Is Cryptocurrency Copy Trading Worth the Risk?

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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

What Is Cryptocurrency Copy Trading?

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. 

How Does Cryptocurrency Copy Trading Work?

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:

Find a Suitable Platform

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. 

What Are Crypto Trading Bots?

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. 

Choose Traders To Copy

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. 

Set a Budget

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.

Is Now a Good Time To Invest in Cryptocurrencies?

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 a Crypto Trader To Copy

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:

  • Is the trader experienced? Using your chosen trading platform, you can assess a trader’s profile to check their record regarding the funds they manage, return on investment, profits, losses, and risk level. Using this information, you can identify consistently successful traders. 
  • How is the trader’s portfolio structured? Is it diversified? Does the trader have a long-term strategy?
  • Are they active on social media and across trading platforms? Communication is key if you are to find the right trader to copy, as it is important to understand the reasoning behind any trade you make. 
  • Equally, the number of followers a trader has is a sign of their success rate. The more profitable a trader is, the more followers they are likely to have.

Is Cryptocurrency Copy Trading Risky?

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.

Final Thoughts: Crypto Copy Trading – The Pros and Cons

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.

Pros

  • Copy trading is great for beginners, and by following expert traders and copying what they do, you can slowly begin to understand and analyze the market effectively. 
  • A fully automated solution requires very little input, and crypto trading bots can do the work for you, helping you earn an income with little effort. 
  • There is no pressure to continue copying a trader. If one doesn’t work out, you can move on to someone else. 

Cons

  • Copy trading always presents an element of risk, just like any other form of cryptocurrency trading.
  • The initial research in finding suitable traders to fit your strategy can be time-consuming.
  • It is sometimes hard to identify a successful trader as opposed to one experiencing short-term success.

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