Ask a seasoned crypto trader, and they’ll most likely agree: Entering the digital assets market is more challenging than many people think. From navigating security protocols to tackling tax reporting, managing a crypto portfolio can feel overwhelming, especially for newcomers.

To simplify access, fund managers have introduced exchange-traded funds (ETFs) tied to crypto assets like Bitcoin (BTC). These products offer traders of all experience levels a more accessible way to invest in blockchain technology and track BTC’s price movements without directly holding cryptocurrency.

While Bitcoin ETFs offer convenience and exposure to Bitcoin’s market performance, they differ significantly from owning Bitcoin in a crypto wallet.

In this guide, we’ll explain how to buy a Bitcoin ETF, how they work, and what to consider before investing.

What is a Bitcoin ETF?

ETFs are an asset class that allows investors to gain price exposure to a fund manager’s holdings. These holdings can range from stocks and commodities to foreign currencies, and the funds trade on exchanges like company shares during regular market hours. Bitcoin ETFs differ because they exclusively track the price of Bitcoin. While owning a Bitcoin ETF doesn’t involve holding BTC in a wallet, it gives investors a way to benefit from Bitcoin’s price movements as part of their portfolios. Here’s how:

As securities, Bitcoin ETFs fall under the jurisdiction of regulatory agencies like the U.S. Securities and Exchange Commission (SEC). Firms offering Bitcoin ETFs must comply with stringent SEC standards for transparency and regulatory compliance.

Spot Bitcoin ETFs vs. futures Bitcoin ETFs

Bitcoin ETFs come in two forms: spot Bitcoin ETFs and futures Bitcoin ETFs. Spot Bitcoin ETFs involve the fund manager directly purchasing and holding BTC, typically with custodial support, with each share representing a portion of the manager’s Bitcoin holdings. Conversely, futures Bitcoin ETFs use synthetic contracts (derivatives) to simulate Bitcoin’s price movements. While both aim to mirror Bitcoin’s market performance, spot Bitcoin ETFs generally offer more accurate pricing because they are directly tied to actual BTC holdings.

How was the first Bitcoin ETF created and approved? A brief history

The concept of Bitcoin ETFs dates back to 2013 when the Winklevoss twins – also known for their legal battle with Facebook (now Meta) CEO Mark Zuckerberg – submitted an application for a spot Bitcoin ETF to the SEC. However, the SEC repeatedly denied proposals for spot Bitcoin ETFs, citing concerns about market manipulation and investor protection.

The breakthrough came in 2021 when the SEC approved the ProShares Bitcoin Strategy ETF, marking the first futures-based Bitcoin ETF in the United States. Around the same time, Canada made international history with the launch of the Purpose Bitcoin ETF, the world’s first spot Bitcoin ETF.

Momentum grew in 2023 after Grayscale Investments sued the SEC for rejecting its application to convert the Grayscale Bitcoin Trust (GBTC) into an ETF. Grayscale’s legal win, combined with Bitcoin’s growing interest as an asset class, pushed the SEC to approve spot Bitcoin ETFs in 2024. Today, several spot Bitcoin ETFs trade on U.S. markets, including BlackRock’s iShares Bitcoin Trust ETF (IBIT), Fidelity’s Wise Origin Bitcoin Fund (FBTC), and Invesco’s Galaxy Bitcoin ETF (BTCO).

Where to buy a Bitcoin ETF token 

One of the biggest draws of Bitcoin ETFs is their accessibility. Unlike direct cryptocurrency purchases, which often require signing up for a dedicated specialized exchange like Coinbase, Bitcoin ETFs are available on mainstream brokerage platforms alongside traditional assets like stocks and mutual funds.

While the availability of Bitcoin ETFs varies, major brokers like Fidelity, Charles Schwab, and E*TRADE now list Bitcoin ETFs, reflecting their growing adoption in the global financial market. Platforms like Robinhood and eToro cater to crypto-friendly investors by offering both Bitcoin ETFs and direct Bitcoin purchases, providing additional flexibility that allows for more diverse investment strategies.

How to buy Bitcoin ETFs

Buying BTC ETF tokens is as straightforward as purchasing traditional stocks or mutual funds. Unlike direct cryptocurrency investments, there’s no need to handle blockchain addresses or digital wallets – everything happens on a single brokerage platform. 

1. Open a brokerage account

Start by choosing a brokerage platform that lists Bitcoin ETFs. Compare key features like trading fees, user experience, and reputation to find the best fit. To open an account, most brokers require “know-your-customer” (KYC) details, including a valid photo ID, address, and Social Security number.  

2. Deposit funds

After setting up a brokerage account, the next step is to fund it via wire transfers, automated clearing house (ACH) payments, or debit and credit card deposits.  

3. Research Bitcoin ETFs

Review the Bitcoin ETF options the brokerage platform offers. Determine whether the product is spot- or futures-based Bitcoin ETF, evaluate the fund manager’s reputation, and check for any associated fees that may impact long-term potential returns.  

4. Buy Bitcoin ETF shares

Select the Bitcoin ETF that aligns with your investment strategy and decide how many shares to purchase. ETF prices depend on factors like the number of shares issued and the underlying BTC held by the fund.  

Monitor your investment

After buying, regularly track your Bitcoin ETF’s performance. Platforms like CoinTracker offer pricing pages for Bitcoin and the Bitcoin ETF token price to monitor real-time prices and portfolio performance, helping you evaluate whether to hold or adjust your position over time.

What’s the difference between holding Bitcoin and Bitcoin ETFs?

Bitcoin ETFs are a convenient option for investors who want exposure to Bitcoin’s price without the responsibilities of self-custody. However, relying on a fund manager comes with tradeoffs that set Bitcoin ETFs apart from directly owning BTC.

Ownership and storage

When holding Bitcoin in a self-custodial wallet, investors maintain full control over their digital assets without intermediaries. While self-custody eliminates counterparty risks, it requires managing private keys and provides no insurance against hacks or lost credentials. Bitcoin ETFs, by contrast, represent shares in a fund managed by third-party custodians. These fund managers handle storage and security, but investors don’t own actual BTC and must rely on the entity’s trustworthiness.

Trading hours

Bitcoin markets operate 24/7, allowing investors to trade on crypto exchanges at any time. Bitcoin ETFs, however, are tied to traditional market hours on platforms like the New York Stock Exchange (NYSE). Investors can only trade ETF shares during these standard hours, limiting flexibility.

Fees and price tracking

Both Bitcoin and Bitcoin ETFs involve costs, but the types of fees differ. Direct Bitcoin purchases incur exchange fees, network transfer fees, and potential storage costs for hardware wallets or custodial services. Bitcoin ETFs, on the other hand, charge expense ratios to cover fund management and custody, and they may experience tracking errors that prevent them from perfectly reflecting Bitcoin’s price.  

Tax implications 

Many tax authorities, including the IRS, classify Bitcoin as property, which means transactions like exchanging BTC for another currency or using it to purchase goods are taxable events. Activities in decentralized finance (DeFi) – such as bridging BTC to other blockchains for yield farming – also have tax implications.

In contrast, Bitcoin ETFs are taxed similarly to traditional investments like stocks or mutual funds. Investors owe taxes on profits when they sell ETF shares, and losses can be deducted to offset gains. Brokerages that are required to report sales of ETF shares simplify the process by providing detailed tax documents, such as Form 1099-B, which details proceeds, cost basis, and capital gains, reducing the complexity of reporting compared to holding BTC directly.

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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.