Cryptocurrency trading is one of the use cases for cryptocurrencies. Some users may prefer to hold their tokens with the expectation that they will increase in value. Users that fall into this category are called holders. Another subset includes users who use their tokens for transactions on native blockchain platforms, such as decentralized finance protocols and NFT marketplaces.
The third set of crypto users includes those who engage in trading activities, such as spot trading, futures trading, margin trading, etc.
This article explores the concept of crypto social trading in detail, what to expect in a social trading platform, its benefits, and much more.
What is Crypto Social Trading?
Crypto social trading is a method of trading in which users copy the trading strategies of others, usually high-performing traders.
Trading may be challenging, especially for newcomers and those trying to change their strategies. Some crypto influencers have established themselves as leaders in the crypto trading industry, owing to their high-performing strategies.
The concept of social trading was developed because of the increased global interest in trading financial instruments and the advent of social media. Social trading is not exclusive to the crypto space, as it has its origins in the traditional financial market.
Some social trading platforms enable users to replicate the trades of high-performing traders in stocks, foreign exchange, derivatives, and other traditional financial instruments. In exchange, the professional trader receives a share of the profits generated by their strategies. Some platforms offer automated social trading, which means that similar activity in the user’s portfolio is executed immediately after the expert makes a trade.
Users can interact with other traders they choose to copy through social trading.
This implies that novice traders do not have to be intimidated by the numerous charts, graphs, candlesticks, news, statistics, and other information that traders must analyze and make sense of when making critical decisions.
All they have to do is observe and replicate the investment strategies of professional crypto traders.
In a typical social trading platform, the user selects the trader they wish to copy.
Participants of a crypto social trading ecosystem
Most crypto social trading ecosystems feature diverse categories of participants who interact with one another.
The user
The user could be a novice or experienced trader who wishes to profit from copying the trades of others. A novice crypto trader may wish to gain practical trading experience and get a feel for the market using this approach. Avid crypto enthusiasts may choose this because they want to change their strategies or do not want to spend a lot of time staring at charts and graphs. This is possible since many social trading platforms are automated. Once the selected expert trader makes a trade, those who copy the trader instantly do the same.
The user is given the option of selecting the trader they wish to emulate based on their success rate and the types of trades they make. They have the option to replace a trader when they see fit. Users must pay a fee to utilize the platform, or a percentage of their profits from copying deals, or both.
Social trading platforms
Crypto social trading platforms offer a variety of features. Some may cater to traditional traders as well as crypto enthusiasts. eToro is one such example. In other cases, the platform, such as Tycoon, may be designed to solely cater to cryptocurrency traders. It should be noted that some protocols may concentrate solely on one aspect of cryptocurrency trading.
Crypto social trading platforms act as a link between users and professional traders. Some are more centralized than others.
Some social trading platforms have a mechanism in place to limit how much loss users might incur from replicating the trades of others. For example, they may allow users to set limits or offer a built-in limit feature.
Transactions on a social trading platform are typically automated, making the mirroring effect easier to achieve. Different advantages come with an automatic feature. For example, users do not have to spend every second of every day attempting to replicate the transactions of others.
They are not required to observe the activities of professional traders and manually replicate them.
It is almost impossible for a human to manually monitor the activities of a high-performing trader every second of the day, especially given the time zone differences. And with the volatility and the fast-paced nature of the crypto market, manual copy trading could be challenging. With manual copy trading, the crypto user might not notice when a position is set by a high-performing trader and thus miss out on it.
Before using a crypto social trading platform, it is critical to conduct due diligence to ensure that it is credible and satisfies the relevant criteria.
Though social trading platforms make crypto trading significantly easier, particularly for newcomers, they are not without risk.
Professional traders
Professional traders are the third category of participants in a crypto social trading ecosystem. This is a group of high-performing traders who have made a fortune from crypto trading.
Checking the history of several wallet addresses reveals that the traders behind them have made significant profits using various strategies. Regular crypto enthusiasts may wish to profit from copying the trades but may be unable to do so due to the anonymity of wallet addresses.
In most situations, it is difficult to determine the person behind a wallet address, making it a Herculean task for other traders to contact the high-performing trader for advice. Cryptocurrency social trading platforms solve this problem as crypto traders with a stellar track record are incentivized to allow others to copy their trades.
What are the benefits of crypto social trading?
Social trading in the cryptocurrency space has some advantages for individuals that engage, some of which will be discussed below.
Extra means of income
High-performing traders can be rewarded with extra income when others copy their trades and strategies. The incentives could be in major crypto or stablecoins, and in other cases, they may be denominated in the native token of the platform.
In this regard, the trader has nothing to lose by allowing others to copy their trades.
In certain circumstances, they may receive a percentage of the profits made by individuals who replicate their strategies, while in others, the incentives are predetermined.
A seamless way for novice traders to become involved.
Crypto social trading enables novice traders to participate in crypto trading activities with ease. Instead of spending several hours analyzing charts or trying to master a strategy, any crypto enthusiast might choose to copy the strategies of expert traders. This lowers the entry barriers into the crypto trading market.
Improved trading knowledge
Apart from having access to an automated trading platform, crypto enthusiasts can improve their trading skills by using crypto social trading platforms. This is because they observe the trading actions of high-performing traders and understand the factors that contribute to their success. They can then recreate these outcomes.
Improved time management
Social trading eliminates the need to spend every second in front of a computer screen analyzing charts and graphs. Unlike traditional financial markets, the cryptocurrency market never closes. The market is open every second of the day, even at night and on weekends. If a crypto trader pulls their gaze away from the computer for even a second, they risk losing.
As a result, some crypto enthusiasts have lost sight of the need to spend quality time doing other activities. Social trading frees up time by eliminating the need to analyze and trade at all times. Time can be spent on more important things, such as spending time with family or pursuing other ventures.
Users can copy the methods of numerous expert traders at the same time using social trading. They can choose to replicate the strategies of one trader in futures trading while copying the strategies of another trader in spot trading. This is a method of risk hedging.
In Conclusion,
- Crypto social trading involves copying the trades of expert crypto traders.
- High-performing traders are incentivized to allow others to copy their strategies.
- It makes it easier for novice and expert traders to take trading positions and earn profits.
- Social trading platforms serve as bridges between users and high-performing traders.
- As always, conduct due diligence before using a social trading platform.
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