What is prop trading, and when is it expected to hit the crypto world? - CoinCodeCap (2024)

Proprietary or prop trading refers to a financial firm investing for direct market gains rather than earning commission dollars by trading on behalf of clients. Prop firms allow talented traders to pass evaluation challenges and allow them to operate a funded account with a large balance. Prop trading can be super attractive for traders who want to trade with substantial accounts without the need to invest their own money in financial trading. Let’s dive deeper and try to conclude if crypto prop trading is going to become popular soon.

Prop trading explained

Proprietary trading involves financial firms or banks trading stocks, bonds, Forex currencies, commodities, futures, or any other financial instruments with their own money, rather than using the client’s funds, to generate direct profits from the market. This approach allows institutions to capitalize on market trading opportunities through strategies derived from their own research and trading expertise. Many prop firms allow traders to trade on funded accounts if they pass the challenge, which is designed by these firms to protect their capital and ensure only the best traders pass. This participation in trading challenges usually costs a small fee depending on the funded account size, ranging from a couple of thousand dollars to hundreds of thousands or sometimes even millions of dollars. In client-driven traditional trading, profits are made from commissions and service fees. In contrast, prop trading’s gains are entirely dependent on the market’s movements and the effectiveness of the firm’s trading strategies. However, not all prop firms are legit and there are many scams and fraud that are trying to lure traders and are only collecting the challenge fees, not allowing traders to operate on a funded account. Selecting legit prop firms, especially in crypto trading, is a critical task, and platforms that provide unbiased reviews and assessments become very important. One such platform is firmfunded.com, which has developed a methodology for evaluating the legitimacy of various prop firms, ensuring prop traders select only legit and reliable props.

Pros of prop trading

There are several distinct advantages for traders opting for prop trading. The primary reason for prop trading is that these firms allow for control of substantial amounts of capital, which is very attractive for traders who have experience but need more money to go big. Traders also get a chance to test their trading skills without risking real money for a small fee. If the trader succeeds, they can generate much higher profits than they would be able to with a smaller budget. So, here are the main pros of prop trading:

• Access to large capital
• Amplified profit potential
• Less financial risk
• Chance to test one’s trading abilities on live markets without risking own money

Cons of prop trading

The cons of prop trading include strict rules set by prop firms to protect their capital and restrict certain trading strategies to be successful. For example, prop firms impose daily and maximum loss limits, typically being 5% and around 8-10%. If a trader is employing a trading strategy that has a lower win rate and higher risk-reward ratio, it is possible to breach daily loss limits before hitting profits. Another important downside of prop trading is that many firms require an audition period to get funded, which may be emotionally stressful. Prop firms also limit certain trading strategies like news trading or holding positions overnight and over the weekends. Many prop firms also prohibit EAs or Expert Advisors, which are automated trading systems. Here are some cons of prop trading:

• Strict risk limit rules
• Limited trading strategies
• Limitations on automated trading robots
• Traders first have to prove their performance, which is time-consuming
• Large trading capital encourages traders to take more, outside their risk tolerance

A brief overview of crypto markets

Crypto markets are digital asset markets, typically traded on numerous centralized and decentralized exchanges. It was all started by Bitcoin in 2009. This market has grown exponentially and thousands of cryptos are available. One distinctive advantage of crypto markets is their inherent nature of 24/7 trading possibility. Crypto markets are always active and can be traded at any time of the day and week, making them super flexible. Crypto markets are known for their highly volatile nature and have become very liquid as many major brokers started offering them for trading. These characteristics of crypto present unique opportunities for substantial returns but also have several risks including price fluctuations and regulatory uncertainties.

Prop crypto trading explored

Crypto prop trading firms leverage the principles of traditional proprietary trading while adapting to the unique dynamics of crypto assets. These firms provide traders with advanced tools, capital, and strategic support, enabling them to execute sophisticated trading strategies in the volatile markets of cryptocurrencies. Crypto prop firms like their Forex counterparts operate on a profit-sharing basis, where successful traders share a certain percentage of profits. These percentages vary from firm to firm but are generally around the 75-90% range. As crypto markets continue to grow, prop firms are increasingly focusing on digital assets, providing opportunities for arbitrage, market-making, and quantitative trading to capitalize on the market’s inefficiencies and liquidity.

The future of crypto prop firms

The future for prop firms offering capital for crypto trading looks promising, as the digital currencies markets are about to grow as institutional interest rises. The launch of Bitcoin ETFs allows institutional investors to jump in and make crypto trading even more popular. With advancements in trading technologies, regulatory clarity, and global market accessibility, prop trading firms are going to play a significant role in shaping the crypto trading landscape. Modern trading platforms enable traders to speculate on a wide range of digital assets using smartphones and mobile internet, which is super flexible. Anyone with a cheap smartphone can access crypto markets and learn trading, allowing them to take advantage of crypto trading firm offerings.

The integration of prop trading strategies with the burgeoning field of cryptocurrencies indicates a critical evolution in both the traditional and innovative crypto markets. As more firms recognize the potential for profits within the crypto space, this synergy is expected to expand.