Trading Is Notoriously Bad for New Investors, How Can Web3 Change This?

Trading is one of the most lucrative skills in today’s digital world; however, it is not as rosy as most ‘experts’ portray it. 

According to a report from eToro, 80% of its traders lost money within the first year of starting. Other data sources suggest different figures but the consensus is that most traders, especially newbies are bound to make consistent losses or eventually run out of steam before making it into the 5% – 10% of traders who are profitable. 

The situation is even more glaring in volatile markets such as crypto where turbulent periods such as Luna’s and FTX collapse caused billions of dollars to be wiped out in a span of a few weeks. For instance, during the May 2022 crypto market crash, a whopping $200 billion was erased within a 24-hour period. A huge number of these liquidations resulted in losses, with new traders catching the most knives. 

So, why is trading such a tricky endeavor and how can decentralized technologies such as the Mosaic Alpha platform reduce the hassle for both experienced and new traders? The next sections of this article will dive into the details of the shortcomings and the possibilities that lie ahead. 

Why Most Traders Are Not Profitable 

Similar to any type of business, trading requires some level of skill in order for one to make ends meet. Many are the times that traders ignore the nuances, hence the high loss rates across the board. Here are some of the pitfalls: 

• Inexperience and Lack of Market Knowledge

Most people who want to take up trading as their main or extra source of income are not conversant with how markets work. Imagine someone whose background is in health competing against a Wall Street quant; while the former stands a chance of making some profit, it is a no-brainer that the Wall Street guy probably has a better understanding of what to trade, when to trade, and how to execute effectively. 

For nascent markets like crypto, even the best sometimes lack the depth to make the right decisions or executions. This was the case with prominent firms such as Three Arrows Capital (3AC) and Celsius which went down in 2022. What about the retail traders who were caught up in the madness of it all? 

• Ignoring Risk Management 

Another important factor that traders tend to overlook is deploying proper risk management strategies or tools to hedge against huge losses. While a huge percentage of professional traders use some form of risk management tools such as stop losses or sizable allocations, only 25% – 30% of retail traders actively employ proper risk management strategies. Part of this shortcoming can be attributed to psychology biases such as FOMO, overconfidence, and loss aversion. 

• Poor Timing and Market Volatility 

Knowing when to enter or exit a trade is a very important survival skill. For instance, most of the traders who bought the crypto market top in 2021 are still under water given that BTC is trading below $69k as of writing. In addition, market volatility is a gift to some and a curse to others, especially if one is new in the game of trading. What this means is that traders ought to be aware of the market conditions when buying in or cashing out their investments. 

How Web3 Can Solve the Trading Dilemma For Newbies 

Web3 is the third iteration of the internet; unlike its predecessor, Web2, which is built on centralized infrastructures, this latest version of the internet introduces the democratization of digital resources. Anyone can access a Web3 protocol regardless of their background and leverage the available tools; this is currently the case with Bitcoin or DeFi-oriented blockchain networks that are offering financial services such as Ethereum and Solana. 

Likewise, there are some Web3 protocols which are building solutions around trading: 

Crowdsourced Investment Strategies 

For starters, it is now possible for newbies to get started with crypto trading through decentralized trading platforms such as Mosaic Alpha, which is simplifying the investment journey through managed token baskets. Instead of doing some guess work on which crypto assets to buy, this Web3 platform has created an ecosystem where professionals can curate token baskets that comprise different crypto assets. 

Those who are new to crypto trading can opt-in to these managed token baskets, allowing them to invest alongside the experienced investors. What this approach does is bridge the knowledge investment gap by reducing the leg work that newbies have to do in terms of research or the risk of burning their capital before they can even become profitable. 

Web3 Based Risk Management Tools 

There are also Web3-oriented risk management tools such as Nansen, one of the leading on-chain analytics platforms that is designed to empower crypto traders and investors with useful insights. These on-chain analytics tools are proving to be valuable in deciphering crypto data in order to develop sound investment and risk management strategies that are based on real-time data from the digital asset industry. 

Simulated Trading 

Similar to the demo accounts offered by traditional FX platforms, Web3 DEXs such as dydx have gone a notch higher to provide a testnet environment where one can trade risk-free. This can be a starting point for both experienced traders or newbies who are just joining the crypto market and are not sure about profitability. More importantly, one does not need to go through all the registration hurdles as is the case with Web2 trading platforms. Web3 solutions that offer simulated trading are sticking to the ethos of decentralization, making it possible for anyone to get started regardless of their status.