While cryptocurrency exchanges once occupied the “Wild West of the internet, they have in recent years been moving into the mainstream. For example, in 2021, the Monetary Authority of Singapore granted Digital Payment Token licenses to four players in the crypto space under the Payment Services Act.
With these developments in mind, some investors are considering buying Bitcoin (or other cryptocurrencies) directly on an exchange rather than through an institutional-grade fund.
But is buying Bitcoin on an exchange all that straightforward? Unfortunately, no. Despite increasing regulation, there are still hidden costs and complications when professional investors buy directly through a crypto exchange.
1. Higher transaction fees than advertised
Many investors pick an exchange based on the advertised fees; however, don’t be surprised if your trades end up costing much more than expected. Below are some common crypto exchange fees to look out for.
Transaction fee: How much the exchange charges per transaction. Crypto exchanges state these fees upfront, so they’re often eye-catchingly low.
“Hidden” transaction fee: Many exchanges require you to exchange your fiat currency (e.g. USD) for its stablecoin equivalent (e.g USDT) before you can use that to buy Bitcoin. You’ll be hit with the transaction fee twice.
Deposit/withdrawal fee: Yes, you may be charged as much as 4% whenever you deposit fiat money or cryptocurrency! Withdrawing money typically costs even more.
Maintenance fees: A fee for merely using the exchange’s platform, typically applied to your account balance. Sometimes known as custody, wallet or setup fee.
Bid/ask spread: Like conventional (fiat) money changers, crypto exchanges quote slightly different rates depending on whether you want to buy or sell a specific currency. The difference is called the “spread”. This becomes costly if you buy and sell Bitcoin before it has had a chance to rise in value.
2. You may not get the best price
With over a thousand exchanges out there, the cryptocurrency market is highly fragmented. In classical economics, this is known as an inefficient market, and it leads to variations in price for the same asset (e.g. Bitcoin) depending on which exchange you look at.
The price difference at any point of time can range from 1% to 5% depending on the day’s supply and demand conditions for the different exchanges. Investors looking to buy directly on an exchange should therefore note that you might not always get the best price. The price difference between exchanges could cost you as much as 5%.
Also, note that large transactions come with additional complications. Some exchanges lack the liquidity to fulfil large orders and may quote higher prices, adding to your costs.
3. Hidden costs specific to larger transactions
Another issue with large transactions is that they are often blocked by exchanges as part of their anti-money laundering safeguards. These restrictions, while necessary for risk management, can be costly and time-consuming for professional investors to work around.
To avoid blocked transactions, you may need to split your orders into multiple transactions and spread them out across a period. This incurs higher fees since you are charged for each trade.
Some crypto exchanges do accept large orders, but might take weeks to process them due to the standard Know Your Customer (KYC) checks.
As crypto exchanges are generally not tightly regulated, there are further risks to placing large orders such as front-running, where the exchange and its affiliates profit off insider knowledge of a large upcoming order. Professional investors in particular would want to steer clear of any such behaviours.
4. Security risks are rampant
Security is a major problem that plagues almost all crypto exchanges and wallets. While regulations can push crypto platforms to invest more in security and data protection, it’s virtually impossible to put a stop to hacking entirely. In 2021, there were over 20 major hacks where over US$10 million were stolen; of these, at least six hacks cost crypto investors more than US$100 million.
Given how vulnerable crypto exchange accounts are, it’s safer to store cryptocurrencies offline in a cold wallet — though this is still not foolproof. The physical cold wallet can also be stolen or simply lost.
Investors who buy Bitcoin directly on an exchange must prepare themselves for the potentially high cost of hacking, theft or loss.
5. Accounting & legal complications
Unlike mature financial assets like property or shares, which are straightforward to transfer or convert, directly-owned cryptocurrency is still a grey area when it comes to accounting and legal treatment.
For example, Bitcoin is subject to a unique accounting treatment where losses are accounted for, while gains are not recognised until the BTC is sold, leading to complications when accounting for company holdings.
Many countries do not recognise Bitcoin as a legal asset, which makes it extremely challenging to transfer its ownership (e.g. as part of estate planning). Crypto exchanges have not evolved to deal with wealth transfers in the case of death, which can result in Bitcoin holdings being stuck in limbo rather than being transferred to beneficiaries. These scenarios impede Bitcoin’s efficacy as a store of wealth.
It might be possible to resolve these issues after many accounting and legal man-hours — but, if not, fiduciaries run the risk of getting sued by their clients.
Buying on an exchange vs Fintonia Physical Bitcoin Fund
We believe that exchanges play a very important role in the cryptocurrency ecosystem, but crypto exchanges might be better suited to retail investors who can tolerate the costs and risks attached to buying smaller amounts of Bitcoin directly.
However, the situation is quite different for professional investors who typically invest larger amounts and/or need to account for and justify their investment decisions.
Increased regulation has not yet removed the problems endemic to crypto exchanges, such as significant price variations, liquidity challenges, security and hacking, and accounting and legal complications. These are not merely financial costs but also have the potential to harm the client-fiduciary relationship.
Fintonia Group’s Physical Bitcoin Fund was developed specifically to address the complications described above.
Transparent fee structure: We charge one simple fee so you avoid hidden costs.
Best prices on the market: We are connected to multiple crypto exchanges and market makers and can obtain the best prices at that point of time.
Optimised for large transactions: As a regulated fund manager, we pass industry KYC/AML requirements and can break up large transactions across multiple parties.
Secure & insured: Your Bitcoin is held in cold storage by a third party, regulated custodian, and it is insured against theft.
Reduce accounting & legal risk: Our institutional-grade fund removes much of the legal and accounting risks around buying Bitcoin directly.
As a MAS-regulated fund manager, Fintonia Group is subject to rigorous laws and guidelines to protect investors. Furthermore, we designed our Bitcoin fund to solve the pain points that a professional investor would face when investing in Bitcoin.