derivatives trading

Many people would like to make money in the crypto space but very few actually possess the knowledge of how to do it. There are several ways to get your hands on digital coins: sell goods or services in exchange for crypto, mine it, trade it, get your salary paid in it, or even gamble. But none of these methods will create a stream of residual income – you have to work for it. This is why many market players are always on the lookout for alternative arrangements.

Investing in startups is a highly interesting and potentially promising opportunity, but it comes with its own set of difficulties: a potential investor has to be well-versed in the intricacies and pitfalls of the market. Similar to trading, which is not highly likely to result in the creation of a stream of residual income in inexperienced hands, investing in startups is risky and not necessarily lucrative for a newcomer.

But things aren’t as bad as they sound. There are solutions available. The truth is that currently there are three main ways in which a person can create a stream of residual income on the crypto market, and they are: (i) to deploy a trading bot; (ii) to put your crypto assets in trust management; or (iii) to use a social trading terminal.

Let’s take a look at the pros and cons of each of these options.

Trading bots, or as they are also called, Automated Trading Systems (ATS) are computer programs that serve to fully or partially automate the trading process (e.g. Cryptohopper, Gunbot, Haasbot). They use specialized trading strategies in which market positions are opened and closed by bots. The purpose of a trading bot is to make a profit. These programs interact with exchanges via APIs to receive and interpret the market data and place Sell or Buy orders accordingly.

In trading, these automated systems are not affected by emotional pressure: they place their orders based exclusively on calculations and clearly defined algorithms. Bots can detect trading signals in the sea of market noise and process massive amounts of data – something that no single human is capable of. If set up correctly, bots can generate residual income.

Unfortunately, they also have a downside. System errors can and do occur in bots’ operations, and they can result in serious losses. History knows quite a few examples when entire markets plunged into the red because of a bot error. It is also extremely difficult to find a bot that would have good track record over the long term.


Key advantages and disadvantages of ATSs:

Trading unaffected by the emotional component Slow to adapt to market changes
High trade transparency High likelihood of repeating the same mistakes
Users’ funds do not change hands but are kept in their own accounts on exchanges Low trust on the part of market participants
Low entry threshold Mass bots often lose money

 

Trade bots are far from being the Holy Grail, and even the most impactful of them have to be regularly reconfigured. In other words, bots do not guarantee one-click profits: if you ever see an ad for a bot that guarantees 100500% profits, just know that this is 99.999% scam.

Trust management (trust management) is another common way to obtain passive income. This service is usually provided by banks and investment companies. Clients transfer their money to the institution, which then uses the funds to buy securities, gold, or other assets to grow the client’s wealth and earn a commission.


Trust management services are usually provided on a case-by-case basis. Clients independently choose bank employees who will be handling the investments on their behalf. They may ask to see their resumes and professional track records in order to make their choice.

The crypto space, however, only retained the general concept of trust management – the fact that you have to delegate control over your funds to somebody else – and the idea of having an entry threshold amount (although it is much lower in the cryptocurrency world). The rest changed beyond recognition, as you will see from the following bullet points.

  • No regulatory framework. Even if you do hand over your digital currencies under a formal legal agreement, this in no way guarantees the safety of your investments – simply because there are no laws that establish the compensation mechanism in the event of losses.
  • No regulatory oversight. The actions of traders and funds that offer cryptocurrency trust management services are completely unsupervised. Regardless of how much of their clients’ money they lose, nothing prevents them from just attracting new clients with new coffers.
  • No way to check the traders’ real-life track record. Any wannabe can brand themselves as a successful crypto trader or even set up an investment fund.

Key advantages and disadvantages of trust management:

Quick response to market changes No control over one’s balance
All commissions are wrapped into the trader’s fee Investor cannot verify trade statistics
A trust management agreement can be entered into No access to own funds. Low liquidity and ROI
Not uncommonly, a trader who has many recommendations can bring meaningful profits High likelihood of fraud

 

With all the benefits of this residual income-earning arrangement, its main drawback, the one that eliminates all trust in traders and companies that provide trust management services, is the fact that the investor has to part with, and, consequently, loses all control over their funds while they are being managed.

“When you are offered 100% profit margin, anybody in their right mind needs to take a deep breath and think about it,” says Yehor Shyshov, FUMGO СЕО. “This is why we strongly advise against giving away your money to strangers if you’re uncertain about their overall past performance. Try asking for references, weigh all the pros and cons, and make your own, well-reasoned decision.”

A mirror-trading platform or a social trading terminal (e.g. Etoro, Tradency, FUMGO). This market tool has emerged relatively recently and was first implemented on the Forex market. This new approach to residual income generation arose because market participants were fed up with vague terms of traditional trust management and HFT bots that went into the red far too frequently.

Social trading involves copying trades of experienced professional traders. Thanks to this type of trading, your portfolio is effectively managed by the best traders, but your trades are conducted automatically right from your own account on an exchange.

Clients do not need to get actively involved: all they need to do is visit their account once or twice a week to check the account balance.

Some platforms that offer the mirror trading feature bring together the best traders from all over the globe. Traders are rewarded for their efforts, and their trade data, including their trade history, is posted on their profiles, which serves to prove the platform’s transparency. The traders’ stats are regularly updated, and traders are ranked to make it easier for laypeople to choose the best traders to copy.

The key disadvantage of this type of terminal is that they often are full of traders without any real experience or expertise. This is why it is of utmost importance to carefully study their trade history and statistics.

Key advantages and disadvantages of mirror trading:

Transparent investment terms Having to pay for the use of the terminal
All users’ funds are kept in their own account on an exchange (inaccessible to traders) Potential losses as a result of poor trades by an inexperienced chosen trader
Users control their funds 24/7 Terminal’s not always very convenient or clear interface
A large choice of traders to follow Potential presence of non-professional traders

 

As we can see, social trading platforms combine the best qualities of both the trust management and automatic trading systems. It is not inconceivable that in the very near future this market segment will push out the money-losing bots and the wannabe traders offering trust management services.

“In any case, I always recommend that people seek out and try new passive income options, but not before they learn the basics of how this or that product works,” says Anton Bartenev, CVO at FUMGO. “Armed with knowledge, you will not fall prey to fraudsters and incompetents.”

Doesn’t matter which of the above residual income-generating methods you favor. What’s important to keep in mind is “test before you invest.” Never surrender your entire holdings for somebody else to manage, whether it is an untested trader or bot. Start small, invest just a little bit, make sure that your chosen tool is working for you: if it does, you can always invest more later. Better be safe than sorry.

Disclosure: This is a sponsored article

Image(s): Shutterstock.com


The writer of this post is a guest. Opinions in the article are solely of the writer and do not reflect Null TX's view.

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