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Buying Ethereum ETFs vs Buying Ether Directly

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Should you buy an Ethereum ETF? Or should you buy ether on a crypto exchange like Binance?

Ethereum ETFs can give investors much better security and safer custody than crypto exchanges like Binance and Swyftx. However Ethereum ETFs come with management fees.

1. Ethereum ETFs have better security

Security and safe-keeping of their assets is often a top priority for investors. And the history of hack attacks in Ethereum has left many investors reluctant to buy ether directly. (Ether is the native token of the Ethereum blockchain).

These hacks can occur due to weak security arrangements from crypto exchanges. Even some widely-used crypto exchanges like Binance have reported breaches.

However the story for Ethereum ETFs, which have been available overseas for years, has been very different. There are billions of dollars invested in Ethereum ETFs in Europe and Canada. However there have been no instances of hack attacks or breaches of the kind reported by Binance.

A likely reason for this is that Ethereum ETFs provide stronger security, and spend more money ensuring the safe keeping of their clients’ assets.

ETF providers pay for the best and safest custody in the world. This is part of the reason that Ethereum ETFs charge management fees, which we’ll discuss below.

This topflight security involves storing all ether offline in “cold storage”. Keeping ether offline keeps it out of reach of hackers. Ethereum ETFs use additional security measures like sharding, which is where private keys are split up across different custodian vaults around the world.

Moving ether in and out of an Ethereum ETF always requires approval from two people or more. And the two people must work for different organisations.

2. Ethereum ETFs management fees vs. exchanges transaction fees

Ethereum ETFs charge management fees, which are transparent and required by Australian law to be disclosed in full.

A large part of the reason Ethereum ETFs charge fees is the superior security arrangements, discussed above. Sometimes unknown to investors, a substantial portion of an Ethereum ETF management fee is paid to the custodian, in return for topflight security arrangements.

By buying ether directly on Binance, Swyftx, Bittrex, etc. investors can sidestep the management fees charged by ETFs. However, these exchanges typically charge fees of their own. These include trading or transaction fees, and spreads.

3. Ethereum ETFs can fit more easily into SMSFs, with potential tax consequences

Good investors always keep taxes in mind. Here, Ethereum ETFs can have advantages over buying ether directly. Like other kinds of ETF, Ethereum ETFs can be bought and held within your current SMSF’s brokerage account – such as CommSec or NABtrade. SMSFs can receive favourable capital gains tax rates.

But buying ether directly is less straightforward within an SMSF. Some crypto exchanges do allow investors to run an account in the name of an SMSF. Others, however, do not.