As contracts near expiration, the fund must roll over its positions — selling expiring contracts and buying new ones for the coming month. The costs associated with these rollovers can cause the ETF's performance to deviate from the spot price of bitcoin, a phenomenon known as tracking error.
There are also inverse futures ETFs, such as the ProShares Short Bitcoin ETF (BITI), which uses futures to generate returns that move opposite to bitcoin's price. ProShares additionally offers the Ether ETF (EETH), an ether futures ETF, and ETFs that track a mix of bitcoin and ether using equal or market capitalization weighting.
2.4 Crypto-Related Equity ETFs
Beyond funds that directly or indirectly hold cryptocurrencies, there are ETFs that invest in companies engaged with blockchain technology, crypto mining, or digital asset infrastructure. For example, the Amplify Transformational Data Sharing ETF (BLOK) holds a portfolio of companies that develop and use blockchain technologies.
These crypto-related equity ETFs offer a different risk profile: instead of tracking cryptocurrency prices, they reflect the performance of publicly traded companies operating in the crypto and blockchain sectors.
Part 3. How to Buy and Trade Crypto ETFs
One of the primary appeals of crypto ETFs is that they integrate seamlessly with the brokerage infrastructure most investors already use.
3.1 Where You Can Purchase Crypto ETFs
Crypto ETFs can be purchased through a range of investment accounts, including individual and joint brokerage accounts, Traditional and Roth IRAs, and certain 401(k) plans. This broad availability stands in contrast to direct cryptocurrency, which is not supported by most major IRA and 401(k) providers.
Platforms such as Webull provide access to ETF trading within a brokerage environment that also includes stocks, options, and other securities. For investors seeking a unified view of their portfolio, trading crypto ETFs alongside traditional assets in a single brokerage account can simplify portfolio management and recordkeeping.
3.2 A Step-by-Step Guide to Buying Your First Crypto ETF
Buying a crypto ETF follows the same general process as purchasing any other ETF. Here is how it typically works:
Step 1: Open and fund a brokerage account. If you do not already have one, you will need to open a brokerage account with a registered broker-dealer. Many platforms, including Webull, allow you to open an account online. The account application typically requires personal information, identity verification, and funding via bank transfer or other accepted methods.
Step 2: Research available crypto ETFs. Before placing an order, review the ETFs available through your brokerage platform. Key details to examine include the fund's structure (spot vs. futures), expense ratio, assets under management, and historical tracking performance. You can find this information through the fund's prospectus and fact sheet, as well as through research tools on your brokerage platform.
Step 3: Decide on order type and quantity. Determine how many shares (or fractional shares, if supported) you wish to purchase and what order type — market order, limit order, or another type — suits your strategy.
Step 4: Place the order. Enter the trade through your brokerage platform. You may wish to review the order details — including any commissions or fees — before confirming.
Step 5: Monitor your position. After the order executes, the ETF shares will appear in your brokerage account. You can track the position, review performance, and manage it as you would any other holding in your portfolio.
3.3 Understanding Account Protections
When you hold crypto ETFs in a brokerage account, the securities are protected by SIPC insurance up to $500,000 (including a $250,000 limit for cash) in the event the brokerage firm fails. It is important to understand that SIPC protection covers broker insolvency — it does not protect against declines in the market value of your investments. Direct cryptocurrency investments are not covered by SIPC or FDIC insurance.
3.4 Fees to Consider
Crypto ETFs carry expense ratios that cover fund management and operational costs. These can be higher than traditional equity ETFs. For example, the ProShares Bitcoin ETF (BITO) has an expense ratio of 0.95%, compared to the SPDR S&P 500 ETF's expense ratio of approximately 0.0945%. The industry average expense ratio across all ETFs was 0.47% as of December 31, 2022.
When trading crypto ETFs through a brokerage platform, investors should also be aware of any applicable brokerage fees, commissions (though many platforms now offer commission-free ETF trading), and potential costs such as spreads or regulatory fees. Reviewing the full fee schedule of both the ETF and the brokerage platform before investing is recommended.
Part 4. Crypto ETF Taxation — What Investors Need to Know
Tax treatment is one of the most important practical considerations for anyone investing in crypto ETFs, and the rules differ meaningfully depending on the type of ETF you hold.
4.1 Capital Gains on Spot Crypto ETFs
When you sell shares of a spot crypto ETF for a gain, you incur a capital gain. The tax rate depends on your holding period:
Short-term capital gains: If you hold the ETF shares for one year or less, your gains are taxed at ordinary income tax rates, which range from 10% to 37% depending on your income and filing status.
