What is crypto copy trading and how does it work?

By akohad Nov5,2022


Cryptocurrency trading is a complex skill requiring extensive knowledge of fundamental and technical analysis and the cryptocurrency ecosystem as a whole. As most traders lack the capability to develop a winning trading strategy, they struggle to learn a multitude of skills needed to be a successful investor (who knows how to swim through the steep tides of the waters).

Do amateur traders have no hope, then? Are they left to fend for themselves, speculating about the prices and taking to stride the sharp ups and downs of the cryptocurrency industry? Thankfully, there are tools that help such traders explore the potential of the cryptocurrency industry, simplifying over-complex cryptocurrency trading by following expert traders.

This article discusses what cryptocurrency copy trading is, how it works, its legitimacy and its limitations. It also talks about how a holistic approach to copy trading can play a key role in the evolution of traders.

What is cryptocurrency copy trading

Cryptocurrency copy trading is an automated strategy that lets one copy an experienced trader’s trading methods. This enables one to buy and sell crypto assets to earn profits without putting in a lot of time for researching or gaining proficiency in crypto trading.

Basically, cryptocurrency copy trading is all about identifying skilled traders and re-executing their moves literally. A trader doesn’t have to spend time picking market trends or learning complex trading methods. Rather, the software just mimics what the expert trader is doing.

For instance, if the trader the copy trading software is following invests $100 to buy coin A, the software will also spend $100 on the same cryptocurrency. The tool not only helps amateur traders to use the expertise of other traders but also helps them learn the skill of making smart investment decisions.

Alternatively, one could join trading groups on Facebook or Robinhood to get advice on the right cryptocurrency trading strategy at their own risk, as nothing is a sure shot in the crypto industry, given the volatility of the market. This practice is termed cryptocurrency social trading. On these platforms, seasoned traders suggest which crypto assets they should buy or sell. However, the process is manual and there are chances of the traders failing to implement it without mistakes, thus diminishing the probability of success.

How does crypto copy trading work

Choosing a skilled copy trader and software are two essentials for successful copy trading. Here is some light on how to get started with cryptocurrency copy trading:

Select the right trader

When one decides to go for crypto copy trading, the first step is to identify the right trader. The efficiency of copy trading is invariably hooked to the skill level of the trader one is following. They need to carefully research the available traders and analyze their skill levels against certain parameters such as profitability of trades, the total amount of funds they manage, risk level and the number of followers, among others.

The array of parameters one eventually chooses depends on their own preferences. Amateur cryptocurrency investors need to carefully determine what is important to them for making a decision regarding crypto trading strategy.

How copy trading works

One might question how they will be able to get insights into the performance of various traders. It is to find all required information on typical copy trading software as traders willingly consent to give member traders access to their trading moves. One can examine the track record of various lead traders on the dashboard and select the one that fits in with the parameters of their choice.

The lead traders themselves are paid a small fee for allowing their trades to be copied. The fee usually hovers around 7% of the profit made. Thus, the system works to the advantage of expert traders as well as those following them.

Set up the software

Selecting the right software is as important as choosing the right cryptocurrency trader. Once the trader zeroes in on the software, the next step is to set it up. Though it might take some time, it is a fluent ride later as the process is automated. The software could usually be set up to invest the same amount or the percentage as the trader being emulated.

Even after the software is set up, a trader could switch to another trader any time they want. They could pause any trade the software makes or could decide on their own about closing a position without waiting for the action of the lead trader.

Cryptocurrency investors can also choose more than one lead trader to diversify their portfolio. However, one needs to determine the chunk of funds they want to allocate to each lead manager.

Keep the vigil

Algorithms of the trading platforms are designed to automatically copy the trade of the lead investors. However, one is in total control of trading and can overrule the software anytime. Traders can leave it totally to the software or watch the portfolio selection of their peers themselves and take trading actions based on their investment goals.

Is copying cryptocurrency trades legal

Copy trading creates the impression of being a pioneering term; however, it has been around for a while. Regulatory bodies such as the Financial Conduct Authority (FCA), a financial regulatory body in the United Kingdom, and European Securities and Markets Authority (ESMA), the European Union’s financial markets regulator and supervisor, have recognized copy trading.

To comprehend the legal status of copy trading in the country one resides in before investing is as important as to establish that the dealer is regulated. Plenty of regulations have been framed for copy trading, so one can regard copy trading as a legitimate trading method if they are using an authorized service.

Risks of cryptocurrency copy trading

To a large extent, the efficiency of the cryptocurrency trading process depends on the choice of the platform and expertise of the lead trader. A wrong move could dampen the whole exercise. It is important to make every decision after due diligence.

There are so many crypto copy trading platforms that picking the right one could be quite demanding for an amateur trader having little knowledge about the domain. A trader failing to make a well thought out decision might result in them losing hundreds or thousands of dollars. Seasoned copy traders would compare the features of various platforms and go through their reviews before arriving at a decision.

When looking for a trader, choosing one in the age of social media is challenging. A Flood of information from all sorts of sources, reliable and unreliable, makes the task steeper. It is important to do adequate research when selecting a trader rather than just going through a person’s profile.

All software, no matter how well they are developed, might go wrong at any time and begin delivering unexpected outcomes. A trader needs to keep monitoring the cryptocurrency trading process and exit their position if they feel they are generating continual losses.

Trading is a full-time job requiring cryptocurrency investors to spend full days studying charts, updating themselves about the latest developments and testing various scenarios to determine when to buy and sell cryptocurrency. While copy trading allows a trader to view the actions of lead traders, they don’t get to see the work behind the scenes that led them to make those moves.

Holistic and long-term view of cryptocurrency copy trading

Factoring in all aspects of cryptocurrency copy trading is important before investing. At its core, the cryptocurrency copy trading process is about taking advantage of the expertise of a previously successful trader, practically negating the time one would usually need to develop trading skills of the same level.

If one is able to choose a trade-worthy platform and the right trader to copy, it might turn out into a profitable long-term trading approach. For rookie traders, learning how to buy and sell cryptocurrency could be perplexing. When copy trading, they are able to see the action of an experienced trader in real time, helping them to understand the nuances. They are able to learn, read the trading charts and gain the ability to respond to changing market conditions.

Copy trading could be the first step for one to become a proficient cryptocurrency investor. Regular monitoring of lead traders’ actions backed by behind-the-scenes learning may help amateur traders to hone their cryptocurrency investing skills and evolve as expert traders themselves.