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Social Investing into the Web3-verse
Social Media Takes Center Stage of Investing
In the 21st century, a remarkable phenomenon unfolded before our eyes: the explosion of social networks. With the widespread availability of Internet connectivity, people began immersing themselves in the online world, forging connections and engaging with one another. It all started with the increasing accessibility, affordability, and prevalence of the Internet during the early century. As more individuals embraced the digital realm - connecting, discovering information, and expanding their business. It was during this era that visionaries recognized the immense potential for a new form of interaction - one centered around sharing: updates, photos, videos, events, and so much more. This marked the birth of influential social networks like Twitter, Facebook, and a multitude of others. As its core, this transformative development emphasized the power of sharing among individuals.
Eventually, the culture of sharing extended its reach into the realm of investing and trading. Traders began exchanging information and providing insights on potential trades, strategies, and market trends. This gave rise to the concept of social investing, or social trading, where traders openly share their trading activities, allowing other investors and individuals to follow and replicate their strategies. To facilitate this collaborative approach, social trading platforms were introduced, streamlining the process of sharing and enabling others to easily track and emulate the trades of their peers. This innovative approach marked the advent of a new era in trading.
When it comes to investing in financial markets like stocks, forex, and cryptocurrencies, it’s essential to possess comprehensive knowledge and experience. Staying abreast of relevant news events that impact the landscape and being able to interpret charts, analytics reports, and trends are crucial skills. Unfortunately, it’s disheartening to see many individuals continuing to suffer financial losses simply because they lack the necessary knowledge and timing for successful investments. This is where social investing comes in handy in mitigating such challenges.
What is Social Investing?
Social investing operates in a similar fashion to social networks, with one key distinction: instead of exchanging selfies or pictures of meals, individuals on a trading network share their trading ideas and charts. Within these platforms, traders engage with one another, observe the trading outcomes of experienced professionals, and collaboratively discuss real-time market conditions. It’s a dynamic space where interaction flourishes and collective brainstorming takes place to enhance strategies.
In social investing, as a retail investor or less experienced trader, your financial decisions are influenced by the valuable insights and content generated by skilled investors, which is sourced from reliable platforms. In simpler terms, when you come across a successful trader whose trading strategy resonates with you, you have the option to start following their activities and replicate their trades. This allows you to leverage the expertise and track record of these accomplished traders as a guide for your own investing endeavors.
Social investing operates on a simple yet powerful principle, revolving around two key players: the sharing trader and the following trader. The experienced trader openly shares all their activities, allowing the beginner to learn and potentially profit or loss based on the experienced trader's actions. Social trading takes this concept to a larger scale, where seasoned traders share their trades on dedicated platforms, granting other traders the opportunity to follow and emulate their strategies.
Frequently, we hear that the key to making profits in the market lies in possessing exclusive knowledge not available to others. This principle seems to contradict the essence of social investing, leading to questions like, “Does social investing actually work?”, or “Is social investing genuinely profitable?” As with any approach, it’s crucial to comprehend the advantages and drawbacks before considering it for your own investment endeavors.
Pros of Social Investing
As previously mentioned, social trading involves two parties, and both can reap significant benefits from this practice:
For the trader who shares their trades, there is a chance to generate additional income. The trading platform rewards the sharing trader with bonuses and money, which are dependent on the number of followers who replicate their deals. Additionally, as their skills gain recognition, their popularity may soar, opening up even more opportunities for success.
On the other hand, the people who follow can gain valuable insights by observing more experienced traders. By shadowing their strategies, they can learn new and effective trading techniques. Moreover, the ability to copy the trades precisely as the experienced trader executes them allows the follower to achieve comparable results.
In essence, social trading platforms offer a gateway to increased earning potential and the opportunity to acquire essential trading knowledge and expertise.
Cons of Social Investing
Social investing, while offering enticing opportunities, also comes with several potential drawbacks that investors need to be mindful of.
One of the main concerns is the risk of following the crowd blindly. Amid the allure of social platforms, there's a tendency for investors to mimic the actions of popular traders without conducting thorough research. This herd mentality can lead to impulsive decisions and undermine sound investment strategies, potentially resulting in suboptimal outcomes.
