Cryptocurrency trading in 2019 has come to a fair long ways from its gun-slinging Wild West days where whales and informal investment pools could push random coins into double-digit percentage gains within a few short hours, sometimes minutes.
The change in cryptocurrency trading has mostly been due to the crushing weight of an extended bear market (“crypto winter” for those with a sense for drama). Trading pools, a seemingly informal variation of more structured investment pools, consisting of a community of investors placing their trading capital under the trust of a single entity (individual or group.)
It might be difficult to decide what to make of cryptocurrency trading pools and whether they’re healthy for the cryptocurrency industry. With the rampant speculation in 2017 in the rear-view mirror, trading pools likely lost investors a ton of money. People with money trusted people with limited successful track records, and all were burned by the rapid decline prices in 2018. Hundreds of dysfunctional projects raised hundreds of millions of dollars via token sales and scams ran away with millions thanks to a lack of due diligence on the part of the pool operator.
One’s gut instinct says trading pools in the volatile cryptocurrency industry can be deadly and should generally be avoided, but there might be more to that idea than meets the eye.
At its roots, cryptocurrency trading pools appear to be a more formal relationship with an influencer. The crypto influencers of yesteryear tended to operate with a lack of integrity and shilled projects left and right for flat fees and percentages of tokens, and I think (hope) as an industry, we’ve learned from that. The cleansing of the crypto winter’s bloodshed may have changed us for the better, and trading pools may have a healthy functional role once again.
Do we need to approach cryptocurrency trading pools from a different angle?
There is an inherent social aspect of trading in the cryptocurrency community. The decentralized nature of the industry itself (in regards to not having a single central Wall Street-esque type of institution) lends itself well to the concept of trading pools. The landscape currently consists of countless Slack, Telegram, Signal, etc., channels ranging from incredibly exclusive to open to anyone with a link.
The problem with social trading is that the majority of it plays on mostly false positive sentiments in the industry. A more formalized aspect of social trading would hopefully allow traders to make more intelligent decisions with where they choose to place their money.
How can investors be protected in cryptocurrency trading pools?
The initial approach would involve pool creators putting their own money in the same pool as investors and having “skin in the game”, so as to prevent them from knowingly acting in ways that could harm investors.
Second, all money should be locked in the trading pool and can be used only for trading, managed by smart contracts, where profits must be distributed by the platform itself. Pool creator should only be able to trade with those funds and nothing else.
There will always be risk whenever someone’s money leaves their bank account (or Ledger, underneath their mattress, etc.,) and trading pools in the cryptocurrency industry rank a bit higher on the Totem pole of riskiness. That being said, a more formal structure for something that already exists could go a long way in maturing the cryptocurrency investment landscape.
In a democratized cryptocurrency trading pool world, the best pool managers (and platforms with the pools) will inevitably rise to the top. Investors have a limited amount of capital, and there will likely be hundreds or thousands of pools. The key component is to build a structure of trust in a market with wild oscillations that appear to happen for no reason, such as a random token flying up 40% in 60 minutes.
That being said, a great investment pool will have everything relevant to its team and structure listed and verified by the platform. A few questions that pop into mind: What is their investment philosophy? Is it proven fundamentals or a large array of riskier projects like a high-risk high-reward early stage VC? How heavy are their investments tethered to a specific ecosystem? How will it allocate its funds based on certain criteria (ie. 50% protocol, 10% to applications, 40% to payment solutions.) How will and how often will trading pool investors be notified of progress?
Context is important. It lets you know where you’re at, and how good your performance is. Yet in today’s trading, this is hard to come by.
If you are recently getting into the cryptocurrency trading space, it’s highly recommended to start with a crypto market simulator or something that doesn’t put your money at risk. Understand the flow of the market. Consult a professional licensed financial advisor before taking any decisive action. Commit to never risk anything more than you can afford to lose. Only then should you start dabbling in something like trading pools.
However, once you are in the realm of trading pools, make sure you are asking the right questions and doing your due diligence to research pool operators, their investment criteria, and lean into the social aspect of understanding where the cream of the crop truly is.
The ability to compare your returns against your peers’ is vital. It lets you know where you stand, and it drives traders to improve. Also, it helps to dive into trader psychology to understand how the best traders are performing and augment your approach accordingly. A wave of transparency brought on by social trading pools can go a long way to understand the finer inner workings of an industry that has long been shrouded in mystery and wild oscillations. No posturing, no fake numbers, only real results.
This article is Originally posted on CoinCentral.com
Author: Alex Moskov