Introducing A Max Cap On Initial Followers’ Equity For Strategy Safety And Risk Aversion

November 5, 2020
blog primexbt safety - Introducing A Max Cap On Initial Followers’ Equity For Strategy Safety And Risk Aversion

Covesting, as a peer-to-peer network, is continuously evolving and responding to the requests from traders, as well as drawdown data, market conditions, and much more.

To reduce overall risk for Followers’ that use the Covesting copy trading module to follow other traders on PrimeXBT and promote a safe environment for all clients, we have introduced a max cap on “Initial Followers’ Equity.”

Why A Maximum Equity Cap Is Necessary And Helpful

The Covesting platform lets investors and traders from all walks of life follow Strategy Managers who regularly demonstrate strong performance and take some of the stress, time, and talent that is generally required out of surviving financial markets successfully.

However, large equity volumes following the same Strategy Manager can bring with it added risk that the maximum follower equity cap was designed to address. Here are the three primary ways that the max Initial Followers’ Equity cap can help prevent unwanted drawdown:

  • A maximum limit in Initial Followers’ Equity reduces the risk associated with drastic price changes and intraday market volatility.
  • It also limits possible losses in Strategies that don’t adhere to strict risk management or overexpose themselves through careless margin allocation.
  • It encourages Covesting users to diversify their portfolios and, therefore, reducing the risk associated – similar to how a diverse portfolio of trading instruments can help to reduce overall risk and maximize reward exposure.

The cap on total Initial Followers’ Equity is currently set to 25 BTC.

What A Maximum Cap On Initial Followers’ Equity Means For Followers

Strategies are able to be followed with up to 25 BTC in Initial Followers’ Equity. What this means is that although a Strategy might have accrued substantially more Follower equity by trading, it is the Initial Follower’s Equity that counts toward the limit imposed.

If at any point Initial Followers’ Equity falls below 25 BTC due to other Followers stopping their followings of the Strategy, then new Followers can finally begin to follow the Strategy yet again, until the Initial Followers’ Equity returns to 25 BTC or more.

For example, a Strategy has 150 followers, with a total Initial Followers’ Equity of 20 BTC. A Follower with 10 BTC wants to follow. They will need to follow with only 5 BTC instead, allocating the remaining 5 BTC toward another Strategy Manager. This will promote portfolio diversification, and therefore lower overall risk across the Covesting platform.

If that same Follower does indeed add 5 BTC in equity, no new followers can join the Strategy as the Initial Followers’ Equity will have reached 25 BTC. Continuing with the same example, if the Follower takes 2.5 BTC back from the initial 5 BTC they deposited, this leaves another 2.5 BTC in Initial Followers’ Equity open and the Strategy can be followed again.

What A Maximum Cap On Initial Followers’ Equity Means For Strategy Managers

This does mean that Strategy Managers are capped at 25 BTC in Initial Followers’ Equity, but there are a few caveats to this.

Strategy managers can build that Initial Followers’ Equity into substantial capital sizing through their successfully executed trades. It is only the Initial Followers’ Equity that is capped to be undeniably transparent.

Because the maximum Initial Followers’ Equity limit is imposed for safety and risk reasons, in the future, Strategy managers that meet certain conditions will be able to request an account review, and if success and risk metrics meet PrimeXBT’s internal requirements regarding safe trading practices, select funds could be eligible for a limit increase. For example, the larger the initial deposit made by the Strategy Manager themselves could unlock a higher imposed limit on Initial Followers’ Equity,

The verification procedure also once established may involve passing a KYC check or providing proof of relevant trading experience for a full assessment. More details regarding requirements and the limit increase procedure will be made available in the future.

A Safer And More Profitable Covesting To Result Of Max Initial Followers’ Equity Cap

The imposed limits aren’t restrictive. Instead, they encourage Followers to get the most out of Covesting by spreading equity around and, therefore, lower risk and increase reward exposure through a well-diversified Strategy portfolio.

It also ensures Followers aren’t ever putting too much capital on the line with any one given Strategy Manager. And it forces Strategy Managers to work harder on growing ROI and keeping performance consistent to ensure total account equity continues to climb.

The Initial Followers’ Equity cap, the five-star system, and the fully transparent global leaderboards packed with success and risk metrics are just some of the many ways PrimeXBT protects traders from unexpected market volatility.

For more information, please visit our help center page on the topic.

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