Long-Term Impact of Hong Kong Crypto Spot ETFs

TL;DR

The Securities and Futures Commission of Hong Kong officially announced the list of approved virtual asset spot ETFs, including Huaxia (Hong Kong), CSOP International, and Bosera International’s Bitcoin and Ethereum spot ETFs. These 6 spot ETF products opened for subscription from April 25th to 26th and debuted on the Hong Kong Stock Exchange on April 30th.

Through subscription, the 6 Hong Kong spot ETFs attained a decent initial scale. According to SoSo Value data, the total net value of the 3 Bitcoin ETFs amounted to $248 million, while the 3 Ethereum ETFs totaled $45 million, reaching a combined net value of nearly $300 million. In contrast, excluding Grayscale’s transition from a trust to an ETF, the total net value of US Bitcoin spot ETF products on the first day was only $130 million.

However, in terms of first-day trading volume, Hong Kong crypto ETFs significantly lagged behind their US counterparts. SoSo Value data shows that the 6 Hong Kong crypto ETFs had a first-day trading volume of only $12.7 million on April 30th, far below the $4.66 billion trading volume of US ETFs on their first day.

We observed a significant mismatch between the initial scale and first-day trading volume of Hong Kong crypto ETFs. To understand the potential impact of Hong Kong crypto spot ETFs on the crypto market and how to seize related investment opportunities, we will analyze this through the supply and demand dynamics of Hong Kong ETFs.

Figure 1: Overview of Hong Kong crypto spot ETF data (data source: SoSo Value)

Demand Side Analysis: Restriction on Chinese Mainland Renminbi Investors May Limit Incremental Funds, Leading to Lower Trading Volumes

This Hong Kong cryptocurrency ETF still has strict restrictions on investor qualifications, and mainland investors cannot participate in transactions.Taking Futu Securities as an example, the account holder is required to be a non-resident of Mainland China & the United States before trading can be conducted. The market expects mainland funds to be traded through southbound Hong Kong Stock Connect, which is currently not allowed and is expected to be difficult to open for a long time.

In terms of fees, Hong Kong crypto ETFs are not superior. Compared with US ETFs, they are less attractive to institutions that want to hold them for a long time.According to SoSo Value data, the 11 Bitcoin spot ETFs in the United States, except for Grayscale and Hashdex, the largest ones such as IBIT and CBOE have management fee rates of around 0.25%, while the comprehensive rates of the 3 Bitcoin ETFs in Hong Kong are relatively The rates are higher, with HuaXia at 1.99%, Harvest at 1.00%, and Boshi at the lowest at 0.85%. Even with short-term management fee reductions, there is still no rate advantage. Due to the fee difference, the U.S. Bitcoin ETF holding cost is lower for institutional investors who are optimistic about the crypto market and want to hold it for a long time.

In the future, demand-side funds may come from two main sources:

1) Hong Kong retail investors.For retail investors with Hong Kong ID cards, the threshold for buying Hong Kong crypto ETFs is lower. If you are purchasing a U.S. Bitcoin spot ETF, you need to have a professional investor qualification (PI), and applying for PI qualification requires a certificate of an investment portfolio of HKD 8 million or a total asset certificate of HKD 40 million. This time, the Hong Kong Bitcoin spot ETF allows retail investors to trade, and the trading hours are more in line with Asian schedules, which is an important addition.

2) Traditional investors interested in Ethereum.The Hong Kong Ethereum Spot ETF is the world’s first launch, so investors who have substantial difficulty holding currency and are optimistic about the prospects of Ethereum may bring incremental growth to the Ethereum ETF.

Figure 2: U.S. Bitcoin spot ETF fee rates (data source: SoSo Value)

Figure 3: Hong Kong crypto spot ETF fee rates (data source: compiled by SoSo Value)

Supply Side: Increasing the In-Kind Creation and Redemption Mechanism for ETF Shares Enhances Supply, Boosting Initial Scale

The biggest difference between Hong Kong crypto spot ETFs and US Bitcoin spot ETFs lies in the addition of the in-kind creation and redemption mechanism alongside cash transactions. This directly determines that, at the ETF share level, Hong Kong crypto ETFs may have more supply available.

In-kind creation and redemption refer to investors being able to exchange cryptocurrencies (such as Bitcoin or Ethereum) for ETF shares when subscribing (creating) or redeeming ETF shares, rather than using cash. During subscription, investors provide a certain amount of cryptocurrency to the ETF in exchange for ETF shares. During redemption, investors return ETF shares in exchange for the corresponding amount of cryptocurrency.

