eToro is a financial technology business that allows users to trade a variety of financial assets such as equities, cryptocurrencies, commodities, and more. Users can also use eToro’s CopyTrader tool to imitate other traders’ trades.
eToro generates money through charging a spread on trades, as well as fees for overnight and weekend trading, withdrawals, currency conversions, and inactivity.
Since its inception in 2007, eToro has evolved to become one of the world’s largest online brokerages. More than 20 million people have signed up for the platform, which is set to launch in late 2021.
What Is eToro and How Does It Work?
eToro is an online brokerage and trading platform that allows users to purchase and sell a wide range of financial instruments.
Stocks, currencies, commodities, cryptocurrencies, exchange-traded funds (ETFs), and indices are all available for trading. This is referred to as manual trading on eToro.
Users can also purchase and sell a contract for difference (CFD), which is a contract between a trader and a broker to exchange the value of a financial asset (such as a commodity) between the contract’s opening and closing dates.
The trader would enter into a contract with eToro to replicate market circumstances without having to buy the underlying assets in this example.
The capacity to acquire and sell the actual asset is determined by the trader’s home nation and the financial instrument they’re trading. All cryptocurrency assets are CFDs in Australia, for example, while clients of eToro (Europe) Ltd can secure BUY positions using the genuine asset (SELL positions, on the other hand, are CFDs).
Users can participate in social trading in addition to manual trading. Users can follow other traders and copy their trading methods via social trading (through eToro’s CopyTraderTM function).
As a result, the platform displays all relevant information about a trader, such as their percentage of gains or portfolio composition. Users can follow up to 100 traders at once and invest up to $500,000.
The firm’s Popular Investor programme allows the best traders on eToro to earn money from the company itself. This project recognises and rewards the best and most responsible traders on the site. It pays a commission based on the trader’s total assets under management (AUM) as well as his or her profits.
To assist its users in navigating the financial markets and financial assets they trade in, eToro provides a variety of educational information (in the form of blogs and videos).
Users can use eToro’s platform by visiting its website or downloading one of its mobile apps (available on Android and iOS devices).
eToro is presently used by more than 20 million people in 140 countries for a range of trading reasons. More than 335 million deals have been executed on its platform as of today.
eToro’s Background
eToro was created in 2007 by brothers Yoni Assia (CEO) and Ronen Assia, as well as David Ring, and is based in Limassol, Cyprus.
Even as children, the Assia family had a strong interest in learning how to invest and trade. Yoni’s father, who worked in finance, had previously taught him how to trade stocks when he was 13 years old.
In the meantime, he developed a keen interest in all things computer-related. He was building software in the Magic programming language when he was in his teens (also known as UniPaaS).
He started his first firm in 2003 after finishing his Computer Science degree and army service (which is required in Israel).
CDRide, the company, developed a hardware solution for recording people riding rollercoasters. After that, the video would be wirelessly transmitted to a booth where it could be purchased. Yoni was able to travel the world while earning money thanks to the team’s success (for example, with Paramount Parks).
Nonetheless, the CDRide company’s prospective scale was quite limited. Yoni chose to start a new business in the financial industry because he still had a talent for trading financial assets.
Many existing trading platforms at the time were difficult to use, had large costs, and were frequently inaccessible to the common person. Yoni, along with his brother Ronen (who had previously worked in product management) and David Ring (who had previously worked in software engineering), set out to change that.
The company was able to raise $1.7 million in an early seed round from private investors, including the son of former Israeli President Shimon Peres.
After months of hard labour, eToro was finally introduced to the world in late 2007. eToro’s initial concentration was entirely on forex trading, specifically the US Dollar, British Pound, Australian Dollar, Euro, and Japanese Yen.
In addition, the team placed a strong emphasis on gamification and making forex trading more understandable. Users may choose from four games, including Dollar Trend (in which they could race the US Dollar against other currencies) and Forex Match (user picks the currency that they think will go up and have it engaged in a tug of rope against a currency they think will go down).
Users would be able to obtain $100,000 in virtual money to test the waters. The underlying trade would be conducted by a partner brokerage whenever a user registered to invest real money (RetailFX or IFX Markets at launch). This is due to the fact that eToro still lacked the required broker licence.
While the gamification part of eToro drew attention, it didn’t actually persuade people to stay for long. Serious investors, on the other hand, would require advanced charting tools and quick trade execution rather than engaging in mindless games.
As a result, eToro shifted its focus to providing traders with everything they need to make transactions as quickly and easily as possible. eToro launched the option to trade commodities in 2009, thanks to a $6.3 million Series B financing.
eToro launched its OpenBook platform a year later, catapulting the company to new heights. Users could publish and share their real-world trades with others on the platform using this function. The identical deals might then be replicated by other traders.
CopyTrader was the name given to this feature later on. By 2013, two-thirds of all eToro users were using the platform’s CopyTrader function. The following year, eToro added the ability to trade corporate stocks, which attracted even more (copy) traders.
