The Battle of Fees: Comparing Crypto Exchanges and Bitcoin ETFs

The Battle of Fees: Comparing Crypto Exchanges and Bitcoin ETFs

The cryptocurrency market has been a hot topic of discussion in recent years, with Bitcoin leading the way as the most popular digital asset. As interest in cryptocurrencies continues to grow, investors are increasingly looking for cost-effective ways to buy and hold Bitcoin. The emergence of Bitcoin exchange-traded funds (ETFs) has raised questions about the pricing structures of crypto exchanges and the potential impact of ETF fees. In this article, we will delve into the debate surrounding fees, comparing the costs of purchasing and holding Bitcoin on various crypto exchanges and through Bitcoin ETFs.

Bloomberg analyst Eric Balchunas raised an interesting question regarding whether crypto exchanges would need to reconsider their pricing models if a spot Bitcoin ETF is approved. He pointed out the relatively low fees charged by some of the prominent players in the industry. However, Caitlin Long, from digital asset custody platform Custodia Bank, expressed concerns over the implications of low ETF fees for issuers. Long warned that ETF issuers offering fees that cannot cover their costs may resort to lending securities to offset losses. While Bitcoin held in custody by ETFs is typically not lent, ETF shares can be lent out with collateral. This practice introduces potential risks and poses challenges to maintaining the security and integrity of investors’ assets.

To get a better understanding of the fee structures of crypto exchanges, we analyzed the transaction fees of several popular platforms for traders making market orders. The chart below showcases the transaction fees for these exchanges, highlighting the costs without any promotional benefits or incentives such as staking, holding native tokens, or high trading volumes.

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Among the exchanges analyzed, crypto.com emerges as the cheapest option for purchasing Bitcoin, with a fee of just $1.50 for a $2,000 purchase. It is worth noting that some exchanges also impose withdrawal fees. For instance, crypto.com has a withdrawal fee of 0.0006 BTC ($27 at the time of writing), while others like Binance only charge the network withdrawal fee.

Now, let’s shift our focus to Bitcoin ETFs. The proposed Bitcoin ETFs awaiting approval offer alternative avenues for investors to gain exposure to Bitcoin. However, purchasing ETF shares requires the use of a broker, which may come with custodial fees. Fortunately, some brokers offer zero-commission trading such as Webull, eToro, and Robinhood.

To compare the costs of purchasing and holding the equivalent value of Bitcoin through ETFs, we gathered data from the filed prospectuses of the ETF applicants. The chart below illustrates the costs associated with holding Bitcoin for one year within the proposed Bitcoin ETFs, assuming zero-commission trading.

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Among the ETFs examined, the lowest fee reported is $4.80 for holding $2,000 worth of Bitcoin for one year. While this appears to be cheaper than purchasing Bitcoin on crypto exchanges, it is important to consider additional factors such as withdrawal fees and the inability to directly access Bitcoin when using an ETF.

There is a critical difference between purchasing Bitcoin through a spot Bitcoin ETF and a crypto exchange. With a spot Bitcoin ETF, investors are exposed to the underlying Bitcoin, which is custodied by the issuer and its Bitcoin custodian. However, when exiting the ETF, investors can only do so in cash, not in Bitcoin. In contrast, purchasing Bitcoin on a crypto exchange allows investors to withdraw the Bitcoin directly to a self-custody wallet or convert it into fiat and withdraw in cash.

The difference in custody between ETFs and crypto exchanges carries significant regulatory implications. Crypto exchanges have faced scrutiny over their custody practices, as demonstrated by the FTX debacle in 2022. Spot Bitcoin ETFs, on the other hand, have undergone closer regulatory scrutiny. As of now, Binance appears to be the cheapest exchange for purchasing Bitcoin and withdrawing it into self-custody. Nevertheless, the choice between ETFs and exchanges should be made based on individual preferences and risk tolerance.

The battle of fees between crypto exchanges and Bitcoin ETFs continues to generate discussions within the cryptocurrency community. While crypto.com stands out as the cheapest exchange for purchasing Bitcoin, the costs associated with ETFs should not be overlooked. Factors such as custody, withdrawal fees, and the inability to directly access Bitcoin make the decision between ETFs and exchanges complex. It is crucial for investors to consider their unique circumstances and preferences when choosing the most cost-effective option for buying and holding Bitcoin. Additionally, it is worth noting that active traders may benefit from discounts and reduced fees offered by many exchanges, further decreasing the cost of buying and holding Bitcoin.

Exchanges

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