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eToro Review

eToro Review: Fine for Derivatives Traders, Not for Crypto Traders

eToro in Brief

eToro built a reputation developing innovative approaches to trading in the equities, forex and commodities markets. The company specializes in a form of derivatives called contract for difference, or CFD, which allows for highly speculative short-term trading on the price changes in various assets without having to own the assets themselves.

eToro also pioneered the concept of “social trading”. This system lets clients manage the learning curve and time commitment of day-trading by automatically adapting the investment strategies of more experienced traders.

Bitcoin trading arrived on eToro in 2013 and has since expanded to support ten of the largest cryptocurrencies.

Pros

  • Established, well-respected FinTech company.
  • Ten high-volume cryptocurrencies.
  • Many trading offerings for risk-tolerant traders.

Cons

  • Not available in the US, Canada or Japan.
  • All coins stored in eToro’s system, not individual wallets.
  • Cannot deposit or withdraw cryptocurrencies.
  • No margin trading of cyptocurrencies.

What is eToro?

History

Israeli entrepreneurs Yoni Assia, Ronen Assia and David Ring founded eToro in 2007 to simplify foreign exchange, or forex trading. Rather than presenting data in highly technical, chart-based interfaces, eToro went with a simplified gaming-based interface.

eToro original interface
Source: eToro

“These days Forex trading platforms are simply too complicated,” Ronen Assia said in the announcement. “Even individuals who are eager to join the online Forex market are turned off by the density of these platforms.”

In an interview several years later with The Times of Israel, Yoni Assia said that “I’ve always been fascinated by the idea of online trading… We started with a vision of trying to make it easier for online traders to succeed, and when we saw there were no solutions, we started eToro.”

Today, eToro has more than nine million clients in 140 countries. Besides foreign exchange CFDs, eToro’s clients can trade CFDs in stocks, commodities, indexes and other traditional investment classes — plus cryptocurrencies.

Social trading

In 2010, eToro launched its OpenBook social trading platform. The system lets new clients follow more experienced traders and learn from their trading strategies. To encourage two-way engagement, eToro pays the experienced traders whenever other traders copy their trading strategies.

Yoni Assia explained in the company’s press release (available at Finance Magnates) that social trading transforms “the lonely art of investing into an exciting collaborative activity. Everyone curious about financial markets can now witness trades as they happen, and watch how the experts plan their next move.”

The fintech conference Finovate tapped eToro for a Best in Show award for the way OpenBook encouraged collaboration and helped novice traders gain experience.

MIT Media Lab researcher Alex Pentland featured eToro’s social trading platform in his book Social Physics: How Good Ideas Spread — The Lessons from a New Science. Drawing on 10 million trades, Pentland found that socially-engaged traders saw a 30% better return on investment than solitary traders.

Introducing Bitcoin CFDs

Most of the trading on eToro does not involve buying and selling assets. Instead, trades are made in a class of derivatives called contracts for difference, or CFDs. A CFD is an agreement made between two parties to pay the change in the price of the underlying asset over a period of time.

These highly-leveraged, speculative derivatives are more suitable for experienced short-term traders rather than novices or long-term investors.

In early 2014, eToro added Bitcoin CFDs to its market in response to cryptocurrency’s growing popularity and the technical learning curve that it demanded from investors.

As a company spokesperson said to Coin Telegraph at the time, “If you want to invest in Bitcoin and you’re not a computer geek, you don’t really know where to start.”

Expanding crypto trading

eToro’s cryptocurrency support ballooned in 2017 as it added more altcoins. Ethereum joined the platform in June 2017 and, most recently, EOS became the tenth cryptocurrency listed in April 2018.

The eToro crypto markets also began transitioning from a derivatives market to an asset-based exchange. In September 2017, eToro locked the leverage of cryptocurrency buy orders at 1X. This appears to be a workaround that allows their system, designed to support leverage-based trades of derivatives, to buy and sell assets. In effect, locking the leverage setting at 1X makes the trade a pure buy-sell transaction.

When you buy Bitcoin or an altcoin, eToro buys the same amount from third-party exchanges and holds it under your name, but not in an individual wallet. eToro’s cryptocurrency holdings are all held in the company’s wallet and assigned to you in their accounting system. The downside to this approach is the inability for clients to deposit or withdraw cryptocurrencies. A client wallet is under development, but eToro has not announced when it will be available.

Leadership and investors

eToro Leadership
Source: eToro

Two of eToro’s three co-founders are still part of eToro’s leadership team. The third, David Ring left his position as eToro’s chief technology officer after eight years with the company. He is now the co-founder and vice president of R&D for the digital wallet company Colu.

  • Yoni Assia, co-founder and chief executive officer: Prior to founding eToro, Yoni Assia was a co-founder of CDRide, a wireless video solutions company. He also serves on the board of Israeli investment house Meitav Dash.
  • Ronen Assia, co-founder and chief product officer: An industrial designer, Ronen Assia guides the development of eToro’s user experience.
  • Shalom Berkovitz, chief financial officer: Berkovitz has held CFO and CEO positions at several Israeli companies from Golden Pages Israel to DSNG Media Group.

