The world of cryptocurrency has seen significant developments in recent years, with the emergence of Bitcoin exchange-traded funds (ETFs) arousing great interest. As the debate intensifies over the potential approval of a spot Bitcoin ETF, questions arise about the pricing structures of crypto exchanges. Could the low fees charged by top players in the market force them to reconsider their strategies? In this article, we will critically analyze the impact of ETF fees on crypto exchanges and delve into the complex issue of pricing structures and custody fees.
Caitlin Long, a prominent figure in the digital asset custody platform Custodia Bank, has raised concerns about the implications of low ETF fees. While low fees may attract investors, Long warns that they could indicate problems for issuers in terms of covering costs. In an ironic stance, Long warns that ETF issuers, aiming to offset losses resulting from low fees, may resort to lending securities. Although filed prospectuses indicate that Bitcoin custody will be held in cold storage and not lent, it is important to note that ETF shares can indeed be lent out with appropriate collateral. This potential shift in strategy raises questions about the long-term sustainability of offering low fees.
To assess the impact of low fees on crypto exchanges, let’s analyze some of the top platforms. We will focus on the transaction fees for market orders without any promotional benefits, such as staking or holding native tokens. The chart below showcases the fees for popular crypto platforms:
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Interestingly, exchanges like Webull, eToro, and Robinhood offer zero-commission trading, while others like Hargreaves Lansdown, BestInvest, Interactive Investor, and ig.com charge fixed fees for U.S. ETF purchases. This analysis assumes zero-commission trading for spot Bitcoin ETFs. Consequently, it appears that crypto.com is currently the cheapest exchange to purchase Bitcoin. For a $2,000 purchase, the fee amounts to just $1.50, compared to the lowest ETF fee of $4.80 if held for one year.
While the initial transaction fees may seem favorable on some exchanges, it is crucial to examine withdrawal fees as well. For instance, crypto.com imposes a 0.0006 BTC withdrawal fee of $27 at the time of writing. Comparatively, the average network fee for Bitcoin stands at 0.0002 BTC ($9.45). On the other hand, Binance only charges the network withdrawal fee.
One critical distinction between buying Bitcoin through an ETF or an exchange is the exposure to underlying Bitcoin. With a spot Bitcoin ETF, investors are essentially relying on the issuer and its Bitcoin custodian (e.g., Coinbase Custody) to hold the Bitcoin on their behalf. However, when exiting the ETF, investors can only do so in cash, not in Bitcoin. In contrast, buying Bitcoin through a crypto exchange allows for more flexibility. The purchased Bitcoin can be withdrawn directly into a self-custody wallet or converted into fiat and withdrawn as cash.
Regulatory scrutiny plays a significant role in evaluating the custodial practices of spot Bitcoin ETFs and crypto exchanges. The 2022 FTX debacle highlighted the importance of knowing where one’s crypto is stored. As of now, Binance emerges as the cheapest exchange to purchase Bitcoin and withdraw into self-custody, given the examined services. Additionally, Bitwise offers the cheapest ETF to buy and hold custodied Bitcoin through an exchange-traded product. Meanwhile, crypto.com remains the most affordable option among crypto exchanges for purchasing and holding Bitcoin without withdrawal.
This analysis is based on a single purchase with no additional privileges or volume bonuses. Many exchanges offer fee discounts for active traders, reducing the overall cost of acquiring and holding Bitcoin. As the crypto market evolves, the competition between crypto exchanges and Bitcoin ETFs intensifies. Both options offer distinct advantages and disadvantages, depending on an individual’s preferences and investment goals. As investors weigh their options, it is vital to consider not only the fees but also the level of custody and regulatory oversight provided by different platforms.
The arrival and potential approval of spot Bitcoin ETFs pose challenges to crypto exchanges in terms of pricing structures and viability. The battle between ETFs and exchanges ultimately hinges on factors such as fees, custody of assets, and regulatory scrutiny. Investors are advised to carefully consider their goals and circumstances when choosing between these two integral parts of the cryptocurrency ecosystem.
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