Copy trading, an investment practice where novice traders replicate the trades of more experienced investors, has become increasingly popular in markets such as forex and, more significantly, cryptocurrency. It promises easy market entry for those with limited knowledge, but experts and regulators in New Zealand are raising concerns about its risks, especially in the largely unregulated crypto space.
How Copy Trading Works
Copy trading platforms allow individuals to follow the trades of seasoned traders, or “strategy providers,” in real-time. Users can connect their accounts to mirror trades in various asset classes like forex, cryptocurrency, and Contracts for Difference (CFDs). Platforms tend to feature user-friendly interfaces, making it easy for less-experienced investors to enter the market with minimal knowledge of trading strategies or market dynamics.
For many beginners, the appeal lies in the potential to profit from the expertise of experienced traders without having to perform complex analyses or closely monitor the markets. However, as highlighted in MoneyHub’s comprehensive guide, copy trading is not without significant risks. Past performance of strategy providers is never a guarantee of future success, and unverified traders on these platforms pose a danger to unsuspecting investors.
The Growing Concern Around Cryptocurrency Copy Trading
As cryptocurrencies grow in popularity, so too does the use of copy trading within this volatile market. Yet experts like Paul Quickenden, Chief Commercial Officer of New Zealand-based Easy Crypto, caution against blindly trusting lead traders in the crypto space. He warns of the minimal oversight in the industry, which often results in “lead traders” being unqualified and unlicensed.
There are essentially no criteria for becoming a lead trader, Quickenden points out, noting that “you pretty much just have to be a living, breathing person and have $500” to start leading trades on platforms like Binance, which recently introduced crypto copy trading for New Zealand users. He goes so far as to mention that these traders might be making decisions under impaired judgment, even saying that “they might be drunk,” a stark contrast to the stringent checks in traditional financial markets.
The absence of regulatory frameworks and licensing in crypto copy trading, compared to the tightly regulated financial advisory and investment sectors, leaves followers exposed to unpredictable and sometimes reckless decision-making. Furthermore, pump-and-dump schemes—where unscrupulous traders artificially inflate the price of a cryptocurrency and sell it at a high value, leaving investors with worthless assets—are common. Quickenden highlights that following traders without transparency or reliable metrics makes investors more vulnerable to these scams.
Regulatory Framework in New Zealand
The FMA advises that crypto assets are highly volatile, with prices fluctuating based on market sentiment, often with little connection to the underlying asset value. Investors are urged to use New Zealand-based platforms that are registered with the Financial Services Provider Register (FSPR) and adhere to dispute resolution schemes and anti-money laundering (AML) regulations.
Platforms like BlackBull Markets, a New Zealand-based CFD broker, offer copy trading tools within a regulated framework. These platforms, regulated by the FMA, provide a layer of protection for users, though the responsibility of evaluating strategy providers still rests on the individual. The FMA stresses the importance of ensuring platforms comply with local regulations to avoid falling victim to scams.
Risks of Copy Trading Platforms
Even on regulated platforms, there are concerns about the fee structures and motivations of lead traders. For instance, profit-sharing models often see lead traders take a percentage of the followers’ profits, which can erode earnings over time. In addition, platforms like ZuluTrade, which are integrated with BlackBull Markets, provide tools like ZuluGuard to safeguard against volatile trading strategies, but there is no guarantee of avoiding losses.
Moreover, as MoneyHub points out, lead traders can be incentivised to trade more frequently to increase fees, which may compromise the quality of trades. This “fee harvesting” behaviour, combined with high-risk strategies, can quickly lead to significant losses for followers.
Conclusion? Exercise Caution
While copy trading offers an attractive entry point for novice traders looking to benefit from the expertise of others, the risks, particularly in cryptocurrency markets, are large. Experts emphasise the importance of conducting thorough research, diversifying strategies, and understanding the platforms being used. In a largely unregulated crypto space, the lack of transparency and oversight poses serious challenges.