Long-term capital gains: If you hold the ETF shares for more than one year, your gains qualify for long-term capital gains rates of 0%, 15%, or 20%, depending on your taxable income.
Additionally, investors whose income exceeds certain thresholds may be subject to a 3.8% net investment income tax on top of these capital gains rates.
There is no tax for simply holding a crypto ETF — taxes are triggered only upon a taxable event such as selling shares at a gain.
4.2 The 60/40 Rule for Futures-Based Crypto ETFs
Futures-based crypto ETFs follow a distinct set of tax rules. Under IRS Section 1256, if the fund holds regulated futures contracts (such as those traded on the CME), 60% of any gain is treated as long-term capital gain and 40% is treated as short-term — regardless of how long you held the shares.
This 60/40 treatment can be advantageous for shorter holding periods when compared to standard capital gains rules, but it also means that even investors who hold futures ETF shares for more than a year will have 40% of their gains taxed at ordinary income rates.
If the fund holds non-regulated futures contracts, gains are subject to normal capital gains rules similar to stocks. Taxation of futures contracts can be complex depending on the specific structure of the fund and any tax elections made.
4.3 Tax-Advantaged Accounts
One notable tax advantage of crypto ETFs is that they can be held in tax-advantaged retirement accounts. Most Traditional and Roth IRA providers allow their customers to hold ETFs — including crypto ETFs — while most do not support holding cryptocurrency directly.
Holding crypto ETFs in a Traditional IRA may allow contributions to grow tax-deferred until withdrawal, while a Roth IRA may allow for tax-free growth and tax-free qualified withdrawals. Investors should consult a qualified tax professional regarding their specific situation, as this information is educational in nature and does not constitute tax advice.
4.4 Tax-Loss Harvesting with Crypto ETFs
Because crypto ETFs trade on regulated exchanges and are treated as securities, investors may be able to use tax-loss harvesting strategies — intentionally selling shares at a loss to offset capital gains or up to $3,000 of ordinary income per year. This is a strategy some investors use during market downturns to manage their overall tax liability. As with all tax matters, consulting a qualified tax professional is recommended before implementing any tax strategy.
Part 5. Crypto ETFs vs. Direct Cryptocurrency Ownership
For investors considering crypto exposure, one of the most common questions is whether to invest through an ETF or to buy cryptocurrency directly. Each approach carries distinct trade-offs.
5.1 Key Differences at a Glance
5.2 Advantages of Crypto ETFs
Crypto ETFs offer several practical benefits that may appeal to investors who prioritize convenience and integration with their existing brokerage relationship:
Ease of access. Investors can buy and sell crypto ETFs through a brokerage account they already use for stocks and bonds. There is no need to open a separate account on a cryptocurrency exchange or manage a digital wallet. This lowers the learning curve for those unfamiliar with blockchain terminology, wallet management, and crypto exchange interfaces.
Security and custody. The ETF provider handles custody and security of the underlying digital assets, which means investors do not need to worry about managing private keys, securing recovery phrases, or protecting against phishing attacks. Cryptocurrency exchanges and wallets have faced security incidents, and for investors uncomfortable with managing these risks, an ETF offers a regulated alternative.
Tax-advantaged account eligibility. As noted earlier, most IRA and 401(k) providers allow customers to hold ETFs but not direct cryptocurrency. For long-term investors, the ability to hold crypto exposure within a tax-advantaged retirement account may be a significant benefit.
Portfolio integration. Holding crypto ETFs alongside traditional assets in a single brokerage account simplifies portfolio tracking, rebalancing, and tax reporting.
5.3 Advantages of Direct Cryptocurrency Ownership
Direct cryptocurrency ownership also has distinct advantages that matter to many investors:
Full ownership and control. When you own cryptocurrency directly, you hold the actual digital asset. As the saying goes in the crypto community, "not your keys, not your crypto" — direct ownership means no intermediary stands between you and your asset.
24/7 trading potential. Unlike ETFs, which trade during regular market hours, cryptocurrency markets operate around the clock. This can be valuable during periods of rapid price movement outside of traditional trading hours.
No annual fees. Holding cryptocurrency directly does not incur an expense ratio. While there may be transaction fees when buying or selling, and network fees for transfers, there are no ongoing management fees for simply holding the asset.
Usability. Cryptocurrency held directly can be used for transactions, payments, and interacting with decentralized applications — capabilities that ETF shares do not offer.
