There is a strong correlation between social trading and copy trading, though they are distinct in their own right and should not be mixed.
Social trading can be described as those activities that engage or facilitate interactions among traders to strengthen the crypto community. On the other hand, copy trading is an element of social trading that allows users to mimic the trading patterns of other traders, in particular, experienced or professional traders.
As industry players and professionals in the cryptocurrency and blockchain space, it’s helpful to understand why these terms are different and how they are similar. Not only will we better understand these concepts but it also makes it easier when explaining them to those who might be new to the industry.
What are the advantages and disadvantages of copy trading?
There is no magic trick to understanding how copy trading works. Once traders make a successful trade, they have the option of sharing their trades with other users. If they choose to share, then copy traders can opt to copy them.
There are benefits for both sides in copy trading. Other than potentially gaining more trading profits from copying the practices of professional traders, copy traders acquire knowledge and new techniques that may be useful for them in the future.
Those who choose to share their trades receive a commission, usually in the form of a percentage or a fraction of the earnings each time their trade has been copied. Such incentives are encouraging and motivate professional traders to share their trades for other users to copy. In this respect, copy trading is a win-win situation.
This has helped the practice of copy trading to quickly become popular. As more new traders join in with copy trading, they gain more practice and become better traders. In turn, they’re more likely to share their own success with future copy traders to get the additional rewards of copy commission. However, there are some precautions to be observed. It is no secret that many who utilize the copy trading feature are predominantly amateurs. Due to their inexperience, they might make unfavorable copy trades that prove to be unprofitable in the long run.
One common mistake from new copy traders is that they’re swift to copy others, especially those with a large number of followers. It may not always be the case that traders with a large following are trustworthy.
Why is social trading so important for the industry?
According to Statista, the number of cryptocurrency users grew by 25% between Q2 2019 and Q2 2020, reaching an all-time high of 50 million. Therefore, it’s evident that more and more people are searching for new investment opportunities in the cryptocurrency industry, but a large portion of these investors are newcomers. Becoming involved in social trading activities is a perfect way for them to kick-start their crypto journey.
When traders share information about trading or events occurring in the industry, they will gain more insight into trading. They can even share ideas or ask questions about trading procedures to get input from those in the know.
However, the influx of newcomers puts responsibilities on crypto companies to ensure that they aren’t jeopardizing the ongoing growth of the cryptocurrency community. Operators offering social trading should scrutinize traders to ensure that they do not cheat others or engage in behaviors that create distrust within the industry.
Knowing they’re using a safe social platform will give investors and leaders more confidence and will help to boost the reputation of the cryptocurrency sector.
What’s hindering exchanges from becoming more innovative with social trading?
There is still quite a bit of work to be done regarding the innovation of copy trading and social trading. Only a few exchanges have integrated the copy trading feature. However, that could quickly change because exchanges can freely borrow innovative ideas from their competitors without any legal restrictions.
What the industry lacks and needs is a robust, comprehensive and intellectual property legal framework that prevents exchanges from stealing the work of other players. Emerging exchanges are particularly vulnerable to this threat.
While that is so, some may argue, on the contrary, that adopting shared ideas has been working for the industry so far, and any interference could create problems. The counterargument is that it takes dedication, commitment and a lot of hard work to create something innovative, so laws governing unfair competitive behaviors like this are essential. Having sound intellectual property laws may even encourage companies to be more creative, and, who knows, they might come up with unique social trading innovations that can bring the community closer.
Furthermore, investors would be more likely to back crypto exchanges that can prove themselves to be innovative. Once the crypto community practices and complies with similar industry standards as its traditional counterparts, it will gain more respect from the financial community, and exchanges can be creative without any fear.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.