Copy trading is a form of investment where you copy the trades of other, more popular, and successful traders. It started in 2005 but gained much more traction when eToro released its CopyTrader service. Today, copy trading is a prevalent form of trading that is both viable and accessible, offered by many brokers around the globe.
How Does it Work in Crypto?
Despite how it sounds, copy trading is a universal concept. You can apply it to any aspect of trading, including cryptocurrency. However, Crypto is still relatively new in finance, and many people are either oblivious or uninformed on the subject. So, it makes perfect sense to copy the trades of someone who knows what they’re doing and has extensive knowledge in the field.
With traditional crypto trading, users must study the markets and perform comprehensive research to be confident and competent enough to make a good trade. Crypto copy trading changes all that. With it, newbies and passive investors can profit from markets without spending all day looking at charts. Copy trading allows anyone to copy the exact trades of proven investors that can be completely automated. It does everything for the user on autopilot.
Copy Trading vs. Social Trading
Due to these methods having a lot in common, people commonly mistake them for one another. Both are investment strategies where one observes or follows another trader. However, they are not the same.
Social trading is a strategy offered by some platforms where you have to stay up to date with another, more successful trader’s social media. You must follow them, track their stats, and communicate with other traders. This strategy emphasizes collaboration and community effort, spending a moderate amount of time following other traders’ stats while gaining experience and connections. However, there are some shady influencers out there who are hard to trust.
Copy trading is technically a subset of social trading. Your account will make whatever trades the trader’s account does. What they do, you do. It’s much more hands-off than social trading and allows you to avoid beginner mistakes by essentially miming an experienced trader. It’s an excellent option for beginners, but you won’t gain much knowledge from being so absent through the entire process.
What Are Its Pros and Cons?
PROS
Automated Trading: Arguably, the main advantage of copy trading is the ability to automate your trades by following successful traders. With everything on autopilot, it is truly a hands-off approach to trading. The only effort expected of you is to find a profitable trader with good results and occasionally review and monitor your chosen strategy.
Minimal Investment: With many of today’s leading platforms, you can begin copy trading with no more than $200 in your account. This minimal investment is another perk of copy trading that makes it so beneficial for new and inexperienced traders.
Beginner Friendly: This is one of the first questions people ask when thinking about jumping into copy trading: Is it beginner friendly? And the answer is a resounding yes! While potentially profitable, crypto copy trading is also very beginner friendly. No study, research, or even active trading is required.
No Emotions: Emotions can significantly impact your trading results – especially if you’re new. With copy trading, that is no longer an issue. Since the entire process is so hands-off, your trading won’t be impacted by your emotions.
CONS
You Might Copy ‘Losing Trades’: The main drawback of copy trading is that your entire performance depends on the trader you’re following and whether their trades do well or not. As such, a bad trade from them automatically deals you a losing trade too. The only way to somewhat bypass this is to limit how much you allocate to a single trader and pre-determine how much you can afford to lose.
Less Likely to Learn Anything: No matter which platform you’re on or which trader you decide to follow, you won’t learn much copying them. While being hands-off is copy trading’s most appealing advantage, it is also a significant drawback. Since everything is automated, the user has no incentive or desire to study and research the market. As a result, even if you profit from it, you stagnate your growth and learning curve in the longer-run..
Let’s Talk Green – Is it Profitable?
Copy trading is a classic example of a double-edged sword. It can be very lucrative if you accurately predict which trader is likely to succeed. You can then copy their trades and earn fat stacks of green. Conversely, a lousy prediction will doom your wallet.
Traders are subject to systematic and liquidity risks, most notably market risk. You will have to face fluctuating exchange rates, commodities, equity, and interest rates. While poor trading is a mistake of its own, market risk is something all traders face at all times. And copy traders usually do not possess the skills or knowledge to mitigate these risks.
On the other hand, following a trader with a good track record and successfully predicting whether their trades will do good is a surefire way to profit. The profitability of copy trading relies entirely on the trader you will choose to mirror; ironically, that is its greatest risk factor. Indeed, a double-edged sword.
The Best Platforms for Crypto Copy Trading Right Now
While there are many good crypto trading platforms, not all support copy trading. Of the ones that do, not all are equal. Here are some of the best platforms for copy trading right now and their pros and cons:
- ByBit
- eToro
- 3Commas
- Pionex
ByBit sets itself apart from the crowd by providing an all-in-one platform, advanced tools to make trading more manageable, and loads of educational resources to help you on your journey. However, the fees for all those transactions eventually add up to a noticeable amount. Its unavailability in the US is another caveat.
eToro is by far the best social trading exchange on this list. It is beginner-friendly, original yet functional, and its Copy Trading technology provides you with some of the best, most innovative copy trading features. The platform is plagued by unprofessional traders, though. This makes the medium a bit less desirable, and the feeling is amplified by the high inactivity fees and $5 withdrawal fee.
3Commas offers a lot of different strategies for effective copy trading and provides their clients with trading and Bitcoin bots. In addition, it connects to many other exchanges and is very affordable. These features, however, make the outlet a bit more challenging to navigate for newer traders.
Pionex is the best platform for traders on a tight budget. And that’s because it’s 100% FREE. In addition, it provides free trading bots with hundreds of supported currencies. However, regulation is an issue with this platform, and the inability to socialize with other traders prevents many from trying Pionex.
Remember that whichever platform you choose is just a tool in the end. So do not get swept up in the minutiae between them; focus on finding an ideal trader to copy.
Conclusion
Copy trading allows people to trade beyond their level of expertise and simultaneously provides them with an opportunity to profit. However, returns are never guaranteed, so you should still somewhat research whatever market you plan on exploring.