The Pros and Cons of Social Trading: Is It a Good Idea for New Investors?
Social trading has the potential to introduce inexperienced consumers to the world of crypto. Here, we look at the pros and cons.
Navigating the world of cryptocurrencies can be nightmarish at the best of times. New coins and tokens are continually emerging, and volatility means that digital assets can be flying high one day and crashing the next.
Understanding how the industry works and where opportunities lie can take an exhaustive amount of effort — and it could be argued that the complicated nature of crypto dissuades many ordinary traders from getting involved.
“Social trading” is being touted as a potential solution. Through specialist crypto platforms, such as exchanges and wallets, inexperienced consumers have the potential to emulate the strategies of others. They can also gain access to insights and perspectives from seasoned traders, enabling them to understand why crypto assets may fluctuate in value — and the indicators that potentially offer clues to future movements.
But how do these tools work, and what are their upsides and downsides?
The pros of social trading
Crypto trading is a challenging beast. The markets are open 24 hours a day, seven days a week — meaning it takes a lot of energy and determination to stay on top of every development. For those who are less experienced, emotions can also get in the way of rational decisions, sometimes resulting in traders losing even more capital because they enter into positions erratically.
Social trading is being regarded as a potential antidote to this. When done right, it can mean that a cool-headed, savvy trader is making decisions on behalf of other investors. These traders are normally chosen based on the types of strategies they specialize in, as well as the returns they have generated in the past. To incentivize them to share their strategies, they’ll usually receive a commission of the profits that their followers generate.
Followers who pay close attention to these market moves, analyzing each trade and why it has taken place, have the potential to become better traders themselves in the future. It can be an invaluable tool for gaining confidence, and a front-row seat for finding out what works in crypto trading — and what doesn’t.
The cons of social trading
As with everything in life, there are some downsides that need to be accounted for. Some inexperienced crypto enthusiasts are simply overconfident when they get involved with social trading — and they believe that strong levels of past performance serve as a guarantee of future returns. The problem is that no matter how experienced the trader they’re following is, there is always a real risk that mistakes can be made — and a sudden downturn in the markets can take everyone by surprise.
Copying the trades of others or using automation tools should also never serve as substitutes for keeping a close eye on how positions are performing. Those who use these services always need to remember that their money is on the line and that entrusting decision-making to someone else carries a high amount of risk.
Getting in sync
Platforms such as Monnos are giving newer crypto users the chance to follow experienced traders through features such as Sync Strategy. Algorithms take into account a multitude of indicators to provide an impartial ranking on the performance of each strategist. Following a strategist means that any trading moves they make will be automatically mirrored in the user’s own account.
The company also says it offers an all-in-one crypto account — bringing together a multicurrency wallet, an exchange, the ability to copy other traders, as well as savings services. In the future, a debit card will follow that enables users to spend their crypto in everyday life.
Don’t forget: Although social trading features can be appealing, it is crucial to continue monitoring the markets and the strategies being used. Mindlessly copying the actions of other traders — even if they were successful in the past or have many followers — can end up being an extensive mistake.
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