Hong Kong Cryptocurrency ETF to be officially listed at the end of April
The Hong Kong Securities and Futures Commission (SFC) has officially announced the approved list of virtual asset spot ETFs, which includes Bitcoin spot ETFs and Ethereum spot ETFs under Huaxia (Hong Kong), CSOP International, and Boshi International. These six spot ETF products will open for subscription from April 25th to 26th and will be listed on the Hong Kong Stock Exchange on April 30th.
Through the subscription period, 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, totaling nearly $300 million. In contrast, the first-day net value of the US Bitcoin spot ETF products, excluding Grayscale (GBTC) that transformed from a trust to an ETF, was only $130 million.
However, in terms of first-day trading volume, Hong Kong’s cryptocurrency ETFs are much smaller than their US counterparts. According to SoSo Value data, the six Hong Kong cryptocurrency ETFs only had a first-day trading volume of $12.7 million on April 30th, far lower than the $4.66 billion trading volume on the first day of US ETF listings.
We have observed a significant mismatch between the initial scale and first-day trading volume of Hong Kong’s cryptocurrency ETFs. How large Hong Kong’s cryptocurrency spot ETFs can grow, what impact they can have on the cryptocurrency market, and how to seize related investment opportunities will be analyzed based on the supply and demand relationship of Hong Kong ETFs.
Further reading:
Hong Kong Bitcoin and Ethereum spot ETFs officially approved! Will Chinese investors miss out? What do experts think?
Demand side: Limited incremental funds due to restrictions on Chinese RMB investors, leading to low trading volume
This Hong Kong cryptocurrency ETF still has strict restrictions on investor qualifications, and Chinese investors are not allowed to participate in trading. For example, Futu Securities requires that the account opening party must be a non-mainland and non-US resident in order to trade. It is currently not allowed for mainland funds to trade through the southbound Hong Kong Stock Connect, and it is expected to be difficult to bridge for a considerable period of time.
In terms of fees, Hong Kong cryptocurrency ETFs are not advantageous compared to US ETFs and are not very attractive to institutions who want to hold them long-term. According to SoSo Value data, the management fees of most US Bitcoin spot ETFs, except for Grayscale and Hashdex, are around 0.25%, while the comprehensive fees of the three Hong Kong Bitcoin ETFs are relatively higher: 1.99% for Huaxia, 1.00% for CSOP, and 0.85% for Boshi. Even with a temporary reduction in management fees, there is still no fee advantage. Due to the difference in fees, for institutional investors who are optimistic about the cryptocurrency market and want to hold them long-term, the holding cost of US Bitcoin ETFs is lower.
Looking ahead, the funds on the demand side may mainly come from two sources:
1. Hong Kong retail investors
For retail investors with Hong Kong ID cards, the threshold for purchasing Hong Kong cryptocurrency ETFs is lower. For example, to purchase a US Bitcoin spot ETF, one needs to have a Professional Investor (PI) qualification, which requires a portfolio of HKD 8 million or total assets of HKD 40 million. The Hong Kong Bitcoin spot ETF allows retail investors to trade, and the trading hours are more in line with Asian time, which is an important incremental source.
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 Ethereum but are optimistic about its future, it may bring incremental demand for Ethereum ETFs.
Further reading:
Hong Kong announces its first batch of “Cryptocurrency Spot ETF” list! Opens for trading on April 30th, what do industry experts think?
Supply side: In-kind creation and redemption increase the supply of ETF shares and boost the initial scale
The biggest difference between Hong Kong cryptocurrency spot ETFs and US Bitcoin spot ETFs is that in addition to cash creation and redemption, in-kind creation and redemption have been added. This directly determines that Hong Kong cryptocurrency ETFs may have more supply at the ETF share level.
In-kind creation and redemption means that when investors subscribe to (create) or redeem ETF shares, they can exchange cryptocurrencies (Bitcoin or Ethereum) instead of cash. In the subscription process, investors provide a certain amount of cryptocurrencies to the ETF in exchange for ETF shares. In the redemption process, investors return ETF shares in exchange for corresponding cryptocurrencies.
