There’s no shortcut to success when developing a personalized crypto trading strategy. Often, day and swing traders spend years familiarizing themselves with technical indicators, analyzing fundamental metrics, and testing different tactics before they find their preferred method for managing the crypto market.
While there’s no substitute for research and direct trading experience, social media makes mimicking crypto influencers more accessible to beginner traders. Some surveys suggest that 80% of Gen Z and millennial traders copy their favorite online crypto profiles, with roughly 50% claiming they profited from copycat trades. In fact, analytics from centralized crypto exchange (CEX) Bitget suggest the total gains from crypto copy trading hit $74 million in 2023.
In this guide, we’ll discuss copy trading in crypto, including how it works, its pros and cons, and how it differs from social trading.
What is copy trading in cryptocurrency?
Copy trading is a software-based strategy where users link their trading portfolios to an experienced trader’s account to place buy and sell orders automatically in real time. It’s especially popular among those new to cryptocurrency trading or those who lack the time or expertise to actively manage their trades.
The only difference between copy trading cryptocurrency and copy trading forex, stocks, or other asset categories is the former strategy focuses exclusively on virtual currencies like Bitcoin (BTC) or crypto derivatives such as perpetual swaps or options. This means crypto copy traders don’t own the underlying crypto assets in their linked account but enjoy the profits—or incur the losses—a pro trader makes.
How does copy trading work in crypto?
Traders who want to mirror other crypto traders use exchanges with copy trading compatibility (e.g., Bybit, eToro, or Zulutrade). For a full list of the most popular copy trading platforms, visit a crypto price aggregator like CoinMarketCap, click the Exchanges tab, and review each crypto exchange’s features.
After eligible traders sign up for a copy trading platform, they deposit some amount of fiat currency or crypto into their accounts and read the track records and fees for different pro traders. When they find an expert trader per their preference, they allocate funds to a linked copy trading account. Whenever the pro trader opens or closes a trade, everyone in the copy trading community instantly makes proportional moves with their portfolios.
For example, if a pro trader buys Ethereum (ETH) at $2,500 and sells one week later for $2,650, every copy trader account posts a 6% gain. Conversely, if the trader buys Solana (SOL) for $100 per coin and later sells at $90, copy traders experience a loss of 10% per SOL.
Every crypto exchange has unique terms and conditions, but copy traders usually have the right to withdraw funds whenever they want to realize gains or cut losses. However, copy traders can’t claim the literal cryptocurrencies in the fund owner’s account.
Copy traders don’t have direct access to the cryptocurrencies a pro trader holds, but they enjoy price exposure to the target crypto assets. In this sense, copy trading cryptocurrency is similar to buying shares in a privately managed portfolio like an exchange-traded fund (ETF). In both cases, traders have access to the price fluctuations of the account manager’s holdings without owning the underlying assets.
Social trading versus copy trading: Is there a difference?
Social trading is similar to copy trading, but the former strategy isn’t as hands-off. Instead of linking a software application to a pro trader’s account and letting the platform’s algorithms place automated trades, social traders closely follow crypto social media profiles or join online forums to keep tabs on what influential traders are doing. While some of this trading info is freely available, social traders sometimes pay extra subscription fees on sites like Patreon to get access to private content from pro traders.
Although social traders often have advanced knowledge of precise trade setups from their favorite influencers, they enter positions manually. The lack of automation in social trading makes it less passive than copy trading, but it gives social traders more freedom to customize their portfolios.
Pros and cons of copy trading in crypto
If crypto traders don’t feel confident in their trading chops, copy trading offers a simple and low-stress way to start exchanging virtual currencies. Although copy trading is a popular passive strategy to enter the crypto market, this method has a few drawbacks. Traders should weigh the risks and rewards of copy trading before putting these responsibilities on someone else’s shoulders.
Pros of crypto copy trading
Copy traders don’t need to spend hours hunched over their computer screens analyzing chart patterns, reading crypto news, and determining the best times to buy or sell digital assets. By delegating these tasks to a crypto trading expert, users only need to monitor their portfolios’ performance and decide when to cut the cord on a linked trading account.
Strong emotions are a major stumbling block for crypto traders, especially as prices enter volatile bull or bear phases. Copy trading eliminates emotional indecision by putting the stress of entering and exiting trades into another person’s hands.
Perfecting crypto trading strategies requires significant time, dedication, and skill, but copy trading is as simple as signing up for an exchange and linking a portfolio. If crypto traders don’t have the inclination to delve deeply into the crypto market, leveraging a seasoned trader’s expertise seems beneficial.
Managing the essential aspects of crypto storage (e.g., protecting private keys and using self-custodial wallets) isn’t always intuitive for new crypto traders. However, since funds in a copy trading account remain on the exchange—and the trading platform safeguards each client’s assets—traders don’t need to worry about the technical complexities and security risks of self-custody.
Cons of crypto copy trading
When users deposit their funds into a copy trading account, they surrender all authority to the designated trader’s decision-making process. If they want to take a more hands-on approach to portfolio management, they can’t swoop in to make swaps in a copy trading account.
Unlike spot cryptocurrency trading, copy traders can’t transfer crypto funds to a self-custodial wallet and use them for Web3 activities like decentralized finance (DeFi), GameFi, or non-fungible token (NFT) trading. This lack of self-custody also exposes traders to counterparty risks such as an exchange hack, bankruptcy, or technical glitches.
Copy trading lets users benefit from the experience of pro traders, but there’s no knowledge transfer in this impersonal arrangement. Traders who depend on copy trading won’t gain a deeper insight into market dynamics, technical indicators, or their preferred crypto trading techniques without education and direct experience.
Pro traders who offer copy trading portals often charge commissions, exchange fees, or performance percentages if their portfolio does well. Even if crypto traders have high returns in a copy trading account, they have to consider how their chosen trader’s fees cut into profitability.
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