Hot Topic: Does buying cryptos on eToro affect the market price?

This topic comes up often enough that I’m going to write about it. It almost always starts with a post like this:

Person A creates a post saying “We should buy crypto X so that the price rises!”. Person B then says, “This is a CFD platform, we’re not buying the actual crypto so the price can’t be influenced by our actions here!”.

Person B would be right for any eToro instrument that isn’t a crypto, but eToro deals with cryptos differently. Historically they would buy a crypto for every crypto you “bought” in order to hedge against your gain/loss i.e. when you bought Ethereum, they would buy Ether in the background. In this way when the market value of Ethereum rises or falls, and you subsequently close your position, eToro will have made the same gain or loss as you. This protects them from the insane ups and downs of the crypto market. Let’s look at an example.

Example 1 — if eToro didn’t hedge our crypto positions

  1. You buy Ethereum at $1 (wouldn’t that be awesome?).
  2. The price goes up to $100 within 4 weeks.
  3. You sell your position.
  4. eToro makes money from the spread, but loses $99 when they pay you out.

Etoro would likely go out of business quite quickly this way.

Example 2 — eToro hedges your crypto position with their own

  1. You buy Ethereum at $1.
  2. eToro buy Ethereum to the value of $1 too.
  3. The price goes up to $100 within 4 weeks.
  4. You sell your position.
  5. eToro sells their position. They pay you out and lose nothing whilst profiting from the spread.

Seems to make a bit more business sense right? Etoro has also told me this is how they (used to) do things. Why “used to”? I’ve recently noticed that when I now buy cryptos I get the following notification:

I’m not sure if this has been rolled out to everyone on the platform yet, but this means that I am now actually buying cryptos!

In both of the cases above, whether directly or indirectly, you are causing activity within the crypto market. When you drive activity in a market you influence the price of instruments within that market. When you buy/sell on eToro you are driving the price of cryptos!

Hope that clarifies things.