Do Automated Strategies Really Work For Novices In Web3 Trading?
In Brief
Automated trading strategies like copy-trading and strategy vaults are helping novice Web3 traders bridge the knowledge gap by following expert traders while learning the fundamentals in a secure, transparent environment.
For a novice trader starting out in Web3, there are few experiences more exciting and terrifying (and for good reason). If you’ve made it far enough to start trading, that likely means you’ve done a ton of reading, possibly looked through some whitepapers or even Github repositories; you’ve researched via social media, maybe some friends, and if you want to start with an edge, you’ve even watched a few conference keynotes.
Once you have a wallet and a platform to explore, you jump in. You buy a few cheap tokens to see if you can, and before you know it you are a crypto owner! Maybe it’s $10 worth of crypto, but you have successfully traded in the Web3 ecosystem. You are feeling enthusiastic and nothing can stop you.
Then, as you are about to jump in with both feet, you pause. You suddenly realize that despite all of those amazing accomplishments, you actually have no idea what you are doing.
Now what?
This is one of the best and most challenging parts of the crypto world. To those willing to navigate the onboarding, it is amazingly easy to set yourself up for trading, sitting side by side with professionals and industrial trading companies. TradFi has some elements of novice trading, but nothing like what Web3 can offer. This flattens any hierarchy, removes barriers, and democratizes the entire industry. But it also creates an issue for those who want to jump in and simply don’t know where to start. And for those whose bravery outshines their common sense, they find out very quickly that Web3 is like any other trading environment: Bad decisions can lose money very quickly.
Let’s dive in to see how novices can survive those early days of trading and whether automated strategies have real value for them.
Copy-Trading and Strategy Vaults
So what can be done to get novices over this initial gap and onto real trading? Well, it turns out that because Web3 is innovative by nature, there is an entire business model that can provide a solution. Automated strategies such as copy-trading and strategy vaults are designed to help less experienced traders find various strategies that they think can provide good returns, then commit funds to latch onto the movements of the strategy owner. Whether it is copy-trading, a strategy vault, or something similar, the process is essentially the same. Through a platform that facilitates this service, a number of high performance traders will allow other traders to essentially tag-along as they perform in the market. For those choosing to commit funds, their only real decision is which trader to latch onto, and for how long. After they’ve latched their funds via vault or copy-trade, they can sit back and watch the show. Their trading is automated, and mimics the strategy/trades of the expert they’ve selected.
Why would an expert trader allow this? Simple: they get paid. The top traders can earn management fees as well as a cut of profits they make for their followers. This incentivizes them to both allow copy-trading on their strategy, and incentivizes them to do well. The model is simple but it works as well as it does because the motivation of the expert and those following are aligned: if the expert does well, so does everyone, and vice versa.
This type of strategy is even better for those platforms that emphasize real-time transparency and easy to use interfaces. To show the odds of success or failure as clearly as possible, platforms offering these automated strategies can post the real-time results of each expert offering their strategy, with additional metrics including various performance rates over time, fees earned, and other performance analytics. For a novice, this is a gold mine of insight as they can make a better choice from the start, and either exit the strategy or shift to someone else if they think they might have better luck.
There are a number of quality platforms to choose from, depending on your priorities. For a beginner-friendly, social focused platform, eToro ranks high. For those traders planning to operate in a mobile-first environment, Avatrade has focused on supporting this as a user-friendly interface. For those tech-friendly traders who are interested in setting up automation via API in order to customize what they want, platforms such as FXCM offer additional flexibility. For those choosing a secure experience, EnclaveX has developed a completely encrypted environment for trading.
With such a solid model, why aren’t automated strategy models saturating the market? And what would prevent a novice trader from taking advantage of this?
Pros and Cons of Automated Strategies
While there is no such thing as a guaranteed return with any trading, automated strategies do offer some strong advantages for a novice trader, especially when the alternative is the novice experimenting to see what works. With automated strategies, a novice probably won’t understand the complexities of a given strategy, especially when the expert is using algorithms or other high-performance tools. However, they can fairly easily understand performance metrics like profit/loss over the short and long term, what fees they charge, and their reputation among those traders using them. Depending on the platform they are using, a novice trader can see these metrics on-chain, meaning they cannot be manipulated. Another pro (and probably a good idea in general) is that novice traders don’t have to go with a single expert or strategy; diversification is key to reducing big risk. Users can allocate their funds across different strategies like trend-following, arbitrage, or market-neutral strategies. Even if they are still learning the complexity, they can see the performance and potential risk of these strategies through the transparent metrics of those experts using them. If they have the right platform and motivation, novice traders can increase their knowledge and education of Web3 as a whole, understanding how the different pieces work together to build up the market.
That said, there are some risks to automated strategies. The first and most important is that past performance doesn’t guarantee future results, a phrase that holds true to all trading. Even the best traders can have bad days, so putting all your funds into one spot isn’t the best idea no matter how good the numbers look. However, even assuming the funds are well diversified, there are underlying risks as well. It’s important to research the platform you are using to make sure it is well secured, has a number of audits on its smart contract or vaults, and has a transparent fee structure. These types of trading strategies can be vulnerable to algorithmic bad actors through practices like front-running and MEV, which can undercut performance. For these risks there are few solutions, although EnclaveX’s Alpha Strats is a good choice as it operates on the Enclave’s uniquely encrypted execution infrastructure. This solves the problem completely as it takes away the ability to manipulate trading, and Alpha Strats is strong in the other features mentioned above.
Ensuring encryption is more than just removing risks that can reduce returns for traders. According to Phil Wirtjes, CEO of Enclave Global, creating the right type of encryption is foundational to automated strategies.
“The Alpha Strat vault runs inside a secure enclave, which creates the three pillars needed for trusted trading. First, as automated strategies involve algorithms and lightning fast actions, a process that leaks trades even a millisecond in the future can destroy the gains from that strategy. Second, the encryption ensures that the deposits from professionals and retail traders alike are treated fairly, leveling the playing field. Finally, having the proper encryption ensures that this data is protected from the platform itself, creating trust by removing any possibility of insider risk.”
Novice traders can feel like a fish out of water when they first begin their Web3 journey, but trying automated strategies with expert traders could be a solid way to understand how the market works without doing it alone. Performance metrics can help moderate expectations and the various strategies can help with diversification at the same time a novice is learning some of the trading fundamentals. Finally, ensuring the platform you use is secure, transparent, reliable, and if possible encrypted is important to protect your funds as you jump into the wonderful world of Web3.
Disclaimer
In line with the Trust Project guidelines, please note that the information provided on this page is not intended to be and should not be interpreted as legal, tax, investment, financial, or any other form of advice. It is important to only invest what you can afford to lose and to seek independent financial advice if you have any doubts. For further information, we suggest referring to the terms and conditions as well as the help and support pages provided by the issuer or advertiser. MetaversePost is committed to accurate, unbiased reporting, but market conditions are subject to change without notice.
About The Author
Alisa, a dedicated journalist at the MPost, specializes in cryptocurrency, zero-knowledge proofs, investments, and the expansive realm of Web3. With a keen eye for emerging trends and technologies, she delivers comprehensive coverage to inform and engage readers in the ever-evolving landscape of digital finance.
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Alisa, a dedicated journalist at the MPost, specializes in cryptocurrency, zero-knowledge proofs, investments, and the expansive realm of Web3. With a keen eye for emerging trends and technologies, she delivers comprehensive coverage to inform and engage readers in the ever-evolving landscape of digital finance.
