Will Hong Kong become the world's second-largest Bitcoin spot ETF market?

Written by: Zhou Zhou, Foresight News

The Hong Kong Bitcoin spot ETF is here, and industry insiders believe it may become the world's second-largest Bitcoin spot ETF market, after the United States.

On April 15, 2024, three institutions—China Asset Management, Huaxia Fund, and Bosera International—announced that their application for a Bitcoin and Ethereum spot ETF was approved by the SFC (Securities and Futures Commission of Hong Kong). This is another significant event in the Bitcoin ETF space following the approval of the U.S. Bitcoin spot ETF on January 11 this year, which will accelerate the influx of funds from traditional Asian financial markets into cryptocurrencies like Bitcoin and Ethereum.

OSL CEO Pan Zhiyong told Foresight News: "It is expected that by the end of April, investors will be able to officially purchase Bitcoin spot ETFs from these three fund companies, just like buying ordinary stocks." Relevant personnel from VDX and HashKey Exchange also confirmed this information to Foresight News, stating that unless unexpected circumstances arise, investors will likely be able to purchase Hong Kong's Bitcoin spot ETF in April or May.

Regarding the specific timing for Ethereum spot trading in Hong Kong, Pan Zhiyong indicated to Foresight News: "It is expected that after a period of trading for the Bitcoin spot ETF, the Ethereum spot ETF can be officially traded." Foresight News inquired with several CEOs of licensed (applying for licenses) exchanges in Hong Kong, some indicated it would be a few weeks after the Bitcoin spot ETF trading launch, while others suggested it would be a month later.

The approval of the Bitcoin spot ETF in Hong Kong is considered by many practitioners to be second only to the approval of the Bitcoin ETF in the U.S. Previously, whether in Canada, Germany, or Switzerland, the ceiling for funds has been far below that of the Hong Kong market. Particularly regarding whether southbound funds can enter the Hong Kong Bitcoin spot ETF, some industry insiders analyzed for Foresight News that this is possible.

Foresight News consulted executives from several Hong Kong crypto exchanges about whether southbound funds can enter the Hong Kong Bitcoin spot ETF, but the answers varied.

This issue is considered crucial; if southbound funds are allowed to invest in the Hong Kong Bitcoin spot ETF, it would open a window for mainland Chinese funds and also mean that the two largest economies in terms of GDP, China and the U.S., would for the first time this year allow massive funds accumulated in their respective financial markets to flow into Bitcoin. This may also directly relate to whether Hong Kong can become the world's second-largest cryptocurrency financial center after the U.S. Of course, mainland investors currently cannot purchase Hong Kong's Bitcoin spot ETF.

$500 million, $1 billion, or $10 billion?

How much can the Hong Kong Bitcoin and Ethereum spot ETF attract—$500 million, $1 billion, or $10 billion? Industry practitioners have differing opinions on this.

"It is expected to attract $1 billion in funds to flow into Bitcoin within a few months," said Wayne Huang, the ETF project leader at OSL, a licensed cryptocurrency exchange in Hong Kong, to Foresight News.

HashKey Capital's secondary fund and research partner Jupiter Zheng also provided a similar forecast: "It should reach at least over $1 billion, with the user profile mainly consisting of traditional institutions, family offices, high-net-worth individuals, and native digital asset users."

This data is compared to the inflow of the U.S. Bitcoin spot ETF, which reportedly saw $10 billion in inflows within two months of its launch, a figure that once shook the global financial market. In comparison, the first listed gold ETF took three years to reach this inflow amount, highlighting the strong demand in the global traditional financial market for purchasing Bitcoin.

Paolo from the Hong Kong licensed cryptocurrency exchange VDX stated: "The Hong Kong Bitcoin spot ETF will attract $10 billion in funds this year, but this will not come from southbound funds, but from elsewhere."

Foresight News repeatedly inquired, but Paolo did not disclose which large incremental market the funds would come from. However, he reaffirmed that the Hong Kong Bitcoin spot ETF would attract $10 billion by the end of this year.

However, some practitioners hold a conservative view on the inflow scale of Hong Kong's Bitcoin spot ETF. Bloomberg ETF analyst Eric believes the inflow scale will be around $500 million.

Eric's analysis is not without reason. Currently, the U.S. ETF market exceeds $8 trillion, while Hong Kong's ETF market is about $52 billion, only one percent of the U.S. market, showing a significant gap. Europe's ETF market is second only to the U.S., exceeding $1 trillion. In Asia, as of the end of 2023, Japan's ETF market ranks first in Asia at $533.8 billion, while South Korea's ETF market reaches $91.3 billion, ranking second.

The author believes that for the Hong Kong Bitcoin spot ETF to attract over $1 billion, an important factor is whether "southbound funds can enter the Hong Kong Bitcoin spot ETF"; another factor is whether funds from Japan and South Korea can flow into Hong Kong.

Regarding southbound funds, Wayne stated: "According to Hong Kong regulations, as long as the funds have arrived in Hong Kong, they can buy Bitcoin spot ETFs in the secondary market, but they will not directly trade through domestic brokers."

However, some practitioners believe that southbound funds could potentially flow into the Hong Kong Bitcoin spot ETF.

A senior practitioner who wished to remain anonymous stated: "Whether it is Huaxia Fund (Hong Kong), China Asset Management, or Bosera Fund, they are all Hong Kong funds with Chinese backgrounds. Previously, there was a fund (with a Hong Kong background) that was supposed to launch but ultimately did not issue a Bitcoin spot ETF, which actually sends a very clear signal."

