With the gradual recovery of the market, the cryptocurrency market has once again caught the attention of investors and become one of their investment targets. Many investors choose to follow the trades of others, replicating the strategies of traders or cryptocurrency influencers to grasp market trends. However, experts have issued a warning that the risks for followers may differ from those of the traders they are following.
(Menu)
Profit Models for Traders and Platforms
Experts Reveal: Beware of Asymmetric Traps
Avoiding Excessive Risks on One Side
With Bitcoin’s price experiencing a remarkable increase of nearly 160% in 2023, the cryptocurrency market has once again become a target for many investors. Fearing to miss out on potential gains, investors have chosen to engage in “copy trading,” hoping to capture market opportunities by replicating the strategies of traders or cryptocurrency influencers and reduce the risk of missing out on major market movements.
In the context of “copy trading,” traders who provide trading strategies for others to follow, known as “leaders,” generally profit in the following ways:
Performance-based commission: Leaders can earn commissions from the profits generated by their followers. This means that leaders only receive a certain percentage of rewards when their followers make money through copy trading.
Fixed fees: Some platforms allow leaders to charge fixed fees for their services, regardless of whether their followers make profits.
Sharing of transaction fees: Additionally, some exchanges or platforms offer a percentage of the transaction fees generated by copy trading as a rebate to the leaders, such as Binance.
Using the benefits for leaders on Binance as an example:
On the other hand, platforms that provide copy trading services profit in the following ways:
Transaction fees: Platforms usually charge a certain percentage of transaction fees from each trade. As copy trading increases trading volume, this naturally increases the platform’s fee income.
Revenue-sharing models: For platforms that share profits with leaders, they may deduct a portion from the performance-based commissions earned by the leaders.
Subscription fees: Some platforms may charge monthly or annual fees to users who wish to use copy trading services.
At first glance, the design of this mechanism seems to suggest that both popular leaders and followers are on the same boat, adopting a “win together, lose together” stance. However, with recent reports of more and more leaders receiving poor trading rewards, and even cases where leaders and subscribers experience total loss of funds and margin calls, financial analyst Yu Zhe’an has issued a warning.
Inspired by Nassim Nicholas Taleb’s idea in “Skin in the Game,” Yu Zhe’an believes that the core of this “copy trading” mechanism design lies in ensuring that strategy providers and their customers share both profits and losses, thereby ensuring alignment of interests between the two parties.
In light of this, Yu Zhe’an suggests that strategy providers should invest a certain percentage of their own funds in their strategies to demonstrate confidence. For example, if the total amount subscribed to a strategy is one million US dollars, the strategy provider should invest at least 10% (i.e., one hundred thousand US dollars) to qualify for a certain percentage of profit sharing from the users. This design can better prove that it is not a case of “poor people trading for the benefit of the wealthy.”
Another approach is to require leaders to reinvest the profits obtained through subscriptions into the same strategy for a certain period (e.g., six months) without immediate withdrawal. This design means that strategy providers can only profit when their strategies remain effective and stable in the long run, thereby reducing risks.
Yu Zhe’an stated that these methods are actually common in many risk management mechanisms, such as the linkage of final payment with acceptance, product warranties, or liability insurance, all aiming to achieve risk sharing and benefit sharing. In this model, leaders are forced to face risks together with their users, thereby avoiding the burden of excessive or unfair risks on one side.
Related Reports:
How do star traders shine in the market? In-depth analysis of Bitget’s copy trading data reveals the top 100 traders.
Trading platform NFT Trader suffers a large-scale hack! Hacker: I am a good person, send me 10% ETH to redeem your assets!
Justin Sun claims to have identified the identity of the Poloniex hacker: Return the money and receive a reward of 10 million USD, or face global pursuit.