Hong Kong Cryptocurrency ETFs to be Listed at the End of April
The Hong Kong Securities and Futures Commission has officially announced the approved list of virtual asset spot ETFs, which includes Bitcoin spot ETF and Ethereum spot ETF under the subsidiaries of Huaxia (Hong Kong), CSOP International, and Bosera International. These six spot ETF products will be open for subscription from April 25th to 26th and will be listed on the Hong Kong Stock Exchange on April 30th.
Through the subscription process, the six Hong Kong spot ETFs have achieved a good initial scale. According to SoSo Value data, the three Bitcoin ETFs have a total net value of $248 million, and the three Ethereum ETFs have a total net value of $45 million, with a total net value of nearly $300 million. In contrast, the first-day net value of the US Bitcoin spot ETF, excluding Grayscale (GBTC) which converted from a trust to an ETF, was only $130 million.
However, in terms of first-day trading volumes, Hong Kong’s cryptocurrency ETFs were much smaller compared to their US counterparts. According to SoSo Value data, the six Hong Kong cryptocurrency ETFs had a first-day trading volume of only $12.7 million on April 30th, significantly lower than the $4.66 billion trading volume of US ETFs on their first day of listing.
We observed a significant mismatch between the initial scale and first-day trading volume of Hong Kong’s cryptocurrency ETFs. It remains to be seen how large the scale of Hong Kong’s cryptocurrency spot ETFs can be, what impact they will have on the cryptocurrency market, and how to seize relevant investment opportunities. In this article, we will analyze this issue through the supply and demand relationship of Hong Kong ETFs.
Further reading:
Hong Kong Bitcoin and Ethereum Spot ETFs Officially Approved! Are Chinese Investors Left Out? Expert Opinions?
Demand Side: Limited Incremental Capital from Chinese Investors Leading to Low Trading Volumes
This Hong Kong cryptocurrency ETF still has strict restrictions on investor qualifications, and Chinese investors cannot participate in trading. For example, Futu Securities requires the account opener to be a non-mainland Chinese and non-US resident in order to trade. It is currently not allowed for mainland Chinese funds to trade through the southbound Stock Connect, and it is expected to be difficult to achieve in the foreseeable future.
In terms of costs, Hong Kong cryptocurrency ETFs are not competitive compared to US ETFs and have limited appeal to institutional investors who want to hold them for the long term. According to SoSo Value data, among the 11 US Bitcoin spot ETFs, except for Grayscale and Hashdex, the largest ones such as IBIT and CBOE have management fees of around 0.25%. In contrast, the comprehensive fees of the three Hong Kong Bitcoin ETFs are relatively higher, with Huaxia at 1.99%, CSOP at 1.00%, and Bosera at 0.85%. Even with temporary fee reductions, they still do not have a fee advantage. Due to the fee difference, institutional investors who are optimistic about the cryptocurrency market and want to hold them for the long term will find that the holding costs of US Bitcoin ETFs are lower.
Looking ahead, the source of demand capital is likely to come from two main sources:
1. Hong Kong retail investors
For retail investors with Hong Kong identity cards, the threshold for purchasing Hong Kong cryptocurrency ETFs is lower. For example, to purchase US Bitcoin spot ETFs, one needs to have professional investor qualifications (PI), and applying for PI qualifications requires providing evidence of an HKD 8 million investment portfolio or HKD 40 million in total assets. The Hong Kong Bitcoin spot ETF allows retail investors to trade, and the trading hours are also more in line with the Asian time zone, which is an important incremental factor.
2. Traditional investors interested in Ethereum
The Hong Kong Ethereum spot ETF is the first of its kind globally, so for investors who have difficulty holding the actual currency but are bullish on the future of Ethereum, it may bring incremental demand to the Ethereum ETF.
Further reading:
First Batch of “Cryptocurrency Spot ETFs” Officially Announced in Hong Kong! Open for Trading on 4/30, What Do Industry Experts Think?
Supply Side: In-kind Creation and Redemption Increases ETF Supply, Boosting Initial Scale
The biggest difference between Hong Kong cryptocurrency spot ETFs and US Bitcoin spot ETFs is the addition of in-kind creation and redemption alongside cash creation. This directly determines that in terms of ETF shares, Hong Kong cryptocurrency ETFs may have more supply.
In-kind creation and redemption means that when investors subscribe (create) or redeem ETF shares, they can use cryptocurrency (Bitcoin or Ethereum) for exchange instead of cash. In the subscription process, investors provide a certain amount of cryptocurrency to the ETF in exchange for ETF shares. In the redemption process, investors return ETF shares in exchange for the corresponding cryptocurrency.
