The Risks of Trading Bitcoin on eToro
If you want to buy or sell Bitcoin, you'll need an exchange/broker. Generally there are two ways of doing this:
- Cryptocurrency exchanges allow you to buy and sell real coins (e.g. if you buy some Bitcoin - you own it). See this guide for some examples.
- Most brokers don't allow you to buy Bitcoin directly. Instead they allow you to invest in it via CFD (Contract for Difference), which means you're not buying the coin itself - the exchange buys it on your behalf, and you have to pay a daily fee to hold it. Some brokers like eToro and IQ Option are starting to take the middle ground, where you can invest in Bitcoin and not pay a daily holding fee.
There are pros and cons to both of these, where pro-exchange arguments will be based around low fees & ownership of the coins, and pro-CFD arguments for reasons such as better user interfaces, better regulation & better risk management (e.g. automated leverage).
eToro is a cross-over between these two. It allows you to buy Bitcoin directly (not via CFD), but it also has a great user interface for things like opening/closing orders and has unique features such as the ability to copy other traders. It does however have many hidden risks which you should be aware of, this guide will explain some of these.
This guide will focus on risks, see this guide for a tutorial on using eToro.
We encourage you to read this entire guide before trying eToro to understand the potential risks; but if after reading this you still want to try it out, here's a link (we'll get some money if you sign up via this).
Is Buying & Selling Too Easy?
When you first use an exchange, you'll find lots of guides and tutorials on how you should be storing your Bitcoin. The general consensus is that once you buy it, you shouldn't keep it on the exchange - it should be moved to a wallet. The most common reason is that the exchange might run away with your money, but there's a second less dramatic one; that by moving your Bitcoin to a wallet, it makes it harder to sell it.
This might seem counter-intuitive, but context is important here. The user interface on eToro is much more user-friendly than most exchanges or CFD brokers, and there are many online reviews stating this causing beginner traders to see eToro as a good platform to try out. When these beginners first trade they're inevitably going to open positions that don't go well and lose them money.
When trading stocks, scenarios where the price will move more than 10% in one day are very rare. In cryptocurrencies they are not. Given the right environment, any cryptocurrency can easily drop 10% or more in a single day (and has done many times). For this to happen to a beginner, the fear of losing more money will often give them a very strong urge to sell. On eToro it's possible to do this in just a few seconds, to close your position and walk away. But a beginner trader would then experience the fear of missing out, and so buy back in again - often at a higher price. This statement is highly speculative, but next time this happens, if you look at the eToro Bitcoin user feed, you'll see many people in this scenario. If you'd stored your Bitcoin on a wallet, the time between moving it back to the exchange would have given you a better time frame to make your decision off.
That said, if you're a more experienced trader you'll likely be aware of this scenario so it won't be an issue for you.
eToro Spreads are Very High
If you were to go on an exchange right now to buy Bitcoin, the price would be determined by the person willing to sell their Bitcoin for the lowest amount. Let's say this amount is $7000. On this exchange you'd normally pay a fee of around 0.2% to buy a coin, and then a second 0.2% fee to sell it, 0.4% total; which would be $28. On eToro you pay a fixed fee of 0.7% to open Bitcoin trades, which is $49. This is only 0.3% higher than exchanges, so not too bad; but on other cryptocurrencies this ranges between 2% and 5%! So if you invested that same amount in Litecoin that would cost you $210, and if you invested that in Bitcoin Cash that would cost you $350 - over 10x more than an exchange.
This problem by itself makes profitable trades harder, but given the extra functionality you get, some justify this as an acceptable cost. Where this isn't ok is how their system for opening orders works. We'll explain a situation we experienced ourselves.
(The rest of this section talks about stop losses, which eToro has since removed)
We decided to try and short Bitcoin Cash, to open a sell order for $250 and then buy it back at a lower cost. When we open risky orders like this we normally set a small stop loss, in this case at -$14, which for other coins we'd traded such as Bitcoin and Ethereum allowed a good 1-2% upward movement before the order closed.
The eToro user interface allowed us to do this, but when we opened this order it hit the stop loss immediately at -$14.64. Two things may have happened here, either the price of Bitcoin Cash dropped 1% or 2% within seconds of us opening the trade (which seems very unlikely), or the eToro interface allowed us to set a stop loss that was lower than the spread at the time. Regardless; the trade we just made should not have been possible. On their fees page eToro states that Bitcoin Cash 'typical spread' is 5%, which would be $12.50 for a $250 order, $2 below our stop loss. Allowing a trade to be opened with a difference between the opening value and stop loss of such a low amount is an incredibly dangerous feature.
High Withdrawal Fees
Withdrawal fees on eToro have always been fairly high, but for lower amounts they've had special cases with lower fees; where for a $20-$200 withdrawal the fee was $5, for a $200-$500 withdrawal the fee was $20, and for $500+ withdrawals the fee was $25.
They've since changed this, where now the withdrawal fee is $25 for all withdrawals. If you're depositing/withdrawing large amounts of money this change won't affect you. But if you're dealing with small amounts of a few hundred dollars this will both eat away at your profits and encourage you to deposit and withdraw larger amounts of money to increase profit margins. This is something that we find very concerning as this encourages new traders to invest larger amounts of money than they should given the associated risks of trading cryptocurrencies.
With all the above said, you might think that we don't like eToro, that you should avoid it. But this isn't the case. Being aware of all the above issues, we're able to avoid the issues caused by them; we tend to avoid Bitcoin Cash trades for example! Cryptocurrency trading is still very new to platforms which previously only dealt with CFDs, so quirks like this are expected. Our hope is that over time eToro will decrease their spreads for cryptocurrencies and add functionality to avoid the pitfalls we've described above.
Features such as the ability to trade on a demo account, and the option to follow/copy other popular traders are very useful, and we think balance out some of the more annoying quirks of the platform. eToro is also a regulated broker, which many exchanges are not, another important consideration for people depositing large amounts.
If you want to try out eToro and help us out, here's a link (we'll get some money if you sign up via this).
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