Cryptocurrency copy trading — principles of operation, types, and real risks
What is cryptocurrency copy trading?
Cryptocurrency copy trading is a trading strategy in which a user copies, or follows, the trades of one or several experienced traders.
Cryptocurrency copy trading provides beginners with several advantages:
- The ability to earn income from trading without in-depth knowledge.
- It is a passive way to earn income and saves time by freeing the user from manual analysis of cryptocurrency price charts.
- It can become an additional strategy for diversifying trading risks.
- It allows users to study the strategies of other traders and gain additional experience in cryptocurrency trading.
- It allows the user to start with small amounts, so they would not be afraid to lose.
However, cryptocurrency copy trading also has its own risks:
- Users do not control the actions of another trader and are not insured against their mistakes, which may lead to losses.
- In not all cases can a user confirm a trader's competence before copying their trades, since positive trading results in the past may be accidental.
- In cryptocurrency copy trading, it's hard to verify the authenticity of traders' statistics. Some exchanges may provide distorted trader statistics, sometimes not even through their own fault. The traders themselves may also manipulate trades.
- Trading history does not guarantee the repetition or improvement of results in the future.
Types of cryptocurrency copy trading
Cryptocurrency copy trading comes in three types: manual, semi-automatic, and automatic.
Manual cryptocurrency copy trading is also called social trading. The advantage of the manual method is that the user does not copy all the trades of another trader, but only those that are most interesting to them. In addition, with manual cryptocurrency copy trading, the user is not tied to a specific exchange, which provides greater trading flexibility.
However, manual cryptocurrency copy trading is inconvenient, as it requires constant monitoring of the experienced trader's deals and tracking notifications about trading operations. At the same time, the user will have to spend more time compared to other methods of cryptocurrency copy trading.
With semi-automatic cryptocurrency copy trading, the user does not need to track all the trader's deals. Instead, the beginner confirms or rejects the trades opened by the experienced trader.
Automatic cryptocurrency copy trading allows users to follow a trader's deals without the subscriber's direct participation, but provides less control over the trading process.
The user can cancel the subscription to an experienced trader's deals at any time, and all current trades will be automatically closed. Automatic cryptocurrency copy trading is also called auto-following.
All types of cryptocurrency copy trading also allow users to follow not only real traders but also customizable trading bots.
Which cryptocurrency exchanges offer copy trading?
Binance, ByBit, OKX, Bitget, and many other well-known cryptocurrency exchanges support cryptocurrency copy trading. A user can test subscriptions across several platforms and assess the effectiveness of cryptocurrency copy trading, which also helps diversify risk.
It is worth noting that different platforms may offer different options for configuring trade copying. Most often, cryptocurrency exchanges allow users to configure:
- Amounts allocated to trades;
- Restrictions for specific trading pairs;
- Setting take-profit* and stop-loss* levels;
- Defining the acceptable leverage* size (for futures trading) or prohibiting its use.
* Take-profit — a special type of trading order that allows a trader to set profit levels at which the trade will be automatically closed.
* Stop-loss — a type of trading order designed to limit losses: the trade is automatically closed when a specified price level unfavorable to the trader is reached.
* Leverage — a tool that allows a trader to open trades for an amount exceeding their own funds by using borrowed funds from the exchange, which increases both potential profits and possible losses.
There are also third-party platforms that support cryptocurrency copy trading and allow users to connect auto-following via cryptocurrency exchange APIs. However, it is essential to ensure the reliability of such platforms, as providing access to trading accounts may expose users to the risk of digital asset theft.
What nuances should be considered before starting cryptocurrency copy trading?
Often, cryptocurrency copy trading is offered with a free subscription, but traders may charge a commission on profits, ranging from 5% to 50%. There are also paid subscriptions with a fixed price for a specific period, and commissions on profitable trades may either be charged or absent.
As a rule, cryptocurrency exchanges provide detailed statistics on the trades of experienced traders, including the ratio of successful and unsuccessful trades and the overall profit and loss (PnL) indicator. Also, on major exchanges, there is usually a ranking of the best traders by profitability (ROI) for a specific period.
However, it should be borne in mind that, in the event of failure, traders may close their copying profiles and all associated trading statistics, then reopen them. Therefore, following traders whose trade history does not span at least several months will be risky.
Allocating large sums to a single trader will also be risky. As in regular trading and investing, the rule of diversification should be followed in cryptocurrency copy trading. It is safer to distribute small amounts to different traders first and increase the balance gradually if positive results are observed.