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Social Trading Explained: Should You Copy Other Investors?

As the crypto community has continued to grow, ‘social trading’ has been becoming increasingly popular. But what is this form of investment? 

By
Jeff Broth, Contributor
4-minute read
The Quick And Dirty

Social trading involves the free sharing and using of information between a group of traders. As well as providing traders with a community, its purpose is to give novice traders the ability to learn from and replicate expert traders, without having to spend years building up their knowledge and losing money through trial-and-error.

There has been lots of buzz and excitement around the crypto market over the past couple of years. This has largely been generated by sharp rises in some of the most popular cryptocurrencies, including Bitcoin and Ethereum.

Even crypto-sceptics are dipping their toes into the unpredictable world of crypto investing – and many seasoned investors are beginning to realize that the playing field is drastically different from what they are used to. Cryptocurrencies are unpredictable. They can skyrocket in value over a matter of hours, but they can crash back down just as quickly.

As the crypto community has continued to grow, ‘social trading’ has been becoming increasingly popular.

Social trading involves the free sharing and using of information between a group of traders. As well as providing traders with a community, its purpose is to give novice traders the ability to learn from and replicate expert traders, without having to spend years building up their knowledge and losing money through trial-and-error.

What is social trading, and how does it work?

Social trading platforms are essentially social networking platforms built especially for traders. Before they emerged, traders had to rely on their own research and technical analysis to figure out what they should invest their money into.

Now, novice traders, or traders who don’t have the time or expertise to sit in front of charts and analyze markets, can learn from traders who have more experience than them. What’s more, they can copy these trading strategies, and reap the benefits. Essentially, users can become profitable traders by simply replicating the positions of other traders.

There are three main types of trades on a social trading platform. The first is a single trade, which means that the user places a normal trade by themself. The second is a copy trade, which means that a trader places exactly the same trade as another trader. The third is a mirror trade, which means that a trader follows all of the trading activities of another trader, and automatically excuses them.

As a result, there are multiple ways to use social trading platforms. Users can choose to either choose to automatically copy all of a trader’s existing positions, they can choose to copy all of the trader’s future positions, or they can decide to manually select which trades they’d like to copy.

How has social trading evolved over the years?

Social trading as we know it today first began in 2010, when one of the first social trading platforms, eToro, was created. It was soon followed by Wikifolo in 2012.

The concept of social trading began to gain mainstream traction in 2015, when a World Economic Forum report stated that social trading platforms "have emerged to provide low-cost, sophisticated alternatives to traditional wealth managers”. It even suggested that these platforms "pose a tangible threat to the traditional practices of the wealth management industry".

Since then, interest in social trading has only increased. More recently, we have witnessed the rise of NAGA, the publicly traded social investing platform that has managed to amass a global community of over 1 million users since it was started in 2017.

NAGA’s Autocopy tool enables users to find leader traders and automatically mirror their trading activity. Anyone with a verified account and at least €50 on their balance can use the Autocopy feature. After choosing a trader to copy, users pay a flat fee of €0.99 to copy a trade – the person that they are copying from will receive around 35% of this as a reward for sharing their trade and allowing it to be copied. Traders can receive up to €100,000 each month, depending on how many people have copied them.

NAGA has also launched its own cryptocurrency, NAGA Coin ($NGC), an Ethereum-based token. $NGC gives skilled traders the ability to monetize their trading strategy through amassing ‘copiers’. In exchange for copying trades and earning money, these copiers pay $NGC directly into the wallets of traders.

What are the advantages of learning from and copying other investors?

Social trading offers advantages for both expert and newbie traders. One of the most obvious benefits of social trading platforms is that they encourage transparency. In traditional investing, an investment manager would typically share monthly updates via a fact sheet, perhaps by email. Making all of the actions and outcomes of each player visible to all other players means that all users can learn from each other and improve their skills by becoming part of the community.

Platforms like NAGA also feature leaderboards to show the platform’s Top Traders. It shows how much profit each trader has made, how many people are copying them, and their win ratio. This makes it easy for new users to see which players they should be paying attention to and following.

While it’s easy to assume that most of the benefits of social trading platforms are geared towards new traders trying to pick up knowledge from experts, there is also a significant benefit for traders: it gives them a better idea of where momentum might head next.

Previously, investors would turn to data to gain an understanding of market sentiment. Now, they can analyze the actions of other traders in the community to figure out where the next big price gains will be. For instance, when the price of Bitcoin skyrocketed in 2017, many seasoned investors were too late to make big gains. But if they had been part of a community where people were chattering about the price rise early, they might have stood more of a chance of getting in on the action.

As the popularity of social trading platforms continues to increase, it’s likely that these kinds of conversations will become more and more important. Right now, many of these conversations are already taking place in community groups on forums such as Reddit. But trading and investing are becoming increasingly popular, and traders are hungry for more and more specialized advice from experts in their field.

It’s looking increasingly like transparent social trading platforms like NAGA could become the first port of call for experienced investors looking to gain an insight into the market.