Investment Research Team
Six virtual asset spot ETFs debuted on the Hong Kong Stock Exchange today, but their market performance was underwhelming.
By market close, the total trading volume for the first batch of Bitcoin and Ethereum spot ETFs launched in Hong Kong amounted to only 87.58 million Hong Kong dollars (US$11.2 million), with three Ethereum spot ETFs trading below their opening price.
This performance contrasts sharply with that of Bitcoin ETFs in the United States, where the trading volume on the first day reached US$4.6 billion for 11 spot Bitcoin ETFs, approximately 383 times higher than Hong Kong’s debut.
While the market had anticipated a modest debut, the actual launch of Hong Kong’s crypto ETF products highlights the challenges the region faces in positioning itself as an Asian crypto hub. Nonetheless, there are still potential opportunities, particularly if mainland Chinese investors are permitted to invest in these ETFs.
Last week, the Hong Kong Securities and Futures Commission (SFC) disclosed listing information for Bitcoin and Ethereum spot ETFs from three fund companies: China Asset Management (Hong Kong) Limited, Bosera Asset Management, and Harvest Global Investments.
Despite being hailed as a historic event by media platforms, Hong Kong’s approval of BTC and ETH spot ETFs failed to make a significant impact on the market. Both Bitcoin and Ethereum prices remained volatile or even slightly declined after this news.
The initial issuance price for Harvest and China Asset Management products is US$1 per share (7.827 Hong Kong dollars), while Bosera’s Bitcoin ETF and Ethereum ETF have initial issuance prices roughly consistent with 1/10000 and 1/1000 of the tracking Bitcoin and Ethereum index on April 26, 2024, respectively. This translates to holding 10,000 shares being approximately equal to 1 Bitcoin, and holding 1,000 shares being approximately equal to 1 Ethereum.
The largest-scale China Asset Management’s Bitcoin ETF opened at 8.07 Hong Kong dollars and closed at only 7.95 Hong Kong dollars. The three Ethereum EFTs traded below opening price at the close of the day.
Hong Kong’s limited liquidity scale presents a significant challenge for BTC and ETH spot ETFs.
According to Eric Balchunas, a senior ETF analyst at Bloomberg, Hong Kong’s total ETF market size of approximately US$52 billion, coupled with institutional fund management restrictions and liquidity issues, means that even if all virtual asset spot ETFs in Hong Kong attracted US$500 million, it would be considered exceptional.
However, the actual performance falls short. On their first day of trading, the ETFs saw a trading volume of less than 100 million Hong Kong dollars. In contrast, spot Bitcoin ETFs in the United States have amassed assets under management exceeding US$52 billion in less than four months.
Hong Kong’s overall capital market pool and performance have been dwindling. In 2023, the Hong Kong Stock Exchange saw 73 IPOs, a 19% decrease compared to the previous year, with total IPO proceeds reaching HK$46.295 billion, a 56% decrease year-on-year.
This decline in fundraising scale has caused Hong Kong to drop out of the top five global IPO markets. Additionally, among the 73 newly listed stocks, 36 experienced a first-day drop, resulting in a break-even rate of 51%.
Given this backdrop, the underwhelming performance of crypto spot ETFs in Hong Kong may not come as a surprise.
The pivotal question looming over Hong Kong’s crypto spot ETFs is whether mainland Chinese investors will be permitted to participate. The influx of mainland funds into Hong Kong is seen as crucial to the success of these ETFs.
Currently, investors from mainland China and Hong Kong can access each other’s markets through schemes like the Shanghai-Hong Kong Stock Connect or the Shenzhen-Hong Kong Stock Connect.
However, a major obstacle arises due to the underlying assets of Hong Kong’s crypto spot ETFs — Bitcoin and Ethereum — being strictly prohibited in the mainland. As a result, attempts by mainland investors to purchase these ETFs in Hong Kong are currently being rejected.
In December 2023, a joint letter from the Hong Kong Securities and Futures Commission and the Hong Kong Monetary Authority stipulated that both existing crypto futures ETFs and potential crypto spot ETFs cannot be sold to retail investors in mainland China and other regions where crypto-related product sales are banned.
Nevertheless, there are exceptions. Mainland individuals holding Hong Kong identity cards, regardless of their permanent residency status, can engage in trading these ETFs. This opens the door for mainland financial institutions and individuals with dual identity cards to participate in Hong Kong’s crypto spot ETF trading. However, whether any gray areas exist in this process remains unclear.
An indication of potential mainland investor participation is the inclusion of Chinese Yuan counters in two crypto spot ETFs offered by China Asset Management, alongside Hong Kong dollars and US dollars.
Despite initial setbacks, optimism persists for the future of Hong Kong’s crypto spot ETFs. Encouragement stems from the success of other ETFs in Hong Kong, such as the SPDR Gold Trust ETF, boasting an asset-under-management of US$69.8 billion, and Chainalysis’ report indicating a US$64 billion trading volume in Hong Kong’s off-exchange cryptocurrency market from June 2022 to June 2023.
Wayne Huang, project manager of OSLETF, predicts that Hong Kong’s crypto spot ETFs could attract at least US$1 billion, while Paolo from VDX believes this figure could soar to even US$10 billion.
A Hong Kong crypto exchange executive noted that despite not matching the scale or influence of the United States, Hong Kong still holds an edge compared to similar products in Europe, Canada, Switzerland, and elsewhere. Additionally, Hong Kong’s strategic location positions it as a gateway for development in Southeast Asia, Taiwan, and the Middle East.
Once compliance issues surrounding crypto assets are clarified, traditional financial funds are expected to flow into these ETFs. Hong Kong’s stringent compliance measures also ensure a more secure trading environment for institutions.
According to regulations from the Securities and Futures Commission of Hong Kong, cryptocurrency exchanges must insure all custodied assets and segregate user assets into hot and cold wallets, with robust compensation mechanisms in place for any losses.
User assets need to be segregated into hot and cold wallets, with 98% placed in cold wallets and only 2% in hot wallets. In case of loss from cold wallets, compensation exceeding 50% is provided, while full compensation is given for losses from hot wallets.
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