Is social trading a good concept for cryptocurrency?

16 December, 2019

Imagine a first-time cryptocurrency investor with a good amount of money to spend on acquiring tokens. At first, Bitcoin was the only cryptocurrency on this person's radar. But research revealed thousands of additional options. Now the investor doesn't know what to do. He barely knows anything about Bitcoin, let alone all those other cryptos competing for his attention. What does he do?

This scenario is not all that unusual. In fact, it is also observed within more traditional forms of investing. The same person who finds cryptocurrency confusing can be equally confused by stocks, bonds, Forex markets, etc. It is really not the asset being traded that causes so much confusion, it is the complex process of trading itself.

Social trading is an idea that came to life at some point in the past as a means of helping those new to financial markets figure out how to wisely invest in stocks. Whether or not it has succeeded in that endeavor remains a matter of debate. That aside, plenty of people approach the stock market with a social trading mindset. So, could the same mindset be applied to cryptocurrency trading?

This post will explore social trading and its applications to the crypto space. Anyone thinking about embarking on a social trading strategy would do well to fully understand what it is, how it works, and its pros and cons.

Basic principles of social trading

Social trading takes its name from the eighth wonder of the technology world: social media. A good way to understand it is to imagine combining the best of what social media has to offer with an office of busy stockbrokers trying to stay ahead of the markets and keep clients happy. Build a website around that and you have social trading.

A social trading strategy is one of gathering a group of experienced investors and inviting them to share their thoughts on a public platform. They can list all the stocks they have bought and sold along with their profit or loss on each. They can explain why they invested in a particular stock or what they expect their favorite stocks to do down the road.

The goal here is to get experienced investors talking among themselves. Each one benefits from the thoughts and ideas of the others, at least in theory. As for new investors, they come along for the express purpose of learning from those with more experience.

An inexperienced investor doesn't know where to start. He does not know how to research or make wise decisions. Without some sort of direction, that investor is likely to lose quite a bit before he makes anything significant. What is the solution? To get some direction. That is the point of social trading. Experienced traders give direction to inexperienced traders simply by interacting in a social setting.

The asset is irrelevant

Knowing what we know about social trading, it would seem that the asset being traded is irrelevant. A social trading strategy that works for stocks and bonds should work for cryptocurrencies as well. This is because the emphasis of social trading is not the assets themselves. It is about the people who trade them and what they do to succeed.

Imagine a social media platform populated by thousands of experienced cryptocurrency traders. You are new to the entire thing, so you spend the first few weeks sitting back and taking in what others have to say. You latch on to a couple of traders who seem to constantly find success. Those are the ones you follow. If they mention buying Bitcoin on signs that point to a significant upward trend, you buy as well. If they stay away from Litecoin, you stay away as well.

The idea here is to learn from the experience and example of others. The more effort you make to understand why experienced traders do what they do, the more quickly you learn how to be a good trader yourself. It shouldn't matter what asset you happen to be trading at any given time.

How social trading could help

Now let us apply social trading specifically to cryptocurrency to figure out how it can help. There is one thing about crypto trading that separates it from all other trading environments: the market never closes. Every other financial market has regular trading hours. Bitcoin, Bitcoin Cash, et al are traded 24 hours a day, every day of the year.

Right off the bat, there is way too much trading information for a single person to keep track of. Indeed, on army of 100 traders probably couldn't keep up on the busiest days. This points us to social trading's first benefit for crypto traders. That benefit is found in having access to up-to-the-minute information whenever you want it.

Do you want to know what Bitcoin is doing right now? The best you will find on most cryptocurrency news media sites is a live ticker. Those sites will not tell you what investors are thinking. They will not explain why investors are buying and selling until the start of the next news cycle. In a social trading environment, things are just the opposite. Social traders update and post in real time, just like they do on Facebook and Twitter.

Another benefit of social trading is the opportunity to educate oneself. There are other ways to be educated, but they do not occur in real time with markets you can follow while you learn. Reading tons of news articles and tutorial pieces certainly has its place, but there is no substitute for real time learning and active trading environment as you are guided by experienced investors.

One final benefit is the ability to craft your own investing strategy based on what you have learned from those traders you choose to follow. You may latch on to just one trader and copy his strategy from top to bottom. You might follow a dozen or more traders and craft your own strategy by combining the best of what each one has to offer.

How social trading can harm

Despite its obvious benefits to new traders, social trading can be harmful as well. The fact of the matter is that investing is always a risky venture regardless of the asset or investing strategy. Yes, you could lose a ton of money in Bitcoin and Litecoin. You could lose just as much in stocks, currencies, commodities, real estate, etc.

Unfortunately, the biggest downside of social trading is that it tends to give new traders a false sense of security. A new trader may begin following a more experienced trader with a long history of success behind him. That's fine, but there is no guarantee that this more experienced trader will succeed moving forward. As we always hear investment advisors say: past performance is not indicative of future returns.

It is a big mistake to assume that experienced social traders do not make their own mistakes. It is unwise to fool yourself into believing that every trade will result in a profit. Things happen. Prices plunge and real money is lost.

Another downside of social trading is relying too heavily on technology. Being that cryptocurrency is technology-based, it is easy to believe that all you need are a few experienced traders to follow and some automation tools that do your trading for you. But such thinking does not line up with reality.

Technology is very helpful to cryptocurrency trading. So is data. But at the end of the day, the foundation of trading still rests on human decision-making. You ultimately have to make the choice to buy or sell. Furthermore, you have an advantage that technology and data do not have. That advantage is intuition.

Social trading values trader input. It values statistics, trends, projections, and on and on. All those things are good when thrown into the recipe that is cryptocurrency trading. But intuition cannot be left out. It is also a vital ingredient to a successful recipe.

Social trading platforms

Should you decide to embark on a social trading strategy, rest assured there are a number of very good platforms out there. Interactive Advisors, eToro, Monnos, Spiking, and Trading View are just five of them. Each one does things just a little bit differently, so be aware of that. Also, do yourself a favor and research social trading platforms as diligently as you would insurance companies.

The best social trading platform for you is the one that provides the information you are looking for offered by experienced traders you understand, believe, and trust. It may take you a while to find the platform that best suits you. As you search, do not be willing to settle. After all, this is investing. You could end up losing everything if you don't learn how to make good decisions.

Social trading is a strategy that has served traditional securities markets well for years. Many a professional investor started as a social trader dabbling in a few stocks and bonds. Given its history, social trading appears to be equally applicable to cryptocurrencies. Anyone new to the crypto markets could certainly do worse than pursuing a social trading strategy.