EToro Online Platform Called In Leveraged Crypto Transactions When Bitcoin Price Peaked

A popular online brokerage firm sharply put the brakes on cryptocurrency trading as bitcoin hit an all-time high, catching investors off guard in one of the hottest corners of the market.

EToro, an Israel-based digital trading platform with global operations, told European clients on Friday evening that they had to close all cryptocurrency margin trades within hours, according to the company. Margin trading uses borrowed money to amplify investments.

The order came as bitcoin neared an all-time high of $ 41,962 on Friday, after more than tripling in 2020. Over the weekend, the world’s leading cryptocurrency reversed, losing around a quarter of its value and trading at $ 34,184 on Monday, according to data from CoinDesk.

EToro’s decision shows the world of cryptocurrency upside down, where rapid price swings – often with little to no catalyst – can surprise investors and the brokerages dealing with them. With margin trading, as the value of an asset increases, investors can increase their leverage, but also expose themselves and the brokerage house to losses if prices fall rapidly.

The online brokerage said it had witnessed a frenzy of cryptocurrency activity in recent weeks. It added around 200,000 new registered users in the first week of the year, in which time its platform saw several days of cryptocurrency trading volumes that were 10 times the average of Last year.

Based on an internal assessment of the risks and high levels of volatility in the market, the company decided to suspend new and existing leveraged contracts, said Amy Butler, spokesperson for eToro.

“Margin requirements for leveraged positions may change from time to time, particularly due to extraordinary market conditions,” she said.

Etoro, founded in 2007, is one of several online financial companies that cater to social network day traders. It launched a US cryptocurrency trading platform in 2018. Friday’s decision did not apply to its operations in the United States.

According to its website, eToro is backed by venture capital funding from Chinese insurance and financial conglomerate PingAn Insurance and Sberbank of Russia..

The platform told users by email on Friday at 4:46 p.m. London time that they had until 9:00 p.m. to increase their margin positions by 100%, which turns leveraged positions into normal positions and without leverage.

Traders who missed this window saw their contracts closed.

Previously, eToro traders had the option to double the cryptocurrency exposure with leverage. For every dollar invested, the brokerage matched it with a loan. Traders could double their gains, but also double their losses.

For those who made a gain on Friday when margin trades were called, their cryptocurrency was converted to dollars and deposited into the trader’s eToro account. Because the margin call happened when the price of bitcoin was high, most traders were in the dark at the time, Ms. Butler said. Under normal circumstances, if a brokerage calls for a margin trade that is not covered by the underlying assets, the brokerage would demand payment from the trader.

The price of bitcoin is skyrocketing, causing a resumption of dynamic trading that has pushed its value higher than it has ever been before. WSJ explains how bitcoin trading works and why volatile digital currency is reaching historic highs. Illustration: Jacob Reynolds / WSJ

It is not clear whether eToro’s decision alone could have dragged the market into its weekend price spiral. Bitcoin is notoriously volatile due to a limited number of large players and a relatively low number of transactions compared to traditional currencies.

Bitcoin, introduced in 2008, has gone from a niche digital version of cash outside of government control to a heavily watched investment. It has a limited supply and has been coveted by traders who consider it a 21st century version of gold. The price of bitcoin skyrocketed last year as central banks cut interest rates. Some investors see bitcoin as a hedge against the degradation of traditional fiat currencies. Others say it’s worthless fad.

Joel Kruger, currency strategist at LMAX Group, doesn’t think bitcoin’s drop over the weekend was necessarily linked to eToro.

“I would attribute it to profit taking,” he said. “If you look at the price development over the last 30 days, it has gone up over 100%. It’s such an intense pace that a withdrawal was virtually guaranteed in the short term.

Mohamad Koddo, a 23-year-old daily trader based in Sofia, Bulgaria, said eToro closed one of its leveraged contracts at a loss on Friday. He tried to sell other profitable investments and show a margin and keep it open and the trade was not processed due to technical issues, he said.

“It was impossible to reach the 100% margin. I will now withdraw my money and use another trading platform, ”Mr. Koddo said.

Jurij Toplak, an adjunct professor of law at Fordham University who advises several eToro users, said traders were drawn to eToro because it is one of the few platforms to offer leveraged bitcoin trading.

“There are a lot of losses here for the users. These are the future losses: if bitcoin hits $ 70,000 now, the user has no way of getting that money, ”he said.

Write to Anna Hirtenstein at anna.hirtenstein@wsj.com

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