Hong Kong: How to Become the World's Second-Largest Bitcoin Spot ETF Market?

"Hong Kong will definitely become the world's second-largest Bitcoin spot ETF market after the U.S.," Paolo said.

Several insiders revealed to the author: "From the third quarter to the fourth quarter of last year, institutions like HashKey, OSL, and Victory Securities began to lay out the Hong Kong Bitcoin spot ETF."

Foresight News previously wrote in the article "Hong Kong Brokers 'Rushing into' the Crypto Circle": "More and more Hong Kong brokers are expanding into the cryptocurrency business, including: Futu Securities, Tiger Brokers, Victory Securities, Interactive Brokers, Nanhua Securities, Changqiao Securities, Fuqiang Securities, and Huafu Jianye Securities."

On one hand, investors will be able to directly purchase Bitcoin and other virtual assets through the aforementioned securities companies and licensed cryptocurrency exchanges like HashKey Exchange and OSL; on the other hand, investors can hold virtual assets by purchasing Bitcoin and Ethereum spot ETFs from fund companies.

A practitioner close to Hong Kong's Victory Securities stated: "The latter has the advantage that a large portion of stock investors are accustomed to purchasing ETF products, so they will find it more convenient to choose to buy Bitcoin spot ETFs. Additionally, many financial institutions are only allowed to purchase ETF products and cannot directly buy Bitcoin; they can only indirectly hold Bitcoin by purchasing Bitcoin spot ETFs, and they will also choose to buy Bitcoin spot ETFs."

"The experience of purchasing Bitcoin spot ETFs will be as convenient as buying stocks on Tiger Brokers or Futu Securities," the practitioner stated.

Compared to the U.S., Hong Kong also has two highlights in this virtual asset spot ETF. First, Hong Kong has approved Ethereum spot ETFs in addition to Bitcoin; second, Hong Kong allows both cash settlement and physical delivery.

Regarding the first point, U.S. regulators have not allowed their fund companies to launch Ethereum spot ETFs due to the lack of a conclusion on whether Ethereum is a security. In Hong Kong, due to different policies, there are no legal obstacles, and it is expected that more ETFs for other virtual assets will be issued in the future.

Regarding the second point, Paolo from VDX stated: "Physical delivery means you own a BTC, which can be exchanged for a fixed proportion of Bitcoin ETF, but in the U.S., you can only purchase Bitcoin spot ETFs with fiat currency. Physical delivery clearly increases liquidity and arbitrage opportunities."

OSL CEO Pan Zhiyong believes: "Physical subscription is actually more friendly to some crypto-native investors." Compared to cash settlement in the U.S., Hong Kong has not only facilitated the flow of currency and cryptocurrency but also the flow between cryptocurrencies.

"Hong Kong can facilitate cryptocurrency in and out, cryptocurrency in and cash out, and cash in and cryptocurrency out," Wayne said.

Of course, compared to the U.S., Hong Kong's Bitcoin spot ETF also has corresponding disadvantages, namely that the trading costs of Hong Kong's Bitcoin spot ETF are slightly higher than those in the U.S., which will ultimately be reflected in investors' transactions.

Wayne pointed out two reasons: "The compliance costs for Hong Kong crypto exchanges are somewhat higher than those for Coinbase in the U.S. The Hong Kong SFC has a stringent requirement that assets entrusted to us by clients must be insured; the more client assets there are, the higher the insurance costs, which increase linearly. Additionally, the Hong Kong SFC requires institutions to track the virtual asset ETF index and purchase services from index service providers."

"However, based on our initial strategic cooperation with China Asset Management and Huaxia Fund on virtual asset spot ETFs, we have managed to keep these two costs relatively low, effectively passing the benefits on to investors," Wayne said.

"The prices will definitely be controlled within a reasonable range that investors can accept," Pan Zhiyong stated.

"The custody and trading fees will be below 0.5%," Wayne added.

Final Thoughts

Although several countries, such as Canada and Germany, have launched Bitcoin spot ETFs, some industry insiders believe that the U.S. and Hong Kong may be the two most important markets for Bitcoin spot ETFs.

The most critical indicator for measuring the performance of Hong Kong's Bitcoin spot ETF is how much capital it can attract. Bloomberg's ETF analyst believes that attracting $500 million would be optimistic, while executives from HashKey and OSL predict it could attract at least $1 billion. VDX's Paolo believes it could reach $10 billion by the end of the year, while Matriport analysts even suggest that if southbound funds can flow in, it could reach $25 billion.

Behind every figure is a processing and judgment of different information, reflecting the predictors' understanding of technology, culture, and politics. Will there be significant breakthroughs in cryptocurrency and Web3 technology? Does Hong Kong have the foundational strength and determination to seize the Web3 opportunity? And has BTC become a key factor profoundly influencing the monetary and financial competition between major powers?

Regardless, the first three months after the launch of the Hong Kong Bitcoin spot ETF may be an important indicator for observing the real demand for the Hong Kong Bitcoin spot ETF.

In the two months following the approval of the U.S. Bitcoin spot ETF, the fund scale reached $10 billion, and $12 billion in four months. Whether Hong Kong can use virtual assets to revive its reputation as a financial center in Asia and globally is expected to face a significant test in the next three months.