The many benefits of engaging with the crypto sector are undeniable, as the industry is now so popular that it has been integrated with traditional functions. Crypto is now used extensively as a medium of exchange, to simplify cross-border transactions, and as an investment channel by investors who understand the inherent price volatility. However, there are several costs of holding crypto apart from the more obvious transaction charges. Understanding these costs can help crypto enthusiasts better plan their use of, or investment in crypto, to ensure profitability.
What are Carrying Costs in Crypto?
In the traditional sector, carrying costs refer to costs paid throughout the period of interacting with an asset, excluding the initial cost of purchase. For instance, carrying costs in real estate include upkeep costs, repair expenses, corporate fees, etc. In traditional investments, these costs may also include the percentage of a portfolio lost to inflation.
In crypto, carrying costs vary and may include the following:
- Custody Fees: People storing their crypto assets with exchange platforms or custodians may incur monthly or yearly fees to maintain the service.
- Insurance Costs: Some investors prefer to buy an insurance plan to protect their portfolio with a third party, especially when they have significant holdings.
- Inflation Costs: The average holder loses some of their purchasing power by buying Bitcoins because miners work tirelessly to add new blocks to the blockchain.
- Opportunity Costs: This is the cost of tying up funds in one asset or another because the funds cannot be used for other potentially lucrative opportunities.
The Initial Costs
Users must be familiar with several direct non-carrying costs payable when buying new coins. Before starting, investors may research new coins to find the best ones with a high chance of future growth. This research is easy as several online platforms curate lists of potential major exchange listings, selected according to important factors like technological innovation, community support, tokenomics specifics, and features such as staking or NFT (non-fungible token) support. (Source: https://www.valuewalk.com/cryptocurrency/new-binance-listings/)
Even with the potential benefits, users must consider initial costs like exchange fees. Some exchanges may charge a small percentage of the total cost as fees for facilitating trades. Also, users must consider that there might be a spread, which is the difference between buy and sell prices at the time of each transaction.
Furthermore, there are costs accruable to people who prefer hardware wallets. Depending on the capacity and maker, these users must spend up to $200 to acquire the device.
Custody Fees
Many people prefer to leave the responsibility of custody to a third party. For some, custody is even more critical for large amounts of cryptocurrency as the holder may decide that assets are more secure when a trusted custody service handles management. These costs may be charged upfront for a specified period or paid in installments.
Custodians offer storage solutions and other services that come with fees. For instance, a custody service that holds assets and insures them against loss may charge significantly to manage the portfolio. Custody services may also extend to cold storage, where the provider moves assets offline for heightened security. This substantially reduces potential profits, especially for long-term holders. However, the cost may be avoided if holders opt for self-custody and retain complete control of their private keys.
Insurance Costs
Crypto insurance is not very popular. However, the spate of hacks in the sector has given rise to the need for coverage. While it is not considered mandatory, holders sometimes consider buying an insurance policy, especially when the person has a large amount of crypto held in an exchange.
The cost of insurance usually varies depending on several factors, including the value of the holdings and the duration of coverage. Some insurance policy providers may charge up to 5% of a user’s total portfolio. There are also crime-specific policies that cover the theft of private keys for assets held with a custodian like Binance or Coinbase.
Inflation Costs
Since new coins are continuously introduced into circulation, the value of existing holdings is constantly being diluted. Like fiat, the increase in supply directly reduces the purchasing power. In hard-cap networks like Bitcoin, this depreciation may not be as pronounced because there is a fixed supply cap. There also is the halving event that reduces the rewards miners get and, therefore, halves the amount of Bitcoin introduced into circulation. On the other hand, assets that have no fixed supply cap suffer more inflation. The cost of inflation is usually neglected by the average crypto user.
All holders must be aware that cryptocurrencies expectedly become less scarce as more coins enter the market, leading to a decrease in market value if demand does not increase. This is a cost investors must consider when evaluating the long-term potential of crypto holdings. Unlike fiat currency, Bitcoin inflation is easier to predict because it is easy to calculate the number of Bitcoins minted each year and also account for the halving event that takes place after every 210,000 blocks – roughly 4 years.
Opportunity Costs
The opportunity cost of holding crypto is probably the most overlooked carrying cost. Anyone who decides to hold an asset for a long time risks losing out on other potential uses of the funds. In the crypto sector, developers and creators are consistently launching new assets or introducing new features into existing networks, all aimed at providing users with more value and earning opportunities. Unfortunately, long-term holders of cryptocurrencies miss out on these promising opportunities by keeping their funds in one asset.
The opportunity cost is generally more evident in the decentralized finance (DeFi) sector. Many DeFi platforms allow users to stake tokens or otherwise contribute to liquidity pools, for the chance to earn passive income over time. Staking an asset usually requires users to tie the asset for a specific period, sometimes without the option to withdraw. In cases where withdrawal is allowed before the predetermined maturity date, the user must pay a withdrawal fee.
Users holding crypto without staking can avoid this opportunity cost because they can easily make investment decisions based on market metrics and events. However, stakers and people who use similar features may miss out on preserving the value of their assets or participating in more promising ventures.
Conclusion: The Actual Cost of Holding Crypto
All users must consider that, in addition to transaction fees from buying and selling crypto, there are several other carrying costs, including opportunity, insurance, and custody fees. All of these can add up over time to diminish the value of the portfolio and the potential profits. To keep carrying costs minimal, investors must carefully choose where and how to store assets, regularly review portfolio value, and make strategic decisions on insurance, storage, and custody.
