Mega-star KOL strategy signal annualized -95%, is the asymmetric risk of the crypto dream island wrong?

On the OKX Trading Signal Platform, a superstar KOL saw a -95% annualized return in a 30-day backtest of their strategy, sparking discussions and debates in the community. What are the key points to note when using strategy services that claim to help investors trade effortlessly?

Famous KOL's Strategy Trading Hits a Wall! 30-Day Backtest Annualized -95%

The famous KOL's signal on OKX resulted in a total subscriber loss of $930,000 in USDT, with a 30-day backtest annualized return of -95.86%. The signal only focused on two trading pairs: BTCUSDT perpetual and ETHUSDT perpetual.

Due to the poor performance of following specific signals, many have begun to discuss whether people understand the risks of such products and the information transparency and responsibility of signal creators.

What is a Signal Strategy?

A signal strategy allows traders to showcase customized digital currency trading strategies on a platform. Traders can fully control their designed algorithms, and the strategy will be executed in real-time with high performance and reliability.

How Does Signal Strategy Profit?

OKX's signal strategy platform is divided into free, monthly fee, and profit-sharing schemes, allowing traders to share their strategies and have the opportunity to earn profits. Taking the aforementioned famous KOL as an example, they adopt a profit-sharing model for subscriptions. If users create strategies through the KOL's signal, 20% of the profits will be shared.

Renowned Researcher: Asymmetric Risks in Strategy Copying

Researcher Yu Zhe'an expresses a conservative view on trading features like "strategy copying."

He believes that if the strategy provider and subscriber are not mutually interested or do not share the risk of losses, they should not make decisions on behalf of others.

He cites the book "Skin in the Game: Hidden Asymmetries in Daily Life" to illustrate situations of symmetric and asymmetric risks.

An example of symmetric risk: "Most final payments in cases are usually tied to inspection, and various products usually have warranties or liability insurance, which is designed to make risks more symmetric."

An example of asymmetric risk: "A celebrity with children and assets overseas who can escape at any time advocating for war."

In his view, "strategy copying" is a design of asymmetric risk. It is understood that since people do not know how much of their own positions the strategy signal creator is trading with, when subscribers invest significantly more than the strategy signal creator, asymmetric risk may occur; because subscribers bear a larger financial risk.

Ways to Address Asymmetric Risks?

Researcher Yu Zhe'an believes that making the interests of strategy providers and subscribers mutual interest might be a solution.

"In principle, if the strategy provider profits, they should share the profits, and if they incur losses, they should share them, or even more," he said.

He gives an example: if the total amount of subscribing to a strategy is $1 million, the strategy provider must invest 10% of the total amount to qualify for a 20% profit-sharing with users, increasing proportionally.

Additionally, the profit withdrawal of strategy creators should be subject to time limits. Subscription earnings must be executed in the strategy for at least six months before gradually withdrawing. He even believes that even if the risk isn't asymmetric, users will still subscribe, so improving user quality should drive exchanges to make improvements.

Celebrity Entrepreneur: Rules Design Need Improvement

Entrepreneur Fenix Hsu also agrees with the issue of misaligned interests between strategy providers and users, extending it to the APR distortion problem in the DeFi world.

For example, the AMM strategy of UniSwap v3, because the strategy provider does not specify whether their APR is the real APR or FeeAPR. "Because the strategy provider does not specify whether their APR is the real APR or FeeAPR." Therefore, users often invest based on high APR figures, leading to capital losses. On the other hand, the strategy providers focus only on high fee annualized returns, leading to misaligned interests.

Fenix Hsu proposes two improvement suggestions: one is regarding the calculation method of real APR as mentioned above, and the other is setting a reasonable profit-sharing mechanism for strategy providers.

"Half-Life Profit-Sharing" Mechanism

Fenix Hsu states that the "High water mark" profit-sharing mechanism commonly used in hedge funds is often used, meaning that profits are shared only when the fund's net value exceeds its historical high. However, this premise requires users to have consistent in and outflows and calculations, making it challenging to implement. However, in the Web3 world where users can enter and exit at any time, and there may be various equity token situations, this mechanism becomes difficult to calculate.

Using his startup topic Teahouse Finance as an example, Fenix Hsu suggests implementing the "Half-Life Profit-Sharing" mechanism to extend the time for strategy providers to take profit-sharing. When a strategy performs poorly, the earlier profits are used to cover losses, holding the strategy provider accountable for their long-term performance, ensuring mutual interests are tied effectively.

Discussion: When KOLs Have to Take More Responsibility, Will People Still Play?

Despite blockchain financial services offering many innovative ways due to their freedom, at its core, it remains the same. However, in traditional finance, mature financial regulations have restricted many things.

The cryptocurrency investment field is still in a regulatory arbitrage bonus period, with many undefined and difficult to govern aspects. Therefore, investment funds, investment advisors, and similar roles have not been regulated under current laws.

Virtual asset trading commodities and services have flourished, with exchanges and lead KOLs playing mutually beneficial roles. Exchanges profit from users' high-frequency trades, while KOLs essentially act as investment advisors, and even fund managers, sharing profits with users and earning commission rebates.

When performance is excellent, the community reveres KOLs as stars; when performance is poor, they are criticized, demanding more rigorous systems to protect investors. However, when KOLs realize they must be accountable for their performance, or even have their profits restricted, will they still want to play? Will exchanges, as rule-makers, actively spoil the KOLs' appetite?

"Should the cryptocurrency community grow up? Or should everyone continue to stay in Neverland as children?"