This Trader Made 295% on Cryptocurrency Derivatives

Jay Smith has little doubt the cryptocurrency market will crash.

The price of bitcoin has increased sixfold in the past year, despite a 25 percent plunge this month triggered by China’s crackdown on digital tokens. Not a week goes by without startups launching new ones to fund everything from dentistry to Las Vegas strip clubs. Even Paris Hilton is tweeting to her 16 million followers about her cryptocurrency investments. If that isn’t a jump-the-shark-moment, what is?

Yet Smith, the No. 1 cryptocurrency trader at online brokerage eToro, shrugs all that off as he plays the markets from his home in Basingstoke, a suburban town west of London. Every day he looks for reasons to buy more bitcoin and other digital tokens -- computer programs that use cryptography to create artificial units of value. He doesn’t have much information to size up the prospects of Blackmoon Crypto, Steem, FirstBlood and other coins that have caught his eye, but that’s cool with Smith, a high school dropout and onetime professional video-game player. His portfolio is up 295 percent in the past 12 months.

“I just put in an order for a Tesla, and I don’t even know how to drive,” said the 29-year-old Briton.

Smith isn’t playing with just his own cash. More than 9,000 retail investors heed his advice and copy his trades on eToro, which is licensed in Cyprus and by the U.K.’s Financial Conduct Authority. It’s a social trading network that enables clients to track their favorite cryptocurrency traders. In an unregulated, ultravolatile market that few investors understand, eToro injects even more risk into the mix.

The firm is one of several that use contracts for difference, or CFDs, derivatives that allow investors to speculate on the price of cryptocurrencies. Plus500 Ltd. offers leverage of 30 to 1 on such bets, while XTB International Ltd, registered in Belize, touts its award as the best cryptocurrency trading provider of 2017.

Unlike futures contracts, CFDs don’t trade on exchanges and are largely illiquid. Investors can suffer big losses because they have to put up only a percentage of the value of their trades on margin. While the U.S. largely prohibits retail investors from trading CFDs, regulators in Europe are only now beginning to address the peril they pose.
In June, the European Securities and Markets Authority, the European Union watchdog for capital markets, said it was concerned about the suitability of CFDs and was weighing measures to restrict their use. Combining CFDs with cryptocurrencies is reckless, said Rainer Lenz, chairman of Finance Watch, a Brussels-based public-interest organization, who serves on an advisory group at ESMA.

“We have to put a stop to this,” said Lenz. “This is selling a synthetic instrument on top of another synthetic instrument. This is the highest form of speculation. You just can’t do that to retail investors.”