Cryptocurrency exchanges and Bitcoin exchange-traded funds (ETFs) have gained significant attention in recent years. With the potential approval of a spot Bitcoin ETF, analysts have raised questions about the pricing structures of crypto exchanges and the implications for ETF issuers. This article critically analyzes the fees charged by exchanges and the cost of holding Bitcoin through ETFs.
Crypto Exchanges and Pricing Structures
Crypto exchanges play a crucial role in facilitating the buying and selling of cryptocurrencies. Some of the most popular exchanges include Webull, eToro, Robinhood, Hargreaves Lansdown, BestInvest, Interactive Investor, and ig.com. These exchanges differ in terms of the fees they charge for trading and custody services.
However, the low fees offered by certain exchanges have raised concerns. Caitlin Long, a representative of Custodia Bank, a digital asset custody platform, warns that low ETF fees could indicate problems for issuers in covering their costs. There is a possibility that issuers may resort to lending securities to offset losses. While Bitcoin in custody is not expected to be lent in the proposed Bitcoin ETFs, ETF shares can be lent out with collateral backing the transaction.
To gain a better understanding of the fee structures, we analyzed the transaction fees of various crypto exchanges. The fees were compared for traders making market orders without promotional benefits such as staking, holding native tokens, or high trading volume.
One exchange that stands out for its low fees is crypto.com. It charges just $1.50 for a $2,000 Bitcoin purchase, making it the cheapest exchange in terms of purchasing Bitcoin. In contrast, the lowest ETF fee for holding Bitcoin for one year is $4.80.
However, it is important to consider the withdrawal fees imposed by these exchanges. For instance, crypto.com has a withdrawal fee of 0.0006 BTC ($27 as of press time), while the average network fee on Bitcoin is 0.0002 BTC ($9.45). Other exchanges like Binance only charge the network withdrawal fee.
There is a critical difference between buying Bitcoin through an ETF and purchasing it directly from a crypto exchange. With a spot Bitcoin ETF, you are exposed to the underlying Bitcoin, which is custodied by the issuer and its Bitcoin custodian (e.g., Coinbase Custody). However, when you exit the ETF, you can only receive cash, not Bitcoin. The Bitcoin remains custodied for you as long as you hold the ETF shares.
On the other hand, when you buy Bitcoin from a crypto exchange, it is held in custody by a third party. Here, you have the option to either withdraw the Bitcoin to a self-custody wallet or convert it into fiat currency and withdraw it as cash. The difference in custody arrangements between ETFs and exchanges is crucial, especially considering the regulatory scrutiny that ETFs have undergone compared to many crypto exchanges.
Taking into account the custody considerations and fees, Binance emerges as the cheapest exchange for purchasing Bitcoin and withdrawing it into self-custody. Its fee structure and withdrawal options make it a cost-efficient choice for users.
In terms of buying and holding Bitcoin through an exchange-traded product, Bitwise offers the lowest fees among the examined services. Users can acquire custodied Bitcoin at a competitive cost using Bitwise ETFs.
Choosing between a crypto exchange and a Bitcoin ETF involves considering various factors, such as fees, custody arrangements, and withdrawal options. While exchanges like crypto.com and Binance offer low fees for purchasing Bitcoin, ETFs like Bitwise provide the benefit of exposure to Bitcoin without the need for self-custody.
It is important to note that this analysis is based on a single purchase with no special privileges or volume bonuses. Active traders may be eligible for discounted fees on many exchanges, reducing the overall cost of buying and holding Bitcoin. Ultimately, users should carefully evaluate their investment goals and preferences to determine the most suitable platform for their needs.