Hong Kong cash ETF debut: 6 things you need to know

Author: Helen Partz Source: coindesk Translation: Shan Ouba, Golden Finance

The cryptocurrency community is eagerly awaiting a major industry event that is about to take place tomorrow: Hong Kong is preparing to launch trading in spot exchange-traded funds (ETFs) pegged to physical Bitcoin (BTC) and Ethereum (ETH) cryptocurrencies. Three Chinese companies - China Asset Management, Bosera Asset Management and Harvest Global Investments are expected to launch cryptocurrency ETFs on the Hong Kong Stock Exchange (HKEX) through their Hong Kong subsidiaries on April 30.

This event will mark another milestone in the development of regulated cryptocurrency investment products and ETFs worldwide, following the historic launch of a spot Bitcoin ETF in the United States in January 2024.

HKEX Already Trades Bitcoin Futures and Other Cryptocurrency Contracts

It should be noted that this is not HKEX's first foray into cryptocurrency trading. As early as the end of 2022, HKEX introduced the CSOP Bitcoin Futures ETF and CSOP Ethereum Futures ETF managed by CSOP Asset Management, both of which track cash-settled Bitcoin futures contracts and Ethereum futures contracts traded on the Chicago Mercantile Exchange (CME).

In January 2023, Samsung Asset Management (Hong Kong) followed suit and launched another futures-based Bitcoin ETF - Samsung Bitcoin Futures Active ETF.

According to data from the Hong Kong Stock Exchange on April 29, 2024, the total assets under management of these three futures cryptocurrency ETFs are HK$1.3 billion (approximately US$170 million).

The launch of spot Bitcoin and Ethereum ETFs marks another important step in Hong Kong's development of regulated cryptocurrency investment products, and continues the momentum of launching futures ETFs last year.

All Hong Kong ETFs account for 0.6% of the US ETF market

From the data provided, it is clear that the Hong Kong ETF market is much smaller compared to the US ETF market.

Data from ETFGI shows that as of March 2024, the entire US ETF industry has a total of 3,457 products with assets worth $8.9 trillion, listed on three exchanges.

On the other hand, according to Bloomberg data analyst Jack Wang, the Hong Kong ETF market is estimated to be worth $50 billion.

According to the Hong Kong Stock Exchange, the first active ETF in Hong Kong was listed in June 2019. By the end of 2023, the Hong Kong Stock Exchange has accumulated 24 active ETFs with a total market value of HK$8.6 billion (US$1 billion).

In contrast, the Chinese ETF market is expected to reach $238 billion by 2023, according to data compiled by Bloomberg.

Hong Kong's Physical Crypto ETFs vs. Cash-Created ETFs in the U.S.

Hong Kong's spot cryptocurrency ETFs will have at least one notable feature that significantly differs from such products in the U.S., namely the method of ETF redemption.

Unlike U.S. spot Bitcoin ETFs, Hong Kong spot crypto ETFs will be created in physical form, meaning that when ETF intermediaries want to issue new ETF shares, they provide funds to the issuer using actual cryptocurrencies such as Bitcoin.

In contrast, U.S. spot Bitcoin ETF providers are currently only allowed to issue cash-created spot crypto ETFs, meaning that intermediaries are not allowed to touch Bitcoin.

“I think the reason Hong Kong went physical is because we ultimately want to differentiate ourselves from the U.S.,” Rebecca Sin, senior ETF analyst at Bloomberg, said during a Bloomberg-hosted webinar on April 24.

Hong Kong spot Ethereum ETF won’t be the first in the world

The launch of a spot cryptocurrency ETF in Hong Kong is exciting because it will bring not only a physical spot cryptocurrency ETF, but also a spot Ethereum ETF, which has not yet been launched in the United States.

While U.S. securities regulators are expected to reject a spot Ethereum ETF in May and further delay a decision on the matter, Hong Kong authorities have already succeeded in this regard.

However, Hong Kong’s spot Ethereum ETF is not the only such ETF launched globally. Canadian regulators approved the country’s first Ethereum futures ETF in April 2021, making Canada one of the first countries in the world to launch such an investment product.

As of this writing, there are five Ethereum ETFs in Canada: Purpose Ethereum ETF, Evolve Ethereum ETF, CI Galaxy Ethereum ETF, 3iQ CoinShares Ethereum ETF, and Fidelity Advantage Ethereum ETF, according to Nasdaq.

Mainland Chinese Investors Won’t Be Able to Buy Hong Kong Bitcoin ETF

The launch of spot cryptocurrency ETFs may have inspired some optimism about mainland China’s stance on cryptocurrencies, but that may not be the case.

However, despite the ETF issuer’s close ties to mainland China, mainland Chinese citizens are not expected to be able to buy Hong Kong’s spot crypto ETFs.

China prohibits citizens from engaging in any cryptocurrency-related activities, which means cryptocurrency ETF investments are also prohibited, said Wang, the Bloomberg analyst.

"So even for futures-based crypto ETFs listed in Hong Kong -- which I actually tried to trade -- brokers would simply refuse to trade," Wang said. He doesn't think Chinese investors will invest in such products in the short term.

China Asset Management is the largest issuer by assets under management

Among the three issuers of spot cryptocurrency ETFs in Hong Kong, China Asset Management, the Hong Kong subsidiary of China Asset Management, is the largest asset manager.

China Asset Management has 15 ETFs in Hong Kong with total assets under management of $3.6 billion, according to Bloomberg data. Assets managed by the parent company in mainland China increased by 1,400%, or $55.7 billion.

The other two issuers, Bosera and Harvest, manage $40 million and $16 million in AUM respectively in Hong Kong.

Wang believes that under favorable conditions, Hong Kong's spot cryptocurrency ETFs may accumulate more than $1 billion in AUM within one to two years.