Cryptocurrency news site Coindesk is reporting that eToro (Europe) Ltd, the Cyprus based arm of Israeli Retail FX, CFDs and cryptocurrency broker eToro which serves the company’s EU customers, sent a note out late Friday afternoon to clients that they had about four hours to increase margin to 100% on all crypto CFD positions.
Any open positions left with any leverage would be closed out – and indeed many were, as of 21:00 GMT Friday.
The move was apparently made as eToro became unable to properly hedge highly levered client positions in Bitcoin, ETH and other cryptocurrencies, with clients being mostly long as Bitcoin continued its surge forward to and above $40,000. Bitcoin has more than doubled in price in less than a month since crossing the $20,000 level in mid December, and other digital currencies have followed suit.
Retail FX brokers such as eToro make much of their money by market making – matching buy and sell clients orders – and earning the spread between the buy and sell price. When buy and sell orders don’t closely match, the broker can either wait (and hope that things eventually even out), or go to a third party and hedge the side that doesn’t match. However that becomes expensive, and even difficult, in a situation like this where most of the client action is on one side (i.e. buy/long), and with an instrument such as crypto which is difficult and expensive to hedge.
eToro’s announcement caught many of its European customer unprepared, and indeed a number of customers didn’t see or pay heed to the message, sent by email, until their leveraged positions were closed out.
Leveraged crypto CFDs were banned in the UK by the FCA late last year, with the ban taking effect as of last week, on January 6. However they are still allowed in the EU.
The leverage ban is the latest move taken by eToro in recent days to stem the tide of retail traders looking to cash in on the crypto trading craze. We reported over the weekend that eToro increased the minimum deposit for new clients opening accounts to USD $1,000. The company had been reportedly seeing up to 40,000 new accounts being opened each day lately by retail traders – most looking to jump right in to crypto trading – and most looking to start with small amounts, levering their position up where possible.