As Bitcoin reaches an all time high of $64,000 and Coinbase is preparing for its long awaited debut on the NASDAQ today, retail investors are more eager than ever to participate in the crypto-currency boom, particularly as crypto assets outperform stocks and commodities. Investing in Bitcoin alone would have generated an 834% return over the last 12 months, while other currencies such as Cardano yielded over 3500%. From digital asset trading to shopping for NFT’s, new and seasoned investors are rushing into cryptocurrencies trying to not miss out on the potential returns.
Trading has increasingly become a social activity, with millions of users gathering on Reddit and Discord forums such as ‘Wall Street Bets’ and ‘Satoshi Street Bets,’ posting trading ideas, pooling capital and keeping meme-usage at an all time high. As new users are nervous to trade their own portfolios due to the volatility and risky nature of stocks and crypto assets, as well as unpredictable moves by market ‘whales,’ social trading communities offer a level of comfort to the new investor.
Capitalizing on this trend, a new sector of companies are building copy trading platforms, to bring communities of novice investors and seasoned traders together. Copy-trading platforms aim to democratize trading and make lucrative strategies available to new investors, who can automatically mimic the trades of more experienced traders. This allows novices to shorten the steep learning curve, while still maintaining full control of their accounts. Copy-trading platforms tap into human beings’ innate needs to operate as part of a community and look towards others for guidance and direction.
Testing out some of the leading copy-trading platforms, I was reminded of watching gamers on Twitch. Experienced traders, who have mastered the cryptocurrency market, shared their expertise with novice crypto traders and investors. While novice traders were watching, learning, and mimicking strategies to improve the odds of ‘winning’ the trading game. Ultimately, platforms such as eToro, Shrimpy and Zignaly have built businesses to leverage the social predisposition of humans to lower the barrier of entry to cryptocurrency trading.
One of the platforms I tested was Zignaly, the newest member on the copy-trading market serving over 70,000 users with over $1.7 billion in trading volume. The platform also recently rolled out a profit-sharing feature, allowing users to pool their funds to be managed by an expert trader, in a structure similar to an investment fund. The firm recently completed a $3 million round of institutional investment from a group of strategic partners, including Parataxis Capital, GDA Capital, Sino Global, Okex’s Block Dream Venture Fund, AscendEX, LD Capital and Disrupt.com.
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“The way people look at cryptocurrencies has changed in the last 12 months. Digital assets are becoming more mainstream in the global marketplace. With Zignaly’s profit sharing feature and its newly introduced NFT-based insurance protocol, investors will be able to enter this ecosystem with greater security and risk-mitigation tools than ever before,” says Bartolome R. Bordallo, CEO and co-founder of Zignaly.
With the cryptocurrency market capitalization surpassing $2 trillion USD this week, novice traders are jumping into the cryptocurrency space. Copy-trading and other social investment platforms provide an easy access point to retail investors, not too dissimilar to how Robinhood became the mass point of entry to retail investors new to the stock market. These platforms, however, rely on the liquidity from larger exchanges, acting as a gateway into billions of additional retail trading volume for larger exchanges, similar to how Robinhood relied on Citadel during the Gamestop GME short-squeeze.
Copy-trading platforms seem innovative and exciting to the novice trader, but it is still unclear if enough retail investors will trust their portfolio performance in the hands of another trader. Whatever the long term trajectory for the social trading models will look like, it is clear that these platforms have opened the floodgates for additional volume of retails trades for exchanges.