When 1 percent isn't 1 percent

When it comes to safeguarding your Bitcoin, many services offer to manage your assets through a collaborative custody arrangement. Some of these services are based on a flat fee arrangement, while others are based on a percentage of your bitcoin holdings (similar to fee arrangements used by traditional fiat financial managers and mutual funds). In these percentage-based arrangements, it's critical to understand the actual cost you are paying, as at first impression the advertised fee rate might appear reasonable, but when you dig deeper into the numbers, you might find that the actual costs are much higher than you anticipated.

The Scenario: Understanding the Costs

Let's break down a common scenario. Suppose you have 1 Bitcoin (BTC) and decide to use a collaborative custody service that advertises a 1% annual management fee. Additionally, there's an exit fee if you decide to leave the arrangement (for this example, we'll use a 4% break fee). Now, let's assume the starting price of Bitcoin is $90,000 AUD and it appreciates at an annual growth rate of 29%—a reasonable estimate based on Michael Saylor's base case for Bitcoin's growth.

Here’s what your investment could look like over four years:
  • End Balance (BTC): 0.96 BTC  (or 95,689,596 Sats)
  • End Balance (AUD): $238,488
  • Net Yearly Return (AUD): $37,122
  • Net Annual Return (After Fees): 27.59%
  • Gross Annual Return (No Fees): 29%
  • Net Total Return (After Fees):164.99%
  • Gross Total Return (No Fees): 176.92%
  • Total Return Lost Due to Fees: 11.94%
  • Effective Annual Management Fee: 1.41%
  • Total Fees Paid Over 4 Years (BTC): 0.043 BTC
  • Total Fees Paid Over 4 Years (AUD): $10,743
  • Equivalent Monthly Fees Paid (AUD): $224
  • Equivalent Monthly Sats Lost: 89,800 Sats

Despite the advertised 1% management fee, the actual fee you end up paying is closer to 1.41%, which translates to approximately $224 per month. This difference arises from various factors, including the compound effect of annual fees on a growing asset and the inclusion of additional charges like GST (Goods and Services Tax).

What if we started with 5 BTC?

  • End Balance (BTC): 4.78 BTC  (or 478,447,979 Sats)
  • End Balance (AUD): $1,192,439
  • Net Yearly Return (AUD): $185,610
  • Total Fees Paid Over 4 Years (BTC): 0.216 BTC
  • Total Fees Paid Over 4 Years (AUD): $53,714
  • Equivalent Monthly Fees Paid (AUD): $1,119
  • Equivalent Monthly Sats Lost: 449,000 Sats

As you can see, as the size of your holdings increases so too the size of the fees increases in a percentage-based model. With 5 BTC, you are paying $1,119 per month for the collaborative custody service.

What If You Decide to Leave?

The costs become even more apparent if you decide to exit the arrangement after four years and incur the 4% break fee:

1 BTC starting point:

  • End Balance (BTC): 0.92 BTC (or 91,862,012 Sats)
  • End Balance (AUD): $228,948
  • Net Yearly Return (AUD): $34,737
  • Net Annual Return (After Fees): 26.29%
  • Gross Annual Return (No Fees): 29%
  • Net Total Return (After Fees): 154.39%
  • Gross Total Return (No Fees): 176.92%
  • Total Return Lost Due to Fees: 22.54%
  • Effective Annual Management Fee: 2.71%
  • Total Fees Paid Over 4 Years (BTC): 0.081 BTC
  • Total Fees Paid Over 4 Years (AUD): $20,282
  • Equivalent Monthly Fees Paid (AUD): $423
  • Equivalent Monthly Sats Lost: 169,541 Sats

In this scenario, the effective annual management fee skyrockets to 2.71%, equating to approximately $423 per month. The additional break fee significantly impacts your returns, leading to a substantial loss in potential gains.

Again, let's look at a 5 BTC starting point:

  • End Balance (BTC): 4.59 (459,310,059 Sats)
  • End Balance (AUD): $1,144,741
  • Total Fees Paid (BTC): 0.407 BTC
  • Total Fees Paid (AUD): $101,412
  • Equivalent Monthly Fees Paid (AUD): $2,113
  • Equivalent Monthly Sats Lost: 449,000 Sats

In this scenario you are paying a total of $101,412 over 4 years - or $2,113 per month.

Key Takeaway: Understand All the Costs Before Committing

This analysis highlights the importance of fully understanding all the costs involved in any custodial arrangement. While the advertised fee might seem manageable, hidden charges and the exponential growth of Bitcoin can lead to significantly higher costs.

Before committing to a service, carefully assess all the fees, including management fees, exit fees, and any applicable taxes. Understanding these costs will allow you to make a more informed decision about whether a collaborative custody service is suitable for your needs or if self-custody might be a better option.

Remember, when it comes to managing your Bitcoin, transparency and understanding are key to preserving and growing your wealth. Make sure you know exactly what you’re paying for to avoid any unwelcome surprises down the road. Don't trust, verify!

Want to do your own analysis? Use our free, simple collaborative custody fee calculator.