The eToro Business Model – How Does eToro Make Money?

Executive Summary:

eToro is a FinTech company that allows users to trade various financial assets, including stocks, cryptocurrencies, commodities, and many more. Users can furthermore mimic traders from others by using eToro’s CopyTrader feature.

eToro makes money via the spread it applies on trades, overnight and weekend fees, withdrawal fees, currency conversion fees, as well as inactivity fees.

Founded in 2007, eToro has grown to become one of the largest online brokerages in the world. More than 20 million users are now registered on the platform, which is expected to go public in late 2021.

What Is eToro?

eToro is a trading platform and online brokerage allowing users to buy and sell a variety of financial assets.

Users can trade stocks, currencies, commodities, cryptocurrencies, exchange-traded funds (ETFs), and indices. eToro refers to this as manual trading.

Furthermore, users can also buy and sell a so-called contract for difference (CFD), which is a contractual agreement between a trader and a broker to exchange the value of a financial asset (such as a commodity) between the time the contract opens and closes.

In this case, the trader would engage in a contract with eToro to replicate market conditions without buying the underlying assets.

The ability to buy and sell the actual asset is dependent on the trader’s country of residence as well as the financial instrument they’re trading. In Australia, for instance, all cryptocurrency assets are CFD’s while clients of eToro (Europe) Ltd can secure BUY positions with the real asset (SELL positions, on the other hand, are CFDs).

Apart from its manual trading section, users can also engage in social trading. With social trading, users can follow other traders and mimic their trading strategies (via eToro’s CopyTrader™ feature).

The platform thereby lists all the necessary information a user might need about a trader, such as their percentage of gains or portfolio composition. Users can copy up to 100 traders simultaneously and invest a maximum of $500,000.

The best traders on eToro can even earn money from the company itself via its Popular Investor program. This initiative promotes the platform’s best and most responsible traders. It pays out a commission that is based on the trader’s assets under management (AUM) as well as his/her gains.

eToro provides a variety of educational material (in the form of blogs and videos) to help its users navigate the financial markets and financial assets they trade in.

Users can access eToro’s platform via its website as well as by downloading any of its mobile apps (available on Android and iOS devices).

More than 20 million users across 140 countries are now using eToro for a variety of trading purposes. As of today, more than 335 million trades have been placed on its platform.

eToro Company History

eToro, headquartered in Limassol, Cyprus, was founded in 2007 by brothers Yoni Assia (CEO) and Ronen Assia as well as David Ring.

Learning how to invest and trade has been an integral part of the Assia family even in their younger days. By the age of 13, Yoni was already shown how to trade stocks by his father who held a job in finance.

In the meantime, he also developed a great interest in everything related to computers. In his teens, he was writing software in a programming language named Magic (also known as UniPaaS).

After wrapping up his Computer Science studies and army service (which is mandatory in Israel), he went on to start his first business in 2003.

The business, called CDRide, created a hardware system to record people on rollercoasters. The footage would then be wirelessly transmitted to a booth where it could be bought. The team managed to get several big contracts (for instance with Paramount Parks), allowing Yoni to travel the world while making money.

Nevertheless, the potential size that the CDRide business could attain was rather limited. Since his knack for trading financial assets remained, Yoni decided to launch a new business within the financial sector.

At the time, many existing trading platforms were very complex to navigate, imposed high fees, and oftentimes simply not accessible for the average joe. Yoni, together with his brother Ronen (who came from a product management background) and David Ring (who had years of software engineering experience) set out to change that.

To get the ball rolling, the team was able to secure an initial seed round of $1.7 million from private investors, such as the son of former Israeli president Shimon Peres.

In late 2007, after months of hard work, eToro was finally unveiled to the world. At launch, eToro was solely focused on forex trading, namely the US Dollar, British Pound, Australian Dollar, the Euro, and the Japanese Yen.

Furthermore, the team put a lot of emphasis on gamification and making forex trading easier to understand. Users had four games to choose from, such as Dollar Trend (users could race the US Dollar against currencies) or 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).

To test the waters, users would be able to receive $100,000 in virtual money. Whenever a user registered to invest real money, the underlying trade would be executed by a partner brokerage (RetailFX or IFX Markets at launch). That’s because eToro still lacked the necessary broker license.

While the gamification aspect of eToro was a nice attention grab, it didn’t really convince users to stay on for too long. After all, serious investors would need sophisticated charting tools and fast trade execution rather than engaging in distracting games.

As a result, eToro pivoted into offering traders anything they need to execute trades as fast and easy to navigate as possible. In 2009, on the backbone of a $6.3 million Series B round, eToro added the option to also trade commodities.

A year after, eToro introduced its OpenBook platform, which propelled the company to new heights. The feature allowed users to publish and share their real-world trades with others on the platform. Other traders could then duplicate those very same trades.

That feature later became known as CopyTrader. By 2013, two-thirds of all eToro users were taking advantage of the platform’s CopyTrader feature. That same year, eToro introduced the option to trade company stocks, which attracted even greater amounts of (copy) traders.