Comparing the subscription process of Hong Kong cryptocurrency spot ETFs in Figure 2, it can be seen that in-kind creation and redemption bring two major differences compared to cash creation:
Holders can directly subscribe with cryptocurrency:
For some large holders of cryptocurrency, such as miners, it is easy for them to convert their cryptocurrency into ETF shares. After holding ETF shares, they can support cash redemption and also sell them directly for cash on the Hong Kong Stock Exchange, providing a flexible way to deal with them.
For the cryptocurrency market, in-kind creation and redemption do not bring incremental capital inflow to the market, but rather the movement of cryptocurrency between different accounts. Cash creation, on the other hand, brings actual buying interest to on-chain cryptocurrency assets.
Therefore, the subscription side of Hong Kong cryptocurrency ETF shares includes both traditional cash subscribers and large holders of cryptocurrency. Although the specific share of in-kind creation and cash creation has not been disclosed by each company, according to OSL’s public communication, the proportion of ETF shares created through in-kind creation may exceed 50% in the initial batch. This also explains why the initial fundraising scale of Hong Kong cryptocurrency ETFs can reach nearly $300 million, with in-kind creation playing a crucial role. However, on another level, these ETF shares created through in-kind creation may be converted into selling pressure in secondary market trading.
Considering the overall supply and demand, it is important to focus on the premium/discount rate to seize investment opportunities
Based on the comprehensive analysis of supply and demand, unlike the US Bitcoin spot ETFs, we can track the daily net inflow of funds to the ETFs to intuitively judge the impact of incremental capital brought by Bitcoin ETFs on the cryptocurrency asset prices. The supply and demand for Hong Kong cryptocurrency spot ETFs is more complex, and the data disclosed by various fund companies cannot clearly distinguish between in-kind and cash creation and redemption. In this context, we believe that the premium/discount rate in the open market (Hong Kong Stock Exchange trading) may be a better indicator to observe.
As we analyzed earlier, the premium/discount rate in on-exchange trading reflects the balance of power between supply and demand. If an ETF is trading at a discount, it indicates stronger selling pressure, oversupply, and market makers are motivated to purchase ETF shares at a discount on the Hong Kong Stock Exchange and then redeem them with the ETF issuer for a profit. This leads to a decrease in the overall net assets of the ETF and capital outflow, which has a negative impact on the cryptocurrency market as a whole.
The entire process can be summarized as: ETF discount –> stronger selling pressure –> potential redemption –> negative impact on the cryptocurrency market. Conversely, if the ETF trades at a premium –> stronger buying interest –> potential subscription –> positive impact on the cryptocurrency market.
According to SoSo Value data, as of the close on April 30th, except for CSOP Bitcoin spot ETF (3439.HK) and CSOP Ethereum spot ETF (3179.HK) which had negative premiums of -0.18% and -0.19% respectively, all other products had positive premiums. During intraday trading, the premiums reached as high as 0.33%, indicating restrained selling pressure and relatively strong buying interest.
Considering that market makers may have an impact on the first-day trading of the ETFs, this premium/discount data should be continuously monitored. If the premiums can be maintained, it is expected to continue attracting investors to subscribe, especially holders of cryptocurrency. In that case, the scale of Hong Kong cryptocurrency spot ETFs is expected to exceed the estimated value of $500 million. However, if it turns into a discount, one should be cautious about arbitrage trading and redemption of ETF shares, where the ETF issuer sells cryptocurrency, which could lead to a downturn in the cryptocurrency market.
Hong Kong Cryptocurrency ETFs also have another important value for investors: they provide a pathway for the conversion and circulation of cryptocurrency assets into tradable financial assets.
The rapid approval of Hong Kong cryptocurrency spot ETFs, although it may have a smaller short-term impact on the cryptocurrency market compared to US spot ETFs, provides a pathway for the conversion of cryptocurrency assets into traditional financial assets in the medium to long term. Through in-kind creation, cryptocurrency can be converted into ETF shares, which then function as proof of assets in the traditional financial market due to the fair value pricing and liquidity provided by the traditional financial market.
Holding cryptocurrency ETFs can be used as proof of assets in the traditional financial market, allowing for various leveraged operations such as collateralized borrowing and lending, and the creation of structured products. This further connects the value of cryptocurrency assets with the traditional financial market, allowing for a more comprehensive response and realization of the value of cryptocurrency assets.
From a broader and long-term perspective, the approval of Bitcoin and Ethereum spot ETFs in Hong Kong is an important development for the global cryptocurrency market. This policy will have a long-term impact on the financial landscape of the Chinese region and is an important step towards further legitimizing cryptocurrency within the global financial system.
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Shenzhen Chaoshuo (深潮)