Referring to Figure 2, a comparison of the subscription process for Hong Kong crypto assets shows two major differences brought about by in-kind creation:

1) Holders can directly subscribe using their cryptocurrency holdings: For some major holders, such as miners, they can easily convert their cryptocurrency holdings into ETF shares. These ETF shares can then be held, redeemed for cash, or directly sold for cash on the Hong Kong Stock Exchange, offering flexible options.

2) In the context of the crypto market, in-kind creation does not necessarily bring in additional funds; it simply involves the transfer of cryptocurrencies between different accounts. In contrast, cash subscription brings actual buying pressure to on-chain crypto assets.

Therefore, the subscribers of Hong Kong crypto ETF shares include both traditional cash subscribers and major cryptocurrency holders. Although specific proportions of in-kind and cash subscriptions have not been disclosed by each provider, based on public communications from OSL, it’s suggested that the proportion of initial in-kind subscriptions may exceed 50%. This explains why the initial fundraising scale of Hong Kong crypto ETFs can reach nearly $300 million, with in-kind subscriptions playing a significant role. However, on another note, these ETF shares obtained through in-kind subscriptions may subsequently turn into sell-side pressure in secondary market trading.

Figure 4: Comparison of Hong Kong crypto spot ETF physical VS cash subscription process

Considering Supply and Demand, Monitoring Discount/Premium Rate for Investment Opportunities

In accordance with the comprehensive analysis of supply and demand mentioned earlier, unlike US Bitcoin spot ETFs, we can track the daily net fund inflow of ETFs (Total Net Inflow, specific information available at https://sosovalue.xyz/assets/us-btc-spot) to intuitively assess the impact of incremental funds brought to on-chain assets by Bitcoin ETFs. The supply and demand dynamics of Hong Kong crypto spot ETFs are more complex, and the data published by various fund companies cannot clearly distinguish between the volume of in-kind and cash subscriptions and redemptions. In this context, we believe that the discount/premium rate in the open market (Hong Kong Stock Exchange trading) may be a better observation indicator.

As we analyzed earlier, in on-exchange trading on the Hong Kong Stock Exchange, the discount/premium reflects the balance of power between supply and demand. If an ETF trades at a discount, it indicates stronger selling pressure, oversupply, and market makers are incentivized to purchase ETF shares at a discount on the Hong Kong Stock Exchange, then redeem them with the ETF issuer outside the market to profit from the price difference. This results in a decrease in the overall net asset value of the ETF, outflow of funds, and a negative impact on the crypto market as a whole. The entire process can be summarized simply: ETF trades at a discount → stronger selling pressure → potential redemptions → negative impact on the crypto market. Conversely, if the ETF trades at a premium → stronger buying pressure → potential subscriptions → positive impact on the crypto market.

According to SoSo Value data, as of the closing 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, with the highest premium reaching 0.33% during intraday trading. Selling pressure was restrained on the first day, and buying pressure was relatively strong. Considering the influence of market makers on the first day of ETF listing, this premium/discount data can be continuously monitored. If a positive premium can be sustained, it is expected to continue to attract investor subscriptions, especially from holders of cryptocurrencies. In this case, the scale of Hong Kong crypto spot ETFs may exceed the estimated value of $500 million. However, if it turns into a discount, caution should be exercised against arbitrage trading and redemption of ETF shares, which could lead to the ETF issuer selling cryptocurrencies and driving the crypto market downwards.

Figure 5: Hong Kong crypto spot ETF supply and demand impact mechanism (data source: compiled by SoSo Value)

One Significant Value of Hong Kong Crypto ETFs to Investors: A Pathway Added for the Conversion and Circulation Between Crypto Assets and Tradable Financial Assets.

The rapid approval of Hong Kong crypto spot ETFs, while potentially having a smaller short-term impact on the crypto market compared to US spot ETFs, offers significant long-term implications. The in-kind creation and redemption mechanism of Hong Kong crypto ETFs provide a pathway for crypto assets to be converted into traditional financial assets. Through in-kind subscriptions, cryptocurrencies can be exchanged for ETF shares, which, due to their fair value pricing and liquidity in traditional financial markets, can serve as proof of assets in traditional financial markets. This enables various leveraged operations, such as collateralized borrowing and lending, and the construction of structured products. By bridging the gap between crypto assets and traditional finance, the value of crypto assets can be more fully reflected and realized.

From a broader and long-term perspective, the approval of Bitcoin and Ethereum spot ETFs in Hong Kong is a significant development for the global crypto market. This policy will have long-term implications for the financial landscape in the Chinese-speaking region and represents an important step towards further legitimizing cryptocurrencies within the global financial system.

Disclaimer：

1. This article is reprinted from [Theblockbeats]. All copyrights belong to the original author [Tom Analysis，SoSoValue 入驻研究员]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
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