Another huge growth milestone for the company came when it introduced the ability to trade Bitcoin in January 2014. Other cryptocurrencies were added soon thereafter.

eToro, along with the likes of Coinbase, became one of the first platforms that legitimized the trading of cryptocurrencies. In particular, the 2017 Bitcoin craze propelled the firm’s user base, which grew from six to nine million that year, to new heights.

In 2018, eToro users in selected countries were finally able to own the actual asset (such as stocks or cryptocurrencies) they bought. Prior to that, users were only able to invest in CFDs. Furthermore, eToro removed commission and management fees when trading stocks in response to Robinhood, which made commission-free trading fashionable.

2020, in particular, proved to be a very positive year for the Cyprus-based company. Stay-at-home orders and government stimulus checks propelled trading volumes on many online trading platforms, eToro being among them, to new heights. eToro was able to add over 7 million users in 2020 alone.

The company even started distributing universal basic income to a selected list of its users via its GoodDollar token (G$).

As a result of amassing that goodwill and the firm’s continuous expansion efforts, eToro announced that it would go public in March 2021. The company announced it would go public via a merger with FinTech Acquisition Corp. V, a special purpose acquisition company (SPAC) valuing eToro at $10.4 billion.

Today, more than 2,000 people are employed by eToro which operates offices in eight countries, including China, Gibraltar, Israel, or the United States. 

How Does eToro Make Money?

eToro makes money via the spread it applies on trades, overnight and weekend fees, withdrawal fees, currency conversion fees, as well as inactivity fees.

Let’s take a closer look at each of these in the section below.

Spread

A spread is the difference between the bid (SELL price) and ask (BUY price) for any given financial asset the user trades in. Spreads are applied whenever a user buys or sells an asset.

Whenever the user creates a BUY position, eToro’s backend system automatically lists it as a SELL position. Simultaneously, if the user opens a SELL position, eToro lists it as a BUY position.

For instance, if the bid is 1.3737 and the ask price is 1.3739, then the spread is the difference between the two: 2 percentage points.

The difference between the two is where eToro turns a profit. Spreads are applied whenever you trade any type of financial asset on eToro, be it stocks, cryptocurrencies, and so on.

eToro is therefore incentivized to maximize the amount of trading a user does. As such, features like CopyTrader help to incentive users to make trades.

It has to be noted that eToro makes money on the spread for both CFD trades as well as non-CFD trades (where the underlying asset is owned by the trader).

Spreads, according to a company earnings call in May 2021, make up around 87 percent of the overall revenue eToro generates.

Overnight & Weekend Fees

Just like many other CFD trading platforms, eToro charges so-called overnight and weekend fees (also referred to as swap rates or rollover cost).

These fees are a quasi-interest in exchange for the money eToro lends to the user to hold the assets overnight or through the weekend.

The fee structure is dependent on the type of financial asset that is being traded, the type of position being held (BUY vs. SELL), as well as the overall trading volume. Rollover fees can change based on global market conditions.

On top of its overnight and weekend fees, eToro also applies the London Inter-Bank Offered Rate (or LIBOR). LIBOR is what banks charge each other to borrow funds overnight or through the weekend.

Withdrawal & Conversion Fee

Whenever a user withdraws money from their account (for instance by transferring back to their bank account), a so-called withdrawal fee is applied.

This is used to cover expenses related to international money transfers. Users must withdraw a minimum of $30 and are then charged with a withdrawal fee of $5.

Furthermore, a conversion fee is applied whenever a user wishes to withdraw the money in any other currency than the United States Dollar.

Conversion fees are measured in percentage in point (PIP, or percentage point), which is the arithmetic difference between two percentages.

For instance, moving up from 50 percent to 55 percent is a five-percentage point increase, but is a 10 percent increase in what is being measured.

Percentage points vary depending on the currency they’re being exchanged in. For example, converting from USD to EUR adds another 50 percentage points.

eToro Club members can either receive discounts when converting or are fully exempted from paying conversion fees, depending on the tier they’re in.

Inactivity Fee

eToro charges an inactivity fee for users that haven’t logged into their account for the past 12 months.

The fee is $10 per month (fees in other countries may vary) and will be charged on the remaining available balance.

Nevertheless, eToro does not close any of the user’s open positions to cover the charge.

eToro Funding, Revenue & Valuation

According to Crunchbase, eToro has raised a total of $272.7 million across 12 rounds of venture capital funding.

Notable investors include Spark Capital, CommerzVentures, Softbank, Fidelity, China Minsheng Financial Holdings, Korea Investment Partners, and many more.

As previously stated, eToro is supposed to go public on the NASDAQ via a SPAC merger. The newly formed company will be assigned a valuation of $10.4 billion. For the fiscal year 2020, eToro posted annual revenues of $650 million, up 147 percent from the previous year. The company projects to hit a little over $1 billion in 2021.

Viktor

Hi folks, my name is Viktor! By day, I lead a tech team of 10 for an e-commerce startup. At night, I work on expressing my weird thoughts through this blog. And if there's time, I cuddle my cat..