Why blockchain-based social trading is poised to dominate in 2020
Social trading platforms have been around since 2010. But even so, financial markets have been slow to embrace them. With social media becoming a mainstay for most people, the comfort level with using social trading has increased. Now, with cryptocurrencies in play, social trading is becoming more trendy. But what is social trading all about and how does blockchain come into play?
What is social trading?
In the simplest of terms, social trading means that people can share trading ideas on web-based platforms. Individual traders of stocks, forex, and now cryptocurrencies no longer have to go through a brokerage or financial advisor to make trades. Now they can enter a social trading platform that is “peer to peer” and follow an expert to make the same trades, or even automatically copy that expert’s trades.
Social trading is unique in the world of finance for two main reasons:
- Traders with little or no market experience can make trades with confidence by copying more experienced traders (who hopefully have good success scores). While they trade alongside the pros, they can learn about analyzing charts and watching market trends. They don’t have to wait for a certain level of proficiency before actively participating in trades.
- On the flip side, experienced traders can share their knowledge and earn by selling access to their trade predictions. By using a social trading platform, they gain access to a new, global market of traders who purchase their predictions.
Benefits of social trading
Social trading essentially gives newcomers to online investing access to real-time market data and expert traders. Additionally, instead of just accessing the advice of one broker, users see the data and success rates of many traders. They can see how these pros have done in the past and compare their track records.
These types of platforms are very helpful to newer investors who may not be able to tell good trade advice from bad. For expert traders, they now have a new way to do business and the social trading platform represents a source of potential buyers.
Many other benefits to social trading platforms make them very appealing, especially to the incoming crypto crowd. For instance, copy trading saves time for traders who want to spend less time actively trading, or want a break from the stresses of day trading. Newcomers who don’t want to have to wait until they are an expert before they begin trading are able to copy trade experts and follow along with their trading strategies.
Another positive aspect is the layer of transparency that’s added when using a social trading platform. That’s because traders who share their predictions have their success score, trade history and portfolio composition available on their profiles for all users to see.
Social trading also opens up new markets, for instance, a stock trader can now easily access Asian markets because of the global reach of social trading platforms.
How does social trading work?
For newcomers just joining a social platform, there’s often a demo available for them to try. Some platforms will issue $1000 of virtual (fake) money to invest. This gives them a feel for how the whole system works before they go “live”. Others get to try their luck in beta as they become the first to test out a social trading app.
Copy trading is key
As individuals are ready to use real money and make some trades, they can transition by copying the trades of experts. Once they’ve gained more experience, they can venture out and make and trade on their own predictions.
Pro traders get an additional source of revenue, which is largely dependent upon their success. They also can build a community of followers (or subscribers). People who are mirror trading by subscribing to these traders’ predictions can leave comments and feedback, and online traders don’t necessarily have to work in isolation.
Social trading is “social” in the sense that you have peer to peer interactions online between traders of differing levels of experience, from anywhere in the world. You can have many of these interactions without ever needing a personal middleman or a broker – the social trading platform acts as facilitator. All in all, the system is beneficial in many ways to all participants.
Is social trading similar to social media?
Social media can be gamed in a sense so its not the same. The only aspect of social trading which is similar is the fact that it involves having multiple people involved. Many websites allow people to purchase Spotify plays for example, enabling music artists to give the view that they are popular without actually having to be popular. With HedgeTrade, a stake is attached to every prediction which solves this issue.
So what’s the problem with social trading?
Up until now, everything has sounded great. What could go wrong? Well, there are certain limitations to social trading as we know it today.
Some of the inherent problems with social trading platforms today include:
- Lack of trust. Yes, the trader’s profile lists their history and success percentage. But when they are wrong there is no true system of accountability. Now there are hundreds (if not thousands) of social outlets where you can copy trade. If you copy a trade and it goes bad, you have no recourse, you simply take the loss, after having paid for the false prediction.
- The trading fees vary widely and can be confusing to a novice. Often platforms base their fees on spread depending on the coin.
- Withdrawal fees can be significant when you want to take money out of the platform.
- If you’re dealing solely with traditional social trading platforms, many regions may not have access to crypto trading capabilities.
- Banks may hold the platform’s funds. Since banks are centralized points of failure, they do not have the enhanced security for your digital assets.
- Lastly, social trading platforms usually set minimum deposit amounts and trade minimums. In fact, some platforms require a minimum of $1000 or more just to start trading.
Blockchain-based social trading projects may be built using distributed ledger technology. Some of the most appealing features of blockchain tech for financial markets include:
- Full transparency – transactional information (not personal data) is openly viewable on the blockchain, giving all participants real-time financial data.
- Smart contracts – these automated contracts running via blockchain technology make sure promises are kept, helping to maintain accountability in trade prediction markets.
- Secure – because blockchains are built on globally distributed ledgers, there is no single point of failure. This means a hacker cannot easily manipulate the financial data, whereas when a payment processor holds the account information of thousands of people in one centralized system, they create a target for hackers.
- Less expensive transactions – transactions happening on the blockchain are generally inexpensive, plus you have no need for 3rd parties that charge fees along the way.
Social trading in crypto markets encompasses some the the most popular bitcoin investment sites and interactive crypto platforms available today.