In January 2014, the company reached another major milestone when it enabled the opportunity to trade Bitcoin. Soon later, other cryptocurrencies were added.
eToro, along with other sites such as Coinbase, was one of the first to legalise cryptocurrency trading. The 2017 Bitcoin mania, in particular, catapulted the company’s user base to new heights, growing from six to nine million that year.
In 2018, eToro customers in a few countries were finally permitted to possess the assets they purchased (such as equities or cryptocurrencies). Users could only invest in CFDs prior to that. In addition, in reaction to Robinhood, which popularised commission-free trading, eToro eliminated commission and administration fees while trading equities.
The year 2020, in particular, has proven to be a particularly good year for the Cyprus-based firm. Trading volumes on numerous online trading platforms, including eToro, reached unprecedented heights as a result of stay-at-home orders and government stimulus cheques. In the year 2020, eToro was able to add over 7 million new users.
The startup has even begun providing universal basic income to a restricted group of customers through its GoodDollar token (G$).
eToro announced that it would go public in March 2021 as a result of that goodwill and the company’s ongoing expansion initiatives. The company stated that it would go public through a merger with FinTech Acquisition Corp. V, a special purpose acquisition company (SPAC) with a market capitalization of $10.4 billion, valuing eToro at $10.4 billion.
eToro now employs over 2,000 people and has offices in eight countries, including China, Gibraltar, Israel, and the United States.
What is eToro’s revenue model?
eToro generates money through charging a spread on trades, as well as fees for overnight and weekend trading, withdrawals, currency conversions, and inactivity.
In the following part, we’ll take a deeper look at each of these.
Spread
A spread is the difference between the bid (SELL) and ask (BUY) prices for any financial instrument that the user trades. When a user buys or sells an asset, spreads are applied.
For example, if the bid price is 1.3737 and the ask price is 1.3739, the spread is the difference: 2 percentage points.
The difference between the two is eToro’s profit margin. When you trade any form of financial asset on eToro, such as stocks, cryptocurrencies, and so on, you will be charged a spread.
As a result, eToro is motivated to maximise a user’s trading volume. As a result, tools like CopyTrader encourage users to trade more.
Furthermore, it should be noted that eToro makes money when its customers lose money. For example, a trader can buy a CFD if they believe the price of Apple shares will fall.
If the price rises, the trader will be responsible for the difference in price between when he began and closed his position (hence the name contract for difference).
CFDs are regarded to be extremely dangerous due to their speculative character. As a result, online brokerages that sell these sorts of products are required by law to disclose the level of risk associated with trading CFDs with each given supplier.
“67 percent of regular investor accounts lose money when trading CFDs with this provider,” according to eToro’s website.
Fees for Overnight and Weekend Stays
eToro, like many other CFD trading platforms, levies fees for overnight and weekend trading (also referred to as swap rates or rollover cost).
These charges are a kind of interest in exchange for the money that eToro lends to the user to retain the assets overnight or over the weekend.
The fee structure is determined by the type of financial instrument being traded, the type of position (BUY vs. SELL), and the overall trading volume. Rollover costs are subject to vary in response to global market conditions.
eToro charges the London Inter-Bank Offered Rate in addition to its overnight and weekend fees (or LIBOR). LIBOR is the rate at which banks charge each other to borrow money over the weekend or overnight.
Fees for Withdrawal and Conversion
A withdrawal fee is charged whenever a user withdraws money from their account (for example, by sending money back to their bank account).
This account is intended to cover the costs of overseas money transfers. Users must withdraw at least $30 before being charged a $5 withdrawal fee.
Furthermore, whenever a user seeks to withdraw money in a currency other than the US Dollar, a conversion fee is charged.
The numerical difference between two percentages is quantified in percentage in point (PIP, or percentage point), which is how conversion fees are calculated.
Moving from 50% to 55%, for example, is a five-percentage-point rise in what is being measured, but it is a ten-percentage-point increase in what is being measured.
The percentage points differ depending on which currency is being exchanged. Converting from USD to EUR, for example, adds further 50 percentage points.
Depending on whose tier they are in, eToro Club members can get discounts or are completely excluded from paying conversion fees.
Inactivity Fee
eToro levies an inactivity fee to users who haven’t logged into their account in the previous 12 months.
The monthly fee is $10 (fees in other countries may vary), and it will be deducted from the remaining available amount.
To offset the charge, eToro does not close any of the user’s open positions.
eToro Revenue, Funding, and Valuation
eToro has raised a total of $272.7 million in 12 rounds of venture capital funding, according to Crunchbase.
Spark Capital, CommerzVentures, Softbank, Fidelity, China Minsheng Financial Holdings, Korea Investment Partners, and others are among the notable investors.
eToro is expected to go public on the NASDAQ via a SPAC merger, as previously indicated. The newly established corporation will be valued at $10.4 billion. eToro’s yearly revenues for fiscal year 2020 were $650 million, growing 147 percent from the prior year. In 2021, the company expects to earn a bit more than $1 billion. Get more information on ESPP from here.