Bitcoin is much more expensive than gold to store with a third-party custodial service, but there’s a good reason for that discrepancy.
On Monday, the Motley Fool published an article analyzing how the cost of storing physical gold bars compares to storing bitcoin — the new “digital gold” with a third-party custodial service. Noting that the SPDR Gold Trust pays approximately 0.08 percent of the value of its gold for storage and custody, the publication found it “mind-blowing” that bitcoin custodial services such as Coinbase Custody charge 15 times more.
As CCN.com has reported, Coinbase Custody — a regulated storage service targeted to institutional investors making minimum deposits of $10 million — expects to charge a $100,000 setup fee and a 10 basis point (0.10 percent) fee per month on the value of client assets after it launches in 2018.
“If gold can be stored in Fort Knox-like bunkers for just 0.08% per year, there is little reason it should cost 15 times more for bitcoin to be stored in similarly safe solutions,” author Jordan Wathen wrote.
However, Trevor Gerszt, CEO of self-directed IRA custodial services Goldco Precious Metals and CoinIRA, says that crypto asset storage providers must account for significant cybersecurity risks that precious metals storage facilities do not face.
“Cryptocurrency custodians have to have multiple layers of security to keep cryptocurrency keys safe from hackers, and they have to constantly be vigilant because they will be probed and attacked,” he told CCN.com in an email exchange. “That costs money in terms of physical computer hardware, software development, and programmers.”
A Coinbase spokesperson told CCN.com that the company has seen “growing demand from institutional investors for storing digital assets,” and CEO Brian Armstrong wrote in a recent blog post that there is an estimated $10 billion worth of institutional money waiting to enter the ecosystem.
Because the demand for crypto asset custodial services is so high, Gerszt says that institutions are willing to pay a premium for the service. And because cryptocurrency prices have almost uniformly risen in 2017, investors have not felt the full effect of the management fees.
“But it shouldn’t cost as much as it does now,” Gerszt added. “People are still willing to pay more for cryptocurrency custodial services because Bitcoin and cryptocurrencies are making such huge gains, so the costs aren’t as acutely felt.”
Gerszt anticipates that, ultimately, the cost of third-party bitcoin storage will decrease over time as new players enter the market and create healthy competition.
“As the market for cryptocurrency custodial service matures, more companies will enter that market, offer services that are cheaper, more efficient, etc., and that competition will help bring the costs back to more reasonable levels that are in line with other industries,” he concluded.
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Last modified: March 4, 2021 5:02 PM