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According to research by Charles Schwab UK, younger generations particularly Z and Millennials, unlike Gen X and Boomers accept online trading as one of the mainstream supplemental income activities.
This makes many of them trader-like-minded but lacking sufficient experience, so the issue of active investment strategies remains open and usually untapped.
Younger investors are also embracing broader investment opportunities, such as copy trading, which are not usually welcomed as much by their older counterparts.
However, to novice investors, even if they are more advanced, leveraging strategies of master traders and thinking of it as a way to diversify the risk of the human factor may be self-delusional.
Sometimes, seeing an influencer bragging about success and dropping a referral link has a huge toll on investors’ decisions.
So, copy trading is not just trading anymore it’s the influencer economy in full force.
High returns, hidden volatility
Given the social nature of copy trading, there’s a real danger in people placing too much faith in well-known figures in the industry, specifically, the master traders, whose successful trades can be easily replicated.
The biggest risk in copy trading is not the market it’s psychology.
This situation is reminiscent of the wave of celebrity crypto endorsements that tend to surface during every bull market, often leaving seasoned traders feeling uncomfortable when these influencers make outlandish promises about token projects.
While having a celebrity on board can certainly give a project a popularity boost, it doesn’t guarantee that it’s legitimate.
Yet, despite a history of failures, many novice investors are still being overly influenced by prominent people in the industry.
Diversification, despite being a common approach in investing, can also be very delusional.
Just spreading one’s money across 10 different master accounts won’t really shield one from market behavior at the end of the day.
In the crypto world, some semblance of credible diversification could only be in mixing the very copy trading, realizing all its caveats, with long-term investments or alternative investment methods like staking.
The bottom line is that the investors don’t cause common risks of copy trading that much en masse, but by the platforms themselves.
It’s their duty to communicate both risks and performance.
When return or drawdown metrics leave out unrealized profits and losses, investors can easily be misled, leading to unrealistic expectations based on partial information.
Protecting the follower on a platform level
When it comes to safeguarding copy trading ethics, trading platforms usually focus on the key issue unveiling and stopping the known account ‘boosting’ schemes.
This happens when someone sets up multiple accounts et’s say, four and opens ‘buy’ positions on two while placing ‘sell’ positions on the other two.
After closing two ‘victimized’ accounts, the remaining ones might show impressive returns let’s say, 80%.
The trader can then repeat this cycle, eventually boasting an account with, say, 230% return.
At that point, even minor gains like one percent can lead to outsized percentage growth because of compounding.
This creates a false sense of steady profitability when, in reality, it’s just an artificial boost from the start.
Investors who see this kind of past performance might think they can expect similar results, but they’re just buying into a cleverly crafted illusion.
On top of that, there’s not much incentive for platforms to keep a close eye on how traders behave.
After all, it’s just a marketplace some traders may be laid-back and cautious, while others are expected to act more aggressively. There’s a place for both types.
The only twist here is that instead of pushing a casino-style wheel, someone may click the ‘follow’ button on a hyper-aggressive trader.
All in all, a trading platform can offer two complete tools to protect investors risk limits for signal providers and risk limits for investors.
When it comes to risk limits for signal providers, they should be implemented in a way that prevents users from instantly altering them. Otherwise, it doesn’t serve its purpose.
When the set limit is exceeded by the user, the platform intervenes in order to counteract the risky activity. This is the truly effective way to protect investors.
Besides, platforms should clearly communicate those limits to the investors.
For example A stricter risk limit will be imposed on this master trader if his account loses, say, 20%, all positions will be closed automatically.”
That kind of enforcement action would provide a more realistic protection.
The same goes for followers platforms must allow them to rely on automated controls like stop-copy thresholds or risk multipliers.
Let’s say that the investor set a loss limit of 500 USDT for the master trader. If the loss reaches this amount, all copied positions will be closed and the subscription will be terminated.
Final words
When entering the world of crypto copy trading, investors must understand that it inherently involves risks there’s always a chance to win or lose.
The key principle is simple and universal never deposit more than you’re prepared to lose.
Once that deposit is made, there are several ways to manage risk effectively diversify by following multiple signal providers, set clear risk limits and use low-risk multipliers.
If these precautions are in place, losing money becomes much harder, but at the same time, earning a fortune wouldn’t come easily either.
Sergey Ryzhavin is the director of B2COPY, a money management platform for brokers developed by B2BROKER, a global fintech solutions provider for financial institutions. Sergey is a seasoned fintech professional holding over 15 years of experience in copy trading, brokerage solutions and trading technology.
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Disclaimer: Opinions expressed at The Daily Hodl are not investment advice. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency or digital assets. Please be advised that your transfers and trades are at your own risk, and any loses you may incur are your responsibility. The Daily Hodl does not recommend the buying or selling of any cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in affiliate marketing.
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