In March 2018, eToro closed its Series E investment round, raising $100 million from China Minsheng Financial and other investors. In part, Assia explained, the new financing “will help us to continue our market leading work in blockchain research and the development of digital assets.” Other large investors include Sberbank, Spark Capital and PingAn.

Protecting customers’ coins

Legal and regulatory compliance

One of eToro’s main selling points is its integration into Europe’s regulatory system. Since it started out as a derivatives market for traditional asset classes, it has the existing relationships with regulators that many cryptocurrency firms lack.

Most eToro clients are customers of eToro (Europe) Ltd, which is registered in Cyprus and regulated by the Cyprus Securities Exchange Commission (CySEC).

UK-based eToro (Europe) clients with at least $5,000 in their accounts may apply to become customers of eToro (UK) Ltd. This subsidiary is registered in London and subject to oversight from the Financial Conduct Authority (FCA).

“Getting our social investment network FCA regulated is a major milestone for eToro,” Yoni Assia said. “As such we take transparency and user protection very seriously… Having the FCA stamp of approval makes it official.”

Coin listing policies

The cryptocurrencies eToro lists must have large market caps and high liquidity. At the moment, that means at least a $1 billion market cap and daily trading volume of at least $20 million.

Network security

Like many financial companies, eToro does not elaborate on its security systems. The trading platform holds all cryptocurrency assets centrally rather than in clients’ digital wallets which does present some risk. However, eToro’s experience as a derivatives market long predates its entry into the cryptocurrency scene. The company already had the required security systems and processes in place and did not need to play catch-up the way pure crypto startups had to do.

Customer support

A self-serve support site will answer most of the general questions eToro’s customers might have. Clients with more specific issues can generate a support ticket.

Many of eToro’s investment options, both in cryptocurrencies and in more traditional offerings, are highly speculative and require a level of expertise that novices lack. eToro has developed several resources that help new clients get up to speed quickly.

The eToro Trading Academy provides a number of e-courses, video tutorials and webinars. New clients also get access to a trading simulator that lets them explore the eToro system and try their hand in the different markets without placing their assets at risk.

In addition, eToro’s social trading features let new clients learn how different trading strategies work by linking their own investments to those of top-performing traders.

eToro reputation

Since launching in 2007, eToro has established itself as the market leader in social trading and recently received recognition at FinovateEurope 2017 with the Best of Show award. A year earlier, business news network CNBC named eToro one of the 10 hottest fintech startups.

How to Join eToro

eToro geographic restrictions
Source: eToro

Who can join?

eToro operates globally. However, regulatory restrictions keep eToro from serving several countries including Albania, Canada, Japan, Serbia, Turkey and the United States.

In compliance with European and UK sanctions policies, residents of Cuba, Iran, North Korea, Sudan and Syria cannot use eToro.

Verification

In order to comply with European anti-money-laundering regulations, all eToro clients must be verified in order to register their accounts.

Individual accounts

In addition to verifying their mobile phone number through SMS authorization, eToro clients must provide a government-issued proof of identity, preferably a passport, as well as proof of address.

The verification process can take “a few days” to complete after which eToro sends clients an email and a green check mark on their profile.

Business accounts

Upon creating a new account, most eToro clients are classified as retail clients for regulatory purposes. Classification as a professional client requires compliance with a list of criteria found on eToro’s Regulation and License document.

What Can You Trade on eToro?

Cryptocurrencies

Ten cryptocurrencies are available on eToro: Bitcoin, Bitcoin Cash, Dash, EOS, Ethereum, Ethereum Classic, Litecoin, Neo, Stellar and XRP.

Fiat currencies

The US dollar is the only fiat currency eToro supports, although it accepts deposits in Australian dollars, British pounds, Canadian dollars, Chinese yuan, Euros, Japanese yen and Russian rubles.

Currency exchanges

eToro has traditionally focused on the leveraged trading of derivatives rather than trading in actual equities or commodities. With cryptocurrencies, however, you can buy, hold and sell the actual digital currencies. The only thing you can’t do is move those purchases into another wallet outside the eToro platform. This weakness gets fixed later in 2018 when eToro rolls out its digital wallet system.

Advanced trading

eToro does not support leveraged trading of cryptocurrencies themselves. Cryptocurrency short orders and the social trading system, however, are all based on CFDs rather than the actual coins. In those limited cases, eToro clients can take leveraged positions in crypto.

CopyFunds in cryptocurrencies

CopyFunds are diversified pools of CFDs that eToro creates to give clients ways to manage long-term risk. An eToro investment committee regularly reviews each CopyFund to rebalance its holdings. Clients must invest at least $5,000 in each CopyFund they join.

“We have seen an increasing number of our clients looking for a simpler way to access investments in cryptocurrencies,” Yoni Assia said when eToro introduced two CopyFunds built around the digital currency markets. “So we have launched an automatically rebalanced investment strategy to simplify their investments into this new exciting asset class.”

