Institutions face a persistent ‘silent tax’ from costs associated with holding Bitcoin, including custody and insurance fees. Despite its appeal, various expenses erode value over time, making it difficult for institutions to fully embrace Bitcoin. As interest rates rise, scrutiny on these costs intensifies, forcing companies to rethink Bitcoin’s role in their portfolios. New solutions, like potential yield generation through external blockchain engagement, may offer a way to address these challenges.
Bitcoin has long been seen as a way to escape capital control and central bank interference, especially for individual investors. But when it comes to institutions, holding Bitcoin (BTC) is far from cost-free. The so-called ‘silent tax’ consists of various expenses like fees, insurance, and other costs that eat into the value over time, making it increasingly challenging for institutional players to embrace Bitcoin as a serious asset.
Unlike retail investors, institutions typically can’t just store Bitcoin on hardware wallets. They need secure third-party custodians to handle compliance and security checks. Prominent names in this field include BitGo, Coinbase Prime, and Fidelity Digital Assets, but their services come with a price. Custody fees can hit between 0.35% and 0.50% annually, which adds up fast for large holdings. For instance, a $100 million Bitcoin investment could incur annual costs of around $350,000 to $500,000 just for safe keeping, not including transaction fees.
Insurance costs further complicate the issue. While custodians may provide insurance, the limits often fall short for many institutional clients. Some opt to negotiate more coverage or self-insure, both of which bump up costs. Additionally, the need for crypto audits for public companies and funds can lead to significant expenses, sometimes reaching six figures. All of these factors contribute to a steady ‘bleeding’ of value for institutions holding Bitcoin, which can become a serious problem over time.
Another aspect to consider is the inability of Bitcoin to serve as a reliable collateral. In theory, Bitcoin could be posted as collateral for loans, giving institutions liquidity without needing to sell their assets. But if the costs associated with holding Bitcoin, termed negative carry, erode its principal, then this potential liquidity diminishes, playing havoc with a firm’s balance sheet.
This situation is exacerbated by the fact that earning yield on Bitcoin often means removing it from business operations. If institutions lend their Bitcoin to generate interest, those assets are typically not available for collateral. Thus, nor can they unlock liquidity, resulting in an uncomfortable choice: earn yield or maintain the ability to borrow—both of which have important implications for capital efficiency.
In the early 2020s, the allure of Bitcoin as a hedge against inflation made these costs seem less urgent. However, as interest rates have risen and competition from yield-generating assets has increased, institutions are now scrutinising Bitcoin’s role on their balance sheets. They are likely to question whether merely holding Bitcoin provides value beyond its custodial costs.
Currently, the trade-offs for institutional holders of Bitcoin are substantial. Nevertheless, a new wave of blockchain technology may turn this situation around. While Bitcoin, by design, does not provide yield directly through staking—as its proof-of-work system rewards miners—innovative solutions aiming for yield-generating capacities are emerging.
One promising avenue could allow Bitcoin holders to engage with external proof-of-stake chains, effectively earning yield while maintaining custody of their assets. Should these models develop further, they could drastically improve the institutional appeal of Bitcoin, finally allowing firms to balance efficiency and alignment with Bitcoin’s foundational design. This shift is not just possible; for many institutions, it may be absolutely necessary.
