Crypto Prop 101: Understanding the Basics of Crypto Prop Trading
6 minutes read
1. 3. 2024
Maybe you’ve heard of this new phenomenon of crypto prop trading but are unsure as to who qualifies and what it entails. How different is it from traditional prop trading firms? Let’s explore below.
Crypto prop trading refers to proprietary trading on behalf of a firm that bankrolls the trader in exchange for a share of the spoils.
Traders must first pass an evaluation stage that takes place within a simulated demo trading environment.
The most comprehensive crypto prop trading firms source liquidity directly from Tier-1 centralized exchanges, enabling traders to access a broad, deep market.
What exactly is a crypto prop trading firm, and how does it function? What advantages does it offer? With internet searches for crypto prop trading firms on the rise, it makes sense to dive into the most common queries to assist you in determining if this career path aligns with your interests.
Cryptocurrency prop trading firms have gained traction in recent years, evidenced by a 900% year-on-year surge in searches related to prop trading firms since 2022.
An increasing number of traders are now exploring this distinctive opportunity, which boasts numerous advantages over traditional day trading.
So, what precisely is a prop trading firm? How does it operate, and what benefits does it entail?
Let’s delve into the basics of a proprietary trading firm and crypto trading to help you make an informed decision
Crypto proprietary trading involves trading on behalf of a prop trading firm. In this arrangement, the prop trading firm provides the trader with substantial starting capital (such as a starting balance up to $200,000 with firms like Breakout) and allows them the freedom to implement their usual trading strategies, while permitting them to retain up to 90% of the profits.
This setup can be highly advantageous for individual traders in the crypto market who may lack access to their own capital. Retaining 90% of a larger sum is preferable to retaining 100% of a smaller amount. Additionally, the proprietary trading firm benefits from having skilled traders execute strategies on their behalf, thereby generating returns on their capital.
This is a win-win for both crypto prop trading firms and individual traders. Traders get access to capital, educational resources, and more, while crypto prop trading firms have access to phenomenal traders’. In addition, crypto prop trading portfolio diversification is essential in maximizing profits and managing risks effectively.
The opportunity to become a crypto prop trader is open to anyone, but there are still some requirements and due diligence. To be eligible for funded accounts with a prop trading firm, the trader must first undergo an evaluation process conducted within a simulated demo trading environment.
This is an opportunity to show off your skillset, get used to firm processes, and make adjustments when necessary. While many individuals have experience entering the markets on their own, allocating capital with prop firms is different. The evaluation process enables people to do it effectively.
During this stage, if the trader manages to stay within acceptable drawdown limits and adheres to the firm’s in-house risk management rules, they qualify for a full live account.
The evaluation process is designed to ensure that potential proprietary traders are capable of handling the responsibilities of a full account and to determine their ability to adapt to the firm’s in-house risk management rules, which may differ from their natural trading instincts.
Our crypto trading environment sources liquidity from one of the
best Tier 1 centralized exchanges. We believe this is a
first-of-its-kind implementation of Tier 1 exchange liquidity for an
evaluation-based crypto product.
The assets available for trading will vary depending on the financial institution and are determined by the technology utilized by the firm, as well as their liquidity sources.
Some crypto prop trading firms, for example, allow trading of Bitcoin CFDs (contract for difference) through third-party providers, although this method may lack transparency and market depth.
A CFD for cryptocurrencies allows traders to speculate on prices without taking direct ownership of the digital currencies. By trading cryptocurrencies in the form of CFDs, you get the opportunity to enter the market and invest in coins without paying the entire trade’s value.
The most comprehensive crypto prop trading firm obtains liquidity directly from Tier-1 centralized exchanges, allowing their traders to enjoy the benefits of accessing a wide and deep market that reflects broader cryptocurrency trading.
For instance, Breakout sources liquidity directly from the established Tier 1 centralized exchange platform, enabling its proprietary traders to access it’s perpetual futures contracts, as well as leveraged trades on Bitcoin, Ethereum, and other altcoins.
This provides several options for experienced traders to hit their profit target in the market. By sourcing liquidity with a Tier 1 centralized exchange, Breakout creates the most realistic crypto prop trading environment in the market.
Risk management rules are a set of trading practices established by the proprietary trading firm that traders must adhere to when trading cryptocurrencies. These rules are standard in the industry and are designed to minimize risk for both the prop trading firm and the trader.
These rules may include adhering to daily loss limits, avoiding prohibited trading practices, and adhering to maximum position sizes per instrument. The most important reason risk management in prop trading is important is so that traders can avoid breaching the drawdown rule and disqualifying their accounts. The drawdown rule is designed to protect prop firms from losing extensive amounts of capital — especially if the prop firm funds account with real money. This rule also promotes trader longevity by ensuring that risk management is at the forefront of traders’ decision-making process.
While these risk management guidelines establish some basic rules, traders generally have the freedom to execute their preferred strategies, whether it involves arbitrage, leveraged trades, swing trading, or any other approach.
The popularity of crypto prop trading has soared in recent years, possibly fueled by new regulatory clarity surrounding crypto trading and new financial instruments.
An illustration of this surge in interest in crypto proprietary trading is evident in Breakout’s recent decision to discontinue offering proprietary trading accounts for traditional markets like forex. This move came after it became apparent that over 91% of its client base was exclusively trading in crypto.
The most successful traders, when participating in funded trading on behalf of a proprietary trading firm, exhibit discipline and patience with their accounts. They establish accountability by adhering to pre-planned strategies, which prevent them from impulsively entering poor trades or blindly following other users.
Profitable crypto proprietary traders are well-versed in the intricacies of the trading platform they use and strictly adhere to its risk management guidelines. They leverage all available tools to stay abreast of market movements and trends within the industry, often keeping track of their trades using a trading journal.
These practices collectively form a disciplined approach that ensures any setbacks are not a result of negligence or incompetence.
These skills are essential for success in managing a well-funded crypto proprietary trading account.
Breakout’s crypto environment closely simulates live markets, featuring dynamic conditions mirroring real-time changes in spreads and order book depth.
