Despite the increasing interest of institutional players, the overwhelming majority of cryptocurrency wallet holders are retail traders. The promise of earnings rings tall in the ears of many; but the expectation of success can also lead to inaccurate risk assessment, and other biases, for newcomers.
Novice traders often make a plethora of mistakes as they set out on their journey in cryptocurrency. These can be split into four categories of common errors: 1) vulnerability to heuristics and biases; 2) herd behavior; 3) risk aversion; and 4) overtrading.
This article examines these everyday trader missteps and explains how FNDZ provides a solution to each of them.
Heuristics are pragmatic mental rules-of-thumb which may make decision-making faster and more efficient, but do not guarantee an optimal solution. Biases are tendencies to attach disproportionate weight to some factor in judgment or decision making, leading to systematic errors. Compared to experienced traders, rookies are more prone to rely on heuristics and be affected by biases in their trading.
Short-termism, for example, is a bias that many retail traders fall victim to. The term refers to the inclination of traders to prioritize short-term earnings at the cost of opportunities in the longer term.
Many beginners also hope to replicate the success of others, making them susceptible to the representativeness heuristic. The representativeness heuristic is common amongst traders. It refers to the fallacy of believing that the past performance of an asset is indicative of its future performance, even though many of the factors which determined past performance may no longer be present, or may have changed significantly in the interim.
A third example is a close relative of the ‘bull trap,’ in which a bullish signal is immediately reversed and continues falling. In such cases, novice traders tend to behave in a manner consistent with the “anchoring bias.” The anchoring bias, as the name suggests, implies that a shareholder clings on to the original purchase value of an asset. This purchase value can take on an emotional quality, becoming the reference point for future decisions concerning the asset purchased. This may leave many people “anchored” to a sinking asset (ship).
Herd behavior refers to a set of behavioral traits triggered by the actions of other shareholders. One example is panic selling in a downturn, which usually ends up with the owner being in a worse position than before. Another, at the other end of the spectrum, is the purchasing of overvalued or hyped assets, mostly during bull markets. When certain assets have already seen large upticks, many retail buyers will follow this hype and enter very unfavorable positions at the peak of the price trajectory.
Many traders also make insufficient use of portfolio diversification, in part because they do not have a large amount of available funds. Thus, many will try to put all their “eggs in one basket” to concentrate their leverage in case that one asset is successful. While this can work if you are lucky enough to choose the correct asset, it usually leaves you open to a large amount of downside risk and opportunity cost by missing out on the potential return of other assets.
While there may be some difference in risk aversion among shareholders due to factors such as gender, age, work occupation, and marital status, generally the appetite for risk is low. The tendency to lose out on trading opportunities due to a disproportionate desire to avoid risk is known as risk aversion. Risk aversion can act as a powerful bias towards perceived safety in markets known for their extreme volatility. When combined with inexperience, risk aversion may cause beginning traders to seek safety in following the flock, increasing the risk of herd behavior.
Overtrading is a common mistake that many traders make at the beginning of their careers. This is as simple as it sounds, referring to a trader making multiple trades a day, often longing and then shorting the same asset. Multiple studies show how difficult it is to beat the market in this way, pointing to the wisdom of the saying that the less you trade, the better you do.
The journey of many beginning traders have been marked by one or more, if not all, of the mistakes listed above. To some it has become a rite of passage: to learn the traditional, hard way. Luckily that does not have to be the case — and it should not be! FNDZ aims to help beginners find their footing and avoid these common mistakes. FNDZ not only saves them from negative returns and the stress of having to manage their portfolios on a daily basis, but also gives them opportunities to learn about assets.
The FNDZ platform can help retail traders significantly decrease the risk of losses associated with their inexperience, heuristics, and biases. Users choose experienced traders whose profiles and approaches fit their desired strategies and risk exposure, thereby avoiding herd behavior traps. In short, FNDZ enables the individual to release themselves from general market trends, and the stress of managing their own portfolio, by connecting them with the best performing and most experienced vault owners: persons who are better equipped than the average retail trader to recognize and compensate for biases and prejudices.
If social trading is the use of social information to facilitate trading, copy trading is a special type of social trading. As the name suggests, copy trading describes a situation in which a (typically more experienced) trader’s trades are automatically duplicated by other (typically less experienced) traders.
DeFi is a collection of decentralized applications (dApps) built using sets of smart contracts. Smart contracts are algorithms executable on a blockchain and are capable of communicating and interacting with each other. This enables DeFi dApps to be interoperable and build on one another’s features and use cases, thereby capitalizing on the potential for network effects. FNDZ uses DeFi infrastructure to provide a fully transparent, low-cost, highly efficient, and user-friendly copy trading platform. Our audited smart contracts carry out all functions according to open, community-influenced protocols. Trades can be copied with no more effort than connecting a MetaMask wallet to a vault and clicking ‘copy.’ Vault owners operating FNDZ strategies personally carry out their chosen trades and methodologies. Due to the fact that smart contracts are embedded in the blockchain, FNDZ users maintain full control over their assets. Only the person copying a strategy by depositing funds into a vault has the authority to withdraw those funds. DeFi wallets function on a non-custodial basis, ensuring each wallet owner has exclusive access to them when interacting with dApps. The power is in the hands of the copy trader, but it is vital to double-check the smart contract before connecting to a dApp on any blockchain or initiating a transaction. The golden rule is to keep passwords written on paper and stored in a safe place (never on internet-connected devices), and to never, under any circumstances, disclose private keys. For more information on how to spot suspicious dApps or phishing emails, visit the Trustwallet blog.
FNDZ can also help mitigate the security risks typically associated with centralized exchanges. The blockchain itself, like dApps, is based on smart contracts which are written in the programming language Solidity. It is impossible to change the data and logic that is written into a blockchain–this is what makes it ‘immutable’. This means that the address and code of the smart contract cannot be changed, as they are permanently stored on the blockchain. Solidity therefore makes it possible to deliver automated and tamper-proof transactions within the FNDZ ecosystem, which are verified on-chain with exact mathematical formulas.
To participate in a vault, users simply connect their MetaMask wallet to the FNDZ platform and authorize a deposit into the smart contract governing the vault ownersr’s chosen strategy. This eliminates platform-based counterparty risk and ensures that copy traders actually own their digital assets and can redeem them for the original deposit (plus earnings) at any moment to their own custody.
The majority of copy trading platforms available today are marred by complicated functionality, incomplete transparency, and questionable user interfaces which most users are unlikely to fully grasp. FNDZ bridges the gap between experienced professionals and retail traders by delivering a simple and effective trading experience in which each user always knows how much they will pay to copy a trader’s strategy.
FNDZ enables any user to easily transfer funds from their credit or debit card to their preferred wallet. From there, users can scan the site for the best vault owners based on their verified performance and then deposit into their vault with a single click. This is what makes FNDZ different from incumbent providers. It will be one of the first simple-to-use crypto products designed for all levels of experience.
We hope you are as excited as we are about plugging the market gap for DeFi copy trading! Watch this space for more information as we continue to work feverishly towards our official platform launch.