I’d like to propose a couple of ideas for discussion.
As usual, the purpose of this post is to see if other people in the team/community agree that these could be good features to add to our roadmap, especially in light of the upcoming bull run
As we anticipate a surge in retail traders entering the markets, historical data indicates that a significant majority (85% or more) struggle with managing their investments and making profits through active trading. The allure of higher and faster returns in the crypto market often leads retail traders to invest without adequate expertise, resulting in substantial losses. The pushed narrative of ‘passive income’ and ‘generational wealth’ during bull runs intensifies this challenge.
In both traditional finance (TradFi) and Web2, a common solution to this problem has emerged — services that enable retail traders to delegate their funds to professionally managed portfolios or expert traders. Established companies like Blackrock and innovative startups such as Nutmeg and eToro have successfully capitalized on this business model, providing a proven framework where retail traders willingly pay for services that promise higher-than-average returns.
How Alpaca Finance Can Help:Since inception with our LYF product, Alpaca has been offering investors tools and products to help them maximise their returns. Building on the success of our existing tools and brand proposition, particularly with the launch of AV products, we are well-positioned to enter this space with confidence. Alpaca Finance has already established infrastructure that can be repurposed to offer a similar service in the crypto space:
- Our AVs and AF2 are adept at pooling investors’ funds.
- The Perps platform has proven efficient in facilitating leveraged trading.
- Months of data support the profitability of these services, generating substantial fees.
1. Copy Trading:
Our platform could facilitate ‘copy trading,’ allowing professional traders to showcase their profitable and responsible trading skills. Retail investors can then follow and copy these traders, with the professionals earning a percentage of profits on successful trades. This aligns with our commitment to empowering investors while generating additional revenue through transaction fees.
2. Managed funds:
Alpaca Finance can introduce ‘managed funds.’ Users deposit funds into a pool, and a designated ‘fund manager’ operates on behalf of the investors. This model has proven successful in Web2 and can seamlessly translate into the crypto space.
Clarifications and further thoughts
The proposed features aim to attract two distinct user groups:
- Retail Traders Seeking Passive Income:
- Targeting retail traders who seek additional income without active involvement in trading decisions. These users are looking for a seamless solution to delegate their investment decisions to professionals, emphasizing simplicity and profitability.
- Professional Traders Seeking Profit Maximization:
- Attracting skilled and professional traders by offering them an opportunity to monetize their expertise. These traders, who may already manage their portfolios, can now expand their revenue streams by providing their services to other investors.
To ensure our proposal is well-informed and positioned strategically, it’s crucial to analyze existing competitors in the market. Notable players in the space include:
- Bybit - Copy Trading:
- dHedge has been pioneering the model of managed funds, allowing users to deposit funds into pools managed by skilled traders. Analyzing dHedge will provide insights into successful implementations, potential challenges, and user expectations in the managed funds space.
- WunderTrading focuses on copy trading, offering a platform for users to follow and replicate the trades of professional traders. Evaluating WunderTrading’s features and user feedback will inform our strategy to deliver a competitive and innovative solution.
Risk Mitigation Strategy:
To ensure responsible trading practices and protect the interests of all participants, Alpaca Finance will implement robust risk mitigation measures. These measures include adopting risk management rules inspired by proven practices in proprietary trading firms. Examples of such rules include:
- Traders/Funds can’t risk more than 1% of their balance in a trade
- Traders/Funds can’t lose more than 5% in a day
- Traders/Funds must trade with a Stop-loss
- Traders/Funds can’t revenge trade, gamble with strategies such as martingale etc
Marketing and Adoption Strategy:
In addition to traditional marketing efforts, the success of the proposed features hinges on attracting skilled traders to our platform. To achieve this, we can implement targeted strategies:
- Trader Incentives:
- Consider reimbursing trading fees for individuals who successfully pass a predefined trading challenge and become approved as professional traders. This approach not only attracts skilled traders but also ensures a commitment to responsible trading practices.
- Higher Kickbacks for a Limited Time:
- Offer enhanced kickbacks on profits for professional traders during an initial period (e.g., 5% instead of 2.5%). This limited-time promotion aims to incentivize early participation and create a competitive edge in attracting and retaining professional traders.