By comparing the subscription process of Hong Kong cryptocurrency spot ETFs in Figure 2, we can see two major differences brought by in-kind creation and redemption:
Holders of cryptocurrencies can directly subscribe with their currencies:
For some large holders of cryptocurrencies, such as miners, it is easy for them to convert their currencies into ETF shares. Besides holding ETF shares, they can support cash redemption and directly sell them for cash on the Hong Kong Stock Exchange, providing a very flexible way of handling.
For the cryptocurrency market, in-kind creation and redemption do not bring incremental funds into the market, but rather facilitate the transfer of cryptocurrencies between different accounts. Cash creation and redemption, on the other hand, bring actual buying interest to on-chain cryptocurrency assets.
Therefore, the subscribers of Hong Kong cryptocurrency ETF shares include both traditional cash subscribers and large cryptocurrency holders. Although each company has not disclosed the specific share of in-kind creation and cash creation, according to public communications from OSL, the initial share of in-kind creation in the first batch of ETFs may exceed 50%. 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 the other hand, these ETF shares created through in-kind creation may be converted into sell orders in secondary market trading.
Considering the overall supply and demand, it is important to pay attention to 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 total net inflow of funds into the ETFs on a daily basis to intuitively judge the impact of incremental funds brought by Bitcoin ETFs on the cryptocurrency asset prices. The supply and demand of Hong Kong cryptocurrency spot ETFs are more complex, and the data disclosed by various fund companies cannot clearly distinguish between the amount of in-kind creation and cash creation. In this context, we believe that the premium/discount rate in the public market (HKEX trading) may be a better indicator to observe.
As we analyzed earlier, in the on-exchange trading on HKEX, the premium/discount rate is the best representation of the balance of power between supply and demand. If an ETF is trading at a discount, it indicates a stronger selling interest, indicating an oversupply. Market makers have the motivation to buy ETF shares at a discount on HKEX and redeem them from the ETF issuer to earn the spread, leading to a decrease in the overall net assets of the ETF and fund outflows, which has a negative impact on the cryptocurrency market as a whole.
The whole process can be summarized as follows: ETF discount -> stronger selling interest -> possible redemption -> negative impact on the cryptocurrency market. On the contrary, if the ETF is trading at a premium -> stronger buying interest -> possible creation -> 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, the other products had positive premiums. The highest premium generated during intraday trading was 0.33%, indicating restrained selling pressure and relatively strong buying pressure on the first day.
Considering that market makers may influence the premium/discount rate on the listing day, this premium/discount data can be continuously observed. If a positive premium can be maintained, it is expected to continue to attract investor subscriptions, especially from holders of cryptocurrencies, and the scale of Hong Kong cryptocurrency spot ETFs may exceed the estimated value of $500 million. If it turns into a discount, caution should be exercised against arbitrage trading to redeem ETF shares, with the ETF issuer selling cryptocurrencies, which may lead to a downturn in the cryptocurrency market.
Hong Kong cryptocurrency ETF has another important value for investors: it provides a pathway for the conversion and circulation of cryptocurrency assets into tradable financial assets
The rapid approval of Hong Kong cryptocurrency spot ETFs may have a smaller short-term impact on the cryptocurrency market compared to US spot ETFs. However, in the medium and long term, the in-kind creation and redemption mechanism of Hong Kong cryptocurrency ETFs also provide a pathway for the conversion of cryptocurrency assets into traditional financial assets. Through in-kind creation and redemption, cryptocurrencies can be converted into ETF shares, which, due to their fair value and liquidity determined by the traditional financial market pricing, can serve as proof of assets in the traditional financial market. This allows for various leveraged operations, such as margin lending and structured products, and further bridges the gap between cryptocurrency assets and traditional finance, allowing the value of cryptocurrency assets to be more fully reflected and realized.
Taking a more macro 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 in the global financial system.
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