The Social Trading Revolution: Chapter 1

So many people talk about investing like Warren Buffet — but how many have his results? Millions of Robinhood traders getting “paper rich” on buying TSLA with their stimulus checks will get rekt when reality sets in. And how about your friend/neighbor/Uber driver who was laughing at Bitcoin a few months ago now suddenly being an expert on when Bitcoin’s price is too high?

Moral of the story: most people don’t know what they are doing when it comes to investing. And the reason is simple: they don’t have the time to study investing/trading like it’s their job. Because it isn’t. That’s why the future of investing is without a doubt in social trading. By selecting professional traders with continuously verified success guide your trading decisions, you maximize your earnings potential without spending hours every day studying the market, technical and fundamental analysis, macro and micro data, etc.

In this series of articles, we will explore what Social Trading is, why it’s such a big deal, where it is at today, and where it can go. We will talk about projects working in the space and examine various ways both traders and followers can get involved in social trading. While social trading exists in centralized systems as well, our focus will be primarily on Decentralized Finance (DeFi) as we believe it to be the future of finance. This first chapter focuses on the basic question: What is social trading?

What is social trading?

“Social trading is a form of investing that allows investors to observe the trading behavior of their peers and expert traders. The primary objective is to follow their investment strategies using copy trading or mirror trading. Social trading requires little or no knowledge about financial markets, and has been described as a low-cost, sophisticated alternative to traditional wealth managers by the World Economic Forum.”

• Wikipedia

Let’s break it down into key components.

1. You are copying the trades of others rather than spending the time yourself to find the right asset, strategy, and timing for each trade.
2. Generally, you rely on people who are experts at trading, piggybacking on their expertise.
3. Wealth managers are expensive and are often accessible only to people who are already wealthy; the market for traders copied via social trading is much more fluid and democratic.
4. You decide on whom to copy based on their observed behavior — that’s very important since you want their trading record to be transparent and not another “trust me that I’m good” financial advisor.
5. Copying is quick, often automatic.

Now let’s go into each of these in more detail.

Copying

While plagiarism is discouraged in school, it could be your best strategy in life. The entire fashion industry is based on copying “the look.” Everybody wants to listen to the hot music of the day. The first person to use an umbrella, car, cell phone, or even a fork would look very stupid if not copied by everyone else. And everybody benefits.

In investing/trading, copying is encouraged. There are hundreds of thousands of assets and instruments being traded daily around the world: stocks, options, futures, ForEx, commodities, CDOs, etc. etc. Even professional traders rarely have the time to study each asset/instrument in detail and keep up with it on a daily basis. What hope does your average Joe have of keeping up? So copying makes total sense.

Experts

Some experts just trade. Others feel compelled to share their expertise with the general public or their private clients. Thousands of talking heads and investment gurus claim to have the newest most winning strategy and the perfect call on the “trade of a century” — and some of them end up being right. And we follow them because we want to believe that professional traders know better than us and because we want to get the best profit possible — their promises of wealth from successful trades is alluring.

Even more importantly, expert traders/investors tend to be very good at managing risk. So even if you do not become extremely rich copying their trades, you will at least have a better chance of preserving your capital vs. trading based on your own, non-expert intuition (and, let’s be honest, impulse).

A better wealth manager

Let’s face it, rich people have traditionally had more access to wealth-generating opportunities. In the United States, for example, there are specific laws that give special status to “accredited investors” who have at least $2.5 million of net assets or income of at least $250,000. Wealth managers prefer to work with rich people, with some only taking on clients whose net worth is in the millions. Plus, wealth managers, financial advisors, and hedge funds charge hefty fees for their services.

In contrast, anyone can copy a trade as long as they have access to trading the asset. Traders who allow followers to easily copy their trades often do (and should) charge a fee, but it is generally lower than that of a wealth manager (though a very profitable trading strategy can easily justify a high fee). In crypto specifically, people can copy trades by buying fractions of a token. So instead of opening a position in Bitcoin with $40k, they can invest just $400, $40, or even $1 (just be mindful of the transaction fee).

Transparency

Jim Cramer can hit those bright and loud buttons and scream into the camera all day — we still don’t know what his actual trades are. Some wealth management firms have a tendency to sell clients on their own products (funds, etc.) and charge higher fees than promised.

The basic premise of real social trading, in contrast, is to know exactly what trades the person you are copying is making. Ideally, you want to see their trades in real-time and easily compare experts to each other, picking the ones whose approach and track record you like the best. This also helps protect you from traders who hit the jackpot once while being wrong at other times, losing much more over their failed trades than they made in that one good one that they show you.

Automation

The best part about social trading is when you can copy your preferred traders automatically. This is not always easy because of regulations and technical limitations but can be done. Some people build custom APIs and bots to do this. In crypto, there are simpler solutions, notably, Dexe Network’s Wallet-to-Wallet Copying interface, where you can follow any ERC-20 wallet (which holds Ethereum and any token based on Ethereum) and toggle automatic copying of any asset in the target wallet.

Summary and what’s next

In short, social trading is a quick and cheap way for absolutely anyone to benefit from the expertise of expert traders. In the next chapter, we’ll explore why social trading is the future of trading. Stay tuned…

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