The global financial industry has witnessed a remarkable rise in the popularity of cryptocurrency exchange-traded funds (ETFs). From the approval of Spot Bitcoin ETFs stateside in January, to the SEC paving the way for the launch of eight ETFs tied to Ether. Widespread anticipation of the approvals on May 21 sent ether’s price soaring more than 16 per cent year-to-date. After countless rounds of delays, the ETH ETF announcement from the SEC was welcomed as an historic moment.
2024 has been a year of major victories for the cryptocurrency industry. And it’s not just the US that’s making waves. Hong Kong has moved into the spotlight.
The launch of crypto ETFs in Hong Kong in April has sparked significant interest across the industry, and investors have been closely monitoring how the market responds, drawing comparisons to their US equivalents. In an analysis piece for The Asset titled, 'Why Hong Kong's Crypto ETFs Matter,' Alessio Quaglini, CEO and Co-Founder of Hex Trust, explores the significance of Hong Kong’s strategic move - a milestone that not only sees the city stepping up as a leader in the digital asset space, but also has implications beyond Hong Kong’s borders.
As regulatory progress has taken flight in the Middle East and Europe, Hong Kong too has been working with industry players to support demand and build the guardrails to protect investors. Over the past 12 months, the HKMA and SFC have introduced a raft of regulatory frameworks in a bid to develop a tightly regulated home for digital assets. And the launch of crypto ETFs in the city is another positive signal of market maturity.
“The market mispriced the odds of approval by the SEC, as shown by the immediate repricing of ETH once the news hit the tape. What will matter to the market going forward, will be seeing similar flow dynamics that occurred for BTC once the ETFs launch, with institutional demand outpacing overall supply and driving price higher. The fact that HK already offers regulated ETH spot ETFs could strengthen its first mover advantage in the region, attracting potential institutional demand ahead of the US launch.” –Edward Zhao, Head of Markets
The approval of crypto ETFs in Hong Kong could expedite their acceptance across Asia with South Korea, Japan, and Singapore expected to be next in line. As a leading financial centre and gateway for Chinese investment, Hong Kong’s embrace of crypto also presents an opportunity to unlock billions in potential demand from the mainland - should crypto ETFs be included in the Southbound Stock Connect Programme in the future. Indeed, investors are monitoring the success of crypto ETFs products in Hong Kong and whether news concerning net new flows will act as a driver of sentiment in the market.
Asia has provided the base for some of the earliest adopters in the industry, with exchanges like Upbit in South Korea entering the top 5 global exchanges by volume. The Korean Won is now the most traded fiat vs. crypto, surpassing the USD. With retail demand strong in Asia, ETFs can provide a vehicle for institutions seeking locally regulated products.
While the United States has the most mature and deep ETF market globally, Hong Kong's ETF market is still in its nascent stages. However, a comparative analysis of the evolution of the ETF market in Asia Pacific's seven leading markets reveals significant growth potential. ETFs in Asia ex Japan grew to ~$750B in AUM as of November 2023, a growth of 29% YTD, with Hong Kong being a key player.
The in-kind creation model for these ETFs, unlike the cash-settled model in the US, “is a lot more suited to crypto natives”, according to Vivien Wong, partner at HashKey Capital. By allowing investors to directly contribute bitcoin, instead of cash to the ETF, investors can benefit from greater efficiency and arbitrage opportunities.Bosera Asset Management's Derek Wang said that initial interest in the funds started with different types of institutions such as brokerages and family offices, but expects retail investors to drive demand.
"If you look at the overall Hong Kong ETF markets, retail investors actually play a very important role. Once liquidity reaches a certain level, we can see large institutional investors start coming into the fund."
The SFC's approval of Bitcoin ETFs creates a significant market opportunity and has the potential to establish Hong Kong as Asia's leading digital asset hub, sparking a crypto boom across the region. This move not only validates Bitcoin's legitimacy but offers a regulated pathway for investors, both retail and institutional, to access cryptocurrencies.
Whilst there is a climate of cautious optimism in the city, we must acknowledge that building a virtual asset ETF infrastructure, and assessing its impact, takes time. But once matured, Hong Kong’s ETF ecosystem could unlock participation for a wider range of investors, leading to increased investment flows and more competitive pricing. This, alongside catalyzing the launch of crypto ETFs in other regions.
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