Furthermore, the abundance of information on social trading platforms can lead to information overload. With numerous traders sharing their insights and opinions, investors may struggle to sift through the noise and identify reliable sources of information. This overload of data can and emotionally influence cloud judgment and hinder effective decision-making, potentially impacting investment performance.
We have touched upon a few key points to bear in mind when assessing the benefits and risks of social investing. It is essential to recognize that there are various aspects to consider in this realm, and prudent consideration of these factors will enable investors to make well-informed decisions.
What’s in Web3 now?
In the traditional financial markets, the power of online communities has been evident, as illustrated by the GameStop short squeeze led by the subreddit group. In January 2021, WSB orchestrated a short squeeze on GameStop, a struggling brick-and-mortar video game retailer that was heavily shorted by hedge funds. By rallying together, individual investors bought large amounts of GameStop stock, causing its price to skyrocket. This unexpected surge forced some hedge funds to close their short positions at significant losses, while the GameStop stock reached unprecedented heights.
The GameStop short squeeze showcased the potential of collective action in traditional financial markets, highlighting the impact that coordinated efforts from retail investors can have on challenging established financial institutions. This event brought increased attention to the power of online communities in shaping market narratives and influencing investment strategies.
Moving ahead, we foresee social investing progressing beyond the mere exchange of trading ideas on online platforms. Advancements in blockchain and Web3 technology are creating new opportunities, previously unavailable to retail investors, reminiscent of the past investment clubs that pooled funds to purchase stocks. This year, we witnessed an impressive feat as ConstitutionDAO, an organized group of users, successfully crowdfunded $47 million in Ethereum to bid on an original copy of the United States Constitution. Although they were ultimately outbid by a billionaire hedge fund manager, the collaborative effort and swift fundraising were noteworthy. Another notable example is FlamingoDAO, which utilizes pooled crypto funds to bid on NFTs.
However, there are still many limitations for applying social investing/trading to retail investors in the industry. Crypto is a specific field, characterized by market volatility of finance, and flexibility and continuity of technology. This development turned into a barrier, greatly affecting the number of interested users and using DeFi products.
Additionally, the absence of centralized authorities and intermediaries means that users are solely responsible for managing their assets. The lack of user-friendly interfaces and comprehensive educational resources can hinder the broader adoption of DeFi, as many potential users may find it challenging to understand the intricacies of the technology.
We’re some OGs in space, who also fully understand these issues. We have published a more detailed article on the whole vision of deFarm.
So, how does Social Investing work on deFarm?
deFarm is a social investing layer for derivatives-focused on-chain vault asset management protocol. deFarm’s goal is to unleash the potential of communities, enabling easier and more efficient on-chain investing for all individuals. Adding a social layer into a DeFi product, deFarm introduces a novel approach to investing that empowers individuals from all walks of life.
One of the most significant ways deFarm can change the social investing landscape is by democratizing access to sophisticated financial products. Traditionally, derivatives have been the domain of institutional investors and high-net-worth individuals due to their complexity and high entry barriers. However, deFarm's user-friendly interface and community-centric model break down these barriers, allowing retail investors to participate in derivatives trading with ease, along with pro traders. This shift in accessibility opens up new avenues for diversification and risk management, empowering ordinary individuals to take control of their financial future.
Here’s a simple illustration for more understanding why everyone should be involved in.
In addition to democratizing access and enhancing community involvement, deFarm brings increased transparency and security to social investing. With the use of blockchain technology, all investment decisions, strategies, and transactions are recorded immutably on the public ledger. This transparency builds trust among users, assuring them that their funds are being managed with integrity and accountability. The protocol's smart contract-based infrastructure also mitigates counterparty risk, reducing the dependency on traditional intermediaries and ensuring a more robust and secure investing environment.
The influence of the crowd will undoubtedly surge as crypto and Web3 continue to expand. As we continue to evolve and gain traction, we can pave the way for a more inclusive, collaborative, and efficient investment ecosystem that benefits investors of all backgrounds and levels of expertise.
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