Decentralization and independence. For some investors, part of the appeal of cryptocurrency is independence from the traditional financial system. Crypto ETFs, by contrast, operate entirely within that system and are managed by financial institutions.
5.4 Which Approach May Be Suitable?
The choice between crypto ETFs and direct cryptocurrency ownership depends on individual investor preferences, goals, and comfort with technology. An investor who values convenience, integration with retirement accounts, and a regulated custody structure may find crypto ETFs to be a practical choice. An investor who values direct control, decentralization, and the ability to use cryptocurrency for transactions may prefer direct ownership.
Both approaches involve risk. Cryptocurrency prices have historically been volatile, and this volatility applies regardless of whether exposure is gained through an ETF or by holding the asset directly. All investing involves risk, including the possible loss of principal.
Frequently Asked Questions About Crypto ETFs
Are there ETFs that focus specifically on bitcoin?
Yes. Several ETFs focus solely or primarily on bitcoin. Spot bitcoin ETFs hold bitcoin directly, while futures-based bitcoin ETFs like the ProShares Bitcoin ETF (BITO) track bitcoin prices through futures contracts. There are also inverse bitcoin ETFs, such as the ProShares Short Bitcoin ETF (BITI), designed to move in the opposite direction of bitcoin's price.
Can I buy fractional shares of a crypto ETF?
Many brokerages, including Webull, support fractional share trading, which may allow you to purchase a portion of a crypto ETF share. For example, if one share costs $100 and you want to invest $50, you could buy 0.5 shares if fractional trading is supported. Some brokerages may have minimum purchase amounts for fractional shares, so reviewing your specific platform's policies is recommended. To explore available ETFs on Webull, you can browse the ETF trading section of the platform.
Do crypto ETFs pay dividends?
Some crypto ETFs may pay dividends or distributions, depending on the fund's structure and holdings. However, how much you earn in dividends correlates to the number of shares you own. It is important to read the fund's summary prospectus to understand its distribution policies before investing.
How are crypto ETF gains taxed compared to direct cryptocurrency?
Spot crypto ETF gains and direct cryptocurrency gains are both generally subject to short-term or long-term capital gains tax depending on the holding period. However, futures-based crypto ETFs follow the Section 1256 60/40 rule, which may result in different tax treatment. Additionally, crypto ETFs can be held in tax-advantaged retirement accounts like IRAs, which most providers do not support for direct cryptocurrency holdings.
What happens if I do not receive a Form 1099-DA for my crypto ETF?
If a Form 1099-DA is not issued, it does not necessarily mean your activity is non-taxable. Not all customers receive one — typically only those with reportable activity during the tax year do. You remain responsible for reporting taxable crypto-related activity when filing your taxes.
Are crypto ETFs protected by SIPC insurance?
Crypto ETFs held in a brokerage account are protected by SIPC insurance up to $500,000 (including a $250,000 limit for cash) in the event the brokerage firm fails. However, this does not protect against a decline in the market value of the ETF shares. Direct cryptocurrency holdings are not covered by SIPC or FDIC insurance.
What risks should I consider before investing in a crypto ETF?
Key risks include significant price volatility, regulatory uncertainty that may affect the fund's operations or tax treatment, potential tracking error (particularly with futures-based ETFs), potential liquidity issues in underlying crypto markets, and higher expense ratios compared to traditional equity ETFs. All investing involves risk, including the possible loss of principal. Past performance does not guarantee future results.
Can I invest in crypto ETFs through my IRA?
Yes. Most Traditional and Roth IRA providers allow customers to hold ETFs — including crypto ETFs — within their retirement accounts. This is a notable difference from direct cryptocurrency, which is generally not supported by major IRA providers. Holding crypto ETFs in an IRA may offer potential tax advantages depending on the type of account.
The Bottom Line
Crypto ETFs offer a regulated, brokerage-friendly way to access digital asset markets without the technical demands of direct cryptocurrency ownership. While they simplify custody and integrate with retirement accounts, investors should carefully weigh fees, tracking characteristics, and tax treatments across fund types. Understanding the risks — including volatility and regulatory shifts — and how an ETF fits within your broader portfolio is essential before committing capital.
Disclaimer:
Investing in Crypto ETPs involves the substantial risks inherent to cryptocurrencies, including extreme price volatility, regulatory uncertainty, and potential for complete loss. This is a high-risk investment suitable only for those with a strong risk tolerance.
Webull Financial LLC (member SIPC, FINRA) offers self-directed securities trading. All investments involve risk. More info: https://www.webull.com/policy
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. Investing involves risk, including the risk of loss of principal.
