{"id":7183,"date":"2023-03-24T17:11:28","date_gmt":"2023-03-25T01:11:28","guid":{"rendered":"https:\/\/finestel.com\/blog\/?p=7183"},"modified":"2023-08-13T08:06:42","modified_gmt":"2023-08-13T16:06:42","slug":"pros-and-cons-of-copy-trading","status":"publish","type":"post","link":"https:\/\/finestel.com\/blog\/pros-and-cons-of-copy-trading\/","title":{"rendered":"The Pros and Cons of Copy Trading: A Practical & Visual Guide for Crypto Traders"},"content":{"rendered":"

There are a ton of resources that discuss the pros and cons of crypto copy trading. However, most of those comparisons\u2013if not all\u2013 are either from the copy traders’ approach or about the crypto copy trading itself.<\/span><\/p>\n

In this post, we get into the trader side of the equation as well as the copy trader side. What you\u2019ll read is from a couple of years of feedback from Finestel\u2019s professional traders and public investors.<\/span><\/p>\n

We\u2019ll talk about the means of crypto copy trading, models, and their functions. The disadvantages and advantages of copy trading, especially in the crypto market, and lastly, we\u2019ll introduce the most descriptive and helpful Finestel guides to you to know about how Finestel solves the copy trading issues and get the best out of its opportunities. It will help you find out if copy trading is a good idea for you and your business or not.<\/span><\/p>\n

Briefly About Means of Copy Trading<\/span><\/h2>\n

\"what<\/p>\n

According to good old Wikipedia, modern copy trading officially started around 2005 via an automated trading system called \u201cMirror Trader\u201d by Tradency. Nowadays though, copy trading is available on various platforms (exchanges, apps, bots, etc.), with infinite functions, and for all financial markets.<\/span><\/p>\n

You might\u2019ve heard other terms being referred to as copy trading as well, like mirror trading, follow trading, social trading and more. First of all, there\u2019s no fine line between them, secondly, they function almost virtually the same.<\/span><\/p>\n

Technically, copy trading refers to executing replications of a trader\u2019s actions (trades) on an exchange account or a third-party software into the exchange accounts of their clients or investors (copy traders).<\/span><\/p>\n

In more advanced models, the replication executions take place thoroughly proportional (including all the trade setup elements), which makes automated asset management possible. You can read more about that on other blog posts we’ve written before, but full details with Binance<\/a>, KuCoin<\/a>, and Bybit<\/a> examples.<\/span><\/p>\n

Crypto Copy Trading Models and How They Work<\/span><\/h2>\n

Generally two models exist, copy trading on a crypto exchange and via API access. Let\u2019s tell you about APIs and how they are used in crypto copy trading, as it\u2019s the primary scheme that we\u2019ll talk about here, and then explain the two models separately.<\/span><\/p>\n

What is API & What API Keys Are Used for in Crypto Copy Trading?<\/span><\/h3>\n

An API (Application Programming Interface) is a connection that applications talk to each other through, using API keys, which one can create on their exchange account or many other platforms.<\/span><\/p>\n

API connections have many functions and use cases but generally two API key configurations are used in copy trading, \u201cRead-Only\u201d and \u201cTrade-Only\u201d API keys. These terms however, may be different among the providers like KuCoin calls read-only APIs as the \u201cGeneral\u201d API configuration and Bybit uses \u201cRead-Write\u201d instead of trade-only API keys.<\/span><\/p>\n

\"Comparing<\/p>\n

Besides, the \u201cAPI Management\u201d section may also differ. For example, KuCoin has a very simple API key configuration, while you have access to modify <\/span>detailed API permissions on Bybit<\/span><\/a>.<\/span><\/p>\n

Read-Only API Keys for Crypto Copy Trading<\/span><\/h4>\n

Read-only API keys allow the copy trading platform to read and copy a trader\u2019s operations (trades) on their exchange accounts. The read data is used to create reports and\/or track portfolios, and so on and so forth. This is the API key that traders connect their exchange account to the copy trading platform with.<\/span><\/p>\n

In advanced copy trading, the third-party (copy trading) platform uses the copied trades to execute proportional replications on the exchange accounts that are connected to the platform via trade-only API keys.<\/span><\/p>\n

Trade-Only API Keys for Crypto Copy Trading<\/span><\/h4>\n

Trade-only API keys are what copy traders connect their exchange accounts to the copy trading platform with.<\/span><\/p>\n

The trade-only API access allows the platform to execute trade replications – AKA trade – on the connected exchange account, also create reports, track portfolios and more.<\/span><\/p>\n

Important<\/span><\/h4>\n

The \u201cwithdrawal\u201d API keys, as the name suggests, are used to transfer or withdraw assets from accounts. While the key has its particular use cases, it\u2019s <\/span>not needed<\/b> for copy trading. Who or whatever has withdrawal API access to your exchange account potentially has your assets.<\/span><\/p>\n

Crypto Copy Trading on Crypto Exchanges<\/span><\/h3>\n

Many crypto exchanges have copy trading available as a service. Namely, futures (referred to as derivatives) copy trading on Bybit or copying a trader bot on KuCoin.<\/span><\/p>\n

\"Bybit's<\/p>\n

The process is simple, dedicate some balance and copy a trader. If the trader makes a profit, the exchange will transfer the trader\u2019s share from your balance to them; other fees such as subscription and\/or management fees, may also include.<\/span><\/p>\n

Crypto Copy Trading via API Access<\/span><\/h3>\n

Third-party crypto copy trading platforms are technically automated trade execution bots that connect to exchange accounts via API access to either read and copy trades from or execute orders on them.<\/span><\/p>\n

The Trader Side<\/span><\/h4>\n

Pro crypto traders connect their exchange accounts to the platform via read-only API keys to make their trades available for the public crypto investors to copy. That way, the trader will be able to practically trade with a higher account balance; or gain AUM (Assets Under Management) but in a non-custodial manner.<\/span><\/p>\n

If the trader makes a profit, their \u201cperformance fee,\u201d which is the share of their copy traders\u2019 profits, has the potential to exceed that profit or even multiple times higher!<\/span><\/p>\n

The Copy Trader Side<\/span><\/h4>\n

The copier side of the equation connects via read-only API keys, allowing the platform to place\/cancel the copied orders or trade on their exchange accounts.<\/span><\/p>\n

So, in return for a subscription or performance fee, or a combination of both, crypto investors (non-traders\u2013for any reason) will have a professional trader managing and maintaining their exchange accounts portfolio.<\/span><\/p>\n

Crypto Copy Trading Pros and Cons<\/span><\/h2>\n

\"Pros<\/p>\n

Crypto copy trading is a rapidly growing industry capable of taking non-custodial crypto asset management to the next level by automating it, but nothing\u2019s perfect, right? There are issues that both copy trading participants (trader and copy trader) may encounter, let\u2019s dive into them:<\/span><\/p>\n

Crypto Copy Trading Pros & Cons for Traders<\/span><\/h3>\n

\"Finestel<\/p>\n

Most of the comparisons out there are from the copy trader side, as the majority of them are not professional traders. Considering the complexity of asset management, especially in the crypto space, traders\u2019 POV in the copy trading concept is quite worth spending some time on; isn\u2019t it?<\/span><\/p>\n

Below is the comparison, but please keep in mind that some of the potentials and advantages are not available on all crypto copy trading platforms and only a few advanced platforms render them; such as thorough proportional replication executions or client management systems.<\/span><\/p>\n

Advantages<\/span><\/h4>\n