Large upward price movements of Bitcoin and other well-known cryptocurrencies are never far from becoming part of a flood of news and a social media frenzy, which tends to attract the attention of many would-be investors who feel they may be missing out on potential gains.
Copy trading, a technique that relies on the knowledge of experienced traders, has become a popular feature among both novice investors and the more experience traders who prefer to “set and forget” their trading strategy.
But, copy trading comes with tradeoffs– mainly control, liquidity, and entrusting your holdings to a third-party custodial solution.
What’s the upside? Is it worth the risk? Is copy trading likely to make you a larger profit than if you were to stick it out on your own?
The following copy trading guide will explore all of these questions.
Let’s start by discussing what cryptocurrency copy trading is. Just remember that the following information is not investment advice and that ultimately, most copy traders only tend to perform as well as the market does.
Cryptocurrency copy trading is the simple concept of copying another trader’s buys and sells. By monitoring the activity of a certain trader (or traders), a copy trader will then make similar transactions.
While this system is much cheaper than hiring the services of a professional who can recommend and advise on what trades to make, you’re also essentially entrusting an unregistered individual’s trading decisions. It may be a suitable option for anyone new to the market who does not have the time to conduct thorough project research and analysis, but again, there are tradeoffs.
Even some experienced traders may opt for the copy trading system when they are short on time. For some, this trading style can be very lucrative without having to study the market constantly.
As copy trading essentially duplicates another trader’s trades, the concept of how it works is relatively straightforward. However, the mechanics can vary depending on the platforms and individual strategies employed.
We can break down the copy trading system into 3 main steps:
Many cryptocurrency exchange platforms offer automated trading functionality, which may be ideal for new traders who lack the relevant experience and confidence to make manual trades. There may also be the option to use a semi-automated approach, giving you the best of both features.
For fully automated trading, crypto trading bots can be an essential tool if you are to be successful.
If you decide to take a more hands-on approach, you may consider a specialized copy trading platform. These platforms will provide trading signals and supply an array of data to help you make informed decisions. For a fee, you will also have access to information provided by expert traders, sharing their decision-making and trade strategies.
A crypto trading bot is an automated tool within a trading platform that can make trades on an investor’s behalf. A trading bot will make a trade when certain conditions defined by the investor are met. By using smart algorithms, a trading bot will also consider current prices, volatility, and market conditions to protect the investment.
The second step is choosing what traders you plan on copying. Therefore, it is important to establish your key objectives to help decide which traders meet your criteria. You may even wish to select several traders with different trading strategies for diversification.
We will discuss choosing a trader in more detail later in the article.
Finally, you should decide how much money you are willing to invest in cryptocurrencies.
As previously mentioned, copying numerous traders and then splitting your investment across each of them is a sensible strategy. As in any form of trading, diversification can help protect your initial investment. This way, you can also determine which traders deliver higher profits and which pose more risk. You can then adjust your budgets accordingly.
You should also ensure you conduct enough research when selecting a crypto wallet. When choosing between crypto wallets, consider factors such as the purchase cost and whether the wallet has its own exchange.
The crash in Bitcoin in June 2022 was well reported, with Bitcoin dropping to its lowest position since December 2020. It followed a similar price crash just one month before.
This has left some traders contemplating major moves in an attempt to ‘buy the dip’ – the method of buying cryptocurrency after a significant drop to make a profit when the market rises again. But this is not necessarily a failsafe strategy, as crypto markets remain constantly volatile, with risk and reward available regardless of whether the market is moving up or down. The expectation is that the markets will rebound to previous levels, but this is not a foregone conclusion.
If you’re more of a long-term trader, it’s recommended not to be swayed by significant market movements and to continue to follow your own trading strategy, ignoring major events that could result in knee-jerk decisions.
Choosing the wrong trader or traders to copy will make your investments quickly evaporate, so it is essential to conduct thorough research and develop a strategy that suits your budget and goals.
When choosing a trader, we recommend using the following criteria:
Copy trading is typically be no more or no less risky than any other form of cryptocurrency trading. Even the best traders will lose money in down markets. Furthermore, it can be difficult to differentiate between a trader who is great at what he does from someone who may be going through somewhat of a lucky spell.
It is also worth noting that copy trading is usually not free; traders require a fee if they are to allow you access to this valuable information. As such, you may end up paying for losing information if you pick the wrong trader.
We will conclude this article with a brief list of pros and cons to help summarize the benefits of copy trading and the overall risks involved.
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