Is eToro Safe?

eToro’s business model is focused on attracting individual investors, also known as retail investors, entering the financial markets world for the first time. Usually, these investors are redirected to the “social investment network”, where they can copy other people’s trades using the social trading feature.

eToro makes most of its money (87%) through a typical process in the brokerage industry known as a market maker model.

When you open a trade, you will see a “bid price” (price you receive when selling an asset) and an “ask price” (price you have to pay when buying an asset). As you will notice, there is a gap between these two prices, formerly known as the spread. The larger the spread, the more money eToro makes from it.

The income statement from 2016 to 2020 (image below) shows a sustainable business model. The firm’s operating performance (EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortisation) is a clear sign of business sustainability. Except for 2016, all the years have demonstrated comfortable margins.

This screenshot does not show you the complete picture. We still have no access to an audited Balance Sheet or Cash Flow Statement, which would help us analyse the company’s financials. Some items revealed to the public following the SPAC merger were not audited, so a careful interpretation is needed. However, from our analysis, there is no sign of red flags.

Finally, according to the latest annual report (2022 – the 2023 annual report is only released in March 2024), “Our underlying business is profitable and our balance sheet is strong”.

eToro follow strict rules on what concerns risk management. As highlighted in their Q3 2023 presentation, they segregate their assets, do not lend crypto assets and are audited by one of the biggest auditing firms: EY.

a. Securities are held in a segregated account

It is crucial to know the structure of eToro – it is similar to most other brokers. It only acts as an intermediary that deposits your ETFs, shares or other financial products.

As such, it holds your securities in a segregated account within a custodian bank. This means that if the broker went bankrupt, the creditors couldn’t claim the investor’s assets, as these belong to the investors.

Given that, what would happen in practice is that you would have to wait (it can take months or years) for the financial authorities to know what belongs to you and allow you to transfer those assets to another broker. If eToro went bust, clients would have their share of the segregated money investments returned, minus any administrators’ costs from handling and distributing these funds. If things always worked like this, the protection amount would be only a formality.

b. Investor Protection

Despite eToro current sustainable business model and asset segregation, the company may go bust for other reasons: fraud, administrative malpractice or operational errors. eToro clearly states all the “Risk Factors” (slide 50 onwards) associated with their business.

That’s where Investor Protection comes into force. eToro is supervised by several top-tier regulators who oversee the securities market to ensure transparency and fair dealings:

• eToro (Europe) Ltd: authorised and regulated by the Cyprus Securities and Exchange Commission (CySEC)
• eToro (UK) Ltd: authorised and regulated by the Financial Conduct Authority (FCA)
• eToro AUS Capital Pty Ltd: authorised and regulated by the Australian Securities and Investments Commission (ASIC).
• eToro (Seychelles) Ltd: registered by Financial Services Authority Seychelles (FSAS).
• eToro USA LLC: licensed by the Financial Crimes Enforcement Network (FinCEN) and Money Services Business (MSB). Member of the Financial Industry Regulatory Authority (FINRA)

c. Investor Compensation Schemes

Given that, in addition to CySEC, FCA, and ASIC regulations, eToro also maintains membership in the following Investor Compensation Schemes[1]:

• The Cyprus Investor Compensation Fund (ICF) gives investment protection coverage of up to €20,000 for clients under the subsidiary eToro (Europe) Ltd;
• The Financial Services Compensation Scheme (FSCS) compensates investors up to £85,000 for the clients under the subsidiary eToro (UK) Ltd
• The Financial Industry Regulatory Authority (FINRA) compensates US investors up to $500,000 in financial assets, and the Federal Deposit Insurance Corporation (FDIC) provides protection for your cash holdings up to $250,000.

As an important reminder, if you invest in cryptocurrencies (CFDs or non-CFDs), you will NOT benefit from the above investment protections!

[1] ASIC does not provide a pre-defined protected investment amount. More info here.

As a rule of thumb, if you are a European Investor (example: Greece or Ireland), you will be under eToro Europe Ltd. If you are a UK investor, you will sign up through the subsidiary eToro (UK) Ltd and so on. You will quickly notice it when registering your account:

On top of the mandatory regulatory protections, eToro created an additional layer of protection on its own: eToro Insurance.

eToro has partnered with Lloyd’s of London to provide free insurance for up to 1 million EUR or AUD (depending on the region). Every eToro investor under the subsidiaries “eToro (Europe) Ltd” and the “eToro AUS Capital Limited” are automatically granted this insurance when they open an account.

This insurance is only applicable to losses above the protected amount of the investor compensation schemes. For example, if you are a European investor and have an account with €30,000, you would receive €20,000 from the investor compensation scheme, and €10,000 would come from this insurance.

But there is a catch: “The Insurance Policy also has an overall maximum limit of €25,000,000 (twenty five million Euro). This is the most it will pay out in aggregate for all Eligible Claimants. Therefore, there is a chance you may not get all of your Losses back if the aggregate Losses of all Eligible Claimants exceed this maximum cap. ” (our highlights).

Following the same procedures of the regulatory entities, the insurance covers cash, all CFD positions, and securities (Stocks, ETFs,…). Again, cryptocurrencies are not covered by insurance.

The introduction of online brokers has opened the world of investing to everyone with a PC/Smartphone and an internet connection. The easiness of investing also creates a healthy suspicion about the safety of these new market operators.

We hope we contributed to your due diligence by reading this article! We believe you should be pretty confident regarding the safety measures conducted by eToro. Hopefully, it will continue to operate for decades to come. Still, you should know what to expect if something unexpected happens to eToro.

As a final tip, once you begin trading, ensure you keep records of your holdings, trade confirmations, and account statements every month. This little step will make the job easier for the regulators when filing for any insurance claim.

Stay safe out there!

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