The Cryptocurrency CopyFund tracks price moves in Bitcoin and Ethereum. The Crypto CopyFund tracks a broader slice of the market with cryptocurrencies that have market caps over one billion dollars and daily trading volumes above the $20 million mark.

Trading Tools and Fees

Trading interface

The days of the cartoonish gaming interface are long gone. Today’s eToro still aims for simplicity in the way it displays market data, but all of the tools experienced traders expect are there.

eToro trading interface
Source: eToro

The cryptocurrency section presents card-based snapshots of all ten markets. Clicking on any one of them will take you into more detailed presentations.

eToro crypto markets
Source: eToro

Here you will find stats and graphs showing the market’s current and historical performance.

eToro market charts
Source: eToro

The chart lets you get deeper into the trends. Analytical tools let you mark up the chart, adjust the formatting and apply different analytics to the data. Experienced traders can dive even deeper with eToro’s ProCharts which displays multiple instruments at a time.

eToro trend charts
Source: eToro

Mobile app support

eToro apps
Source: eToro

The highly-rated eToro apps have a 4.3 star rating in the Google Play Store and a 4.6 star rating in Apple’s App Store. Both apps support all of the features found on the eToro website.

Deposits and withdrawals

Fiat currencies

Note that eToro conducts all activity in US dollars and dollars are the preferred currency for deposits and withdrawals. Clients also can make deposits and withdrawals in Australian dollars, British pounds, Canadian dollars, Chinese yuan renminbi, euros, Japanese yen and Russian rubles. These non-USD transactions are subject to conversion fees from eToro.

Clients who use other fiat currencies must first convert their funds into one of the supported currencies.

There are ten ways that eToro clients can deposit fiat currency into their accounts, although only wire transfers apply to everyone. British clients can use credit or debit cards, Neteller, Skrill or Webmoney. German customers can use Giropay or Wirecard while Russian clients can use Yandex and Hong Kong clients can use China Union Pay.

Only residents of Luxembourg can make deposits with PayPal.

There is a minimum size for each deposit that varies between $200 and $10,000 depending on local regulations.

Total deposits for eToro’s unverified clients are limited to $2,250.

Withdrawals can be made with credit or debit card, PayPal or bank transfer. eToro requires each withdrawal to be at least $50. The withdrawal fee is $25.

Digital currencies

There are no deposit or withdrawal fees since you cannot deposit cryptocurrencies into or withdraw cryptocurrencies out of an eToro account. That’s because eToro is still in the process of implementing a digital wallet system.

When you buy Bitcoin on eToro, the company does purchase that amount of Bitcoin and puts it into an account with your name. But that’s an entry within eToro’s accounting system, not the blockchain. When eToro rolls out its wallet system in 2018, deposits and withdrawals will be possible and may incur fees.

Transaction fees

eToro overnight fees
Source: eToro

eToro generates most of its revenue from the spread between buy and sell prices rather than on transaction fees.

Most of eToro’s trading products are meant for extremely short-term trading rather than long-term investment. Clients who trade in CFD-based offerings, including short positions on cryptocurrencies, will be assessed overnight fees. These fees can range from 0.47% on Bitcoin to as little as 0.000022% for Ripple.

Other fees

An inactivity fee kicks in once an account with deposits has been inactive for more than 12 months. Each month, eToro will assess a $5 fee against the client’s balance until the balance reaches zero or the client logs in again.

Earning money from eToro

As part of the social trading platform’s incentives, eToro lets traders join the Popular Investor program. Traders who develop large followerships are treated like managers of investment funds. When followers copy a Popular Investor’s trading strategies, those assets “under management” earn the Popular Investor fees up to 2% on the assets. Popular Investors also get rebates on spreads up to 100%.

The referral program lets eToro clients earn $20 bounties (up to a lifetime total of $200) whenever they refer new customers.

An affiliate program, called eToro Partners, lets financial advisors and others earn commissions on customer referrals.

Final Word

eToro built a strong reputation among derivatives traders since its founding twelve years ago. Although it supported Bitcoin CFD trading as far back as 2014, eToro only began ramping up its cryptocurrency operations last year. That work in progress is most apparent in the lack of individual digital wallets, which prevents eToro clients from transferring crypto assets in and out of eToro’s systems.

For new traders

Now that eToro allows the buying and selling cryptocurrencies directly, new clients can trade those assets without having to face the steep learning curve of CFD trading.

Should they want to test the CFD waters, eToro’s educational resources and the social platform itself provide an easy path for novices to get up to speed.

For advanced traders

eToro may be best for experienced traders in traditional asset classes who want to try their hand at cryptocurrencies. Shifting their trades within eToro from commodities or equities-based CFDs to cryptocurrencies is seamless.

People with extensive crypto holdings, however, will be frustrated by eToro’s lack of digital wallet support.

Christopher Casper

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