours, these traders can change their strategy and approach to the market, which might not align with your strategy for trading crypto assets due to their unique strategies and approaches.
- You also face platform risk. The extent of your success as a copy trader depends on the platform you use. There’s the possibility of facing technical issues, platform fees, or limitations in the copy trading system that can affect your overall profitability as a trader. Carefully selecting the platform to go with is crucial.
- Due to the good trading history of a trader, a copy trader can become overconfident and decide to invest more than they can afford to lose, forgetting the possibility of a loss. If that happens, the trader will possibly lose all or the majority of their funds to the market.
- Regulatory risk in the cryptocurrency landscape can significantly influence the crypto market and affect the outcome of your trade. While this issue affects assets, the copy trading platform might face the heat as well, leading to panic that can affect your trades and profits.
How to Get Started With Crypto Copy Trading
To start copy trading in crypto, you need to follow some basic steps. In this section, we discuss copy trading in relation to a centralized exchange rather than through a third-party app that requires API to function.
Select a Platform
Decide on the platform you’ll work with. Most centralized cryptocurrency exchanges (CEX) offer copy trading. For traders using CEX for other activities, you can continue from there. Examples of such platforms include Binance, Bybit, etc.
As a first trader testing this out or new to the platform, set aside a budget. This simplifies the process and helps you manage your risk properly.
Navigate the Features
Explore the trading features of copy trading to get an overview of how it works and to maximize your potential profit.
Select a Trader
Decide on the trader whose trades you want to copy. Review their performance history and track record. Ensure you choose based on whether or not the trader aligns with your overall investment goals.
Monitor and Adjust
Ongoing monitoring and continuous review of performance are essential to ensure a positive ROI and stay on the profitable side of the trade.
The introduction of copy trading in crypto is undoubtedly an innovative way to offer simplicity for beginner traders to stay profitable and for experienced traders to improve their overall process.
Despite the positive impact on the crypto ecosystem, such as easing trading processes and passive earning, it puts traders in the trap of being lazy and doesn’t eliminate market risk, potential liquidation, and platform risk. Like any cryptocurrency innovation, it’s important to do your research before deciding to get involved and assess how it aligns with your overall investment goals.
Frequently Asked Questions (FAQs)
Is Crypto Copy Trading Profitability
Your profitability as a crypto trader depends on so many factors, some of which include the platform of choice, the trader you choose to copy their trades, the crytocurrency market, and importantly your risk management skills, If these are in place you’re sure on your way to profitability.
Is Crypto Copy Trading A Legal Activity?
This depends on the jurisdiction or country you reside in and also the allowance of the law in supporting a specific copy trading platform. But largely, copy trading is allowed in most jurisdictions and under the purview of the law and is allowed even in countries like the US and UK.
How Can I Became a Crypto Copy Trader
The process is straightforward, select a platform you decide to use, trade to go with, do your research, allocate funds, and voila, you can now start copy trading. Ensure you review and go through your performance to stay ahead.
Can I Become a Millionaire From Crypto Copy Trading
The amount of money you earn from crypto copy trading largely depends on the amount you invest in trading the crypto market through this method. The higher the amount, the higher your chances are of controlling risk and proper trading strategies.
Are There Risk to Risk to Copy Trading
Yes, there are risks associated with copy traders. Don’t believe that since you’re taking trade of successful traders on your portfolio means you ain’t take losses. Even successful traders incur losses when trading the cryptocurrency market due to its volatility. Management of risk is one of the only ways to stay profitable.