Is eToro a Scam or not?
We’ve seen quite of few people asking or questioning whether eToro is a scam. With over 2 years first-hand experience investing and trading with eToro with a live account I thought it might be useful to share my opinion on this subject. For the purpose of this article, let’s assume we use the official dictionary definition for “scam” which is “A fraudulent business scheme; a swindle”.
eToro is a highly regarded brokerage that has revolutionised how retail clients trade the financial markets. The simple yet innovative approach eToro has taken involves attracting both experienced and beginners to their platform. Experienced investors can be paid to allow beginners to follow their trades and beginners can follow professionals to generate impressive returns, it’s a win-win.
Firstly, as a business how reliable is eToro?
We don’t consider ourselves business analysts, so all we can write here is based on information we’ve found which is publically available. eToro was founded in 2007 and is fully regulated by the Cyprus Securities Exchange Commission (CySEC), which is where they’re based. They’re also fully compliant with EU MiFiD regulations and their American version of their site compliant with US finacial services regulations. I do not know what the impact was of the Cyprus crisis on the company though at no stage did I receive any indication that my investment was impacted (e.g. in case I wouldn’t be allowed to take my funds out).
Is eToro a scam from point of view of investor?
The purpose here is to ascertain whether eToro presents their data or service in such a way as to purposely deceive or scam investors. A key point are the performance metrics and the information of how much the traders you can copy have made in the past, since this is the main information investors will use to make decisions (even though as with any investment, past results don’t necessarily guarantee future earnings … yep, you know the tag line). As per our detailed eToro review, we do not feel the data eToro provide is very transparent. I.e. you cannot download or view the full trading history of the traders you may want to copy and the performance statistics only go back for 1 year. Their performance metrics (gains %) are also based on the Modified Dietz formula and because of the lack of data you cannot replicate the calculation of these numbers. Hence this makes us a bit suspicious and difficult to trust those numbers.
Our experience of using an eToro demo account
However, and here’s what I believe is the interesting part, from a test on eToro practice accounts for 1 year, we’ve found no evidence that the numbers are actually inflated compared to the actual results you would get yourself (even on the contrary). We started 2 demo accounts on May 1st 2012 and June 1st 2012 in which we allocated a $1,000 of the $10,000 available to us in the 10 most followed traders at the time. At the end of each month, we took a screenprint of the account status. We did the same after 1 year and then compared the actual performance of the allocated $1,000 (including open positions) with the gain % reported in the eToro interface. To my surprise, from the traders for which a comparison was possible (some left eToro in that year) over both accounts, a total of 8 results were better in our account. You can see the full eToro performance comparison here, and we’ve included the screenprint for May 2013 below. It’s worth noting that one reason why the numbers are sometimes impacted is that traders may add money to their balance during the period (often via bonuses they receive from eToro). This makes it more difficult to compare ‘like-for-like’, though at least it was sobering to notice the numbers weren’t necessarily inflated and on this basis difficult to call them a scam or swindle.
Please also note that the results you get in a demo account with eToro are the same you’d get with a real money account (mainly because they’re the broker for everyone so trade prices are pretty much the same). We’ve checked this with some separate tests as well. And on the subject of demo accounts, it also speaks in eToro’s favour of not being a scam in our view that a demo account is offered and you can try and keep that demo account open indefinitely (i.e. you can try before you buy).
*All trading involves risk. Only risk capital you’re prepared to lose. Past performance does not guarantee future results.This post is for educational purposes and should not be considered as investment advice
There have been quite a few traders or on there who blew their accounts, and hence follower’s allocations by taking high risks (and yes, it happened to us too). However, it’s up to the investor to try and evaluate how risky a trader is and decide whether to invest in them based on that. It kind of would be the same as calling the stock exchange a scam for listing companies whose share price plummets or who go out of business. It happens and no-one can predict for certain a trader’s future behaviour (even big investment banks cannot – e.g. Nick Leeson or Jerome Kerviel) in the same way as no-one can predict a company’s future results.
eToro marketing and transparency
On the point of the marketing materials and tactics eToro employs, one can perhaps have a better argument that this the approach is slightly scam-y. They do make it sound as easy as ‘select a few traders, sit back & relax and watch your money grow’. But again in, eToro’s defense, they allow people to try with a practice account first and only allow people to allocate 20% maximum in 1 trader (to avoid people losing all their money in 1 rogue bad trader). And yes, their editors are effective at keeping the eToro forums and trader comment feeds clean from any remarks which are too inflammatory or too negative. But probably most businesses do this I guess (hence why people can vent their feedback on other sites like this one).
In the past, we must admit that the way in which eToro presented their rankings surely might (and should?) have been considered a bit scam-ish. They actually ranked traders based on the number of profitable trades, meaning traders with a 100% profit success rate were always top. As any seasoned trader or investor however knows, this only happens if you leave your trades open indefinitely (until they get into profit), but in the long run, some trades will, however, deplete your margin and you’ll be stopped out. This practice did stop though and currently, traders are ranked by gain%.
The Bottom Line: Is eToro A Scam?
So in summary, I don’t believe or see eToro as a scam. We’ve found no evidence that they purposely deceive investors by deflating numbers to show unrealistic profit targets. Yes, there have been and I’m sure there will be some poor traders who lost a lot of their capital after early promise, though that’s the risk you take when investing. Because some of the potential gains which can be achieved with margin trading can be high, the risks are high too (and that’s explained in the risk disclosure of any broker and eToro as well). Of course, they want to get as many people trading as possible, but so does any broker, that’s their business model. It’s up to the investor to decide how much to invest and what risk to take (yes, not always easy, but perhaps our eToro tips will help).