The Underrated Hong Kong Crypto ETF: The Surface and Undercurrents Behind the Data
The trading volume and scale trends are inverted, and the interested parties are refining processes and clearing bottlenecks. Perhaps two months later will be the key turning point for volume increase.Author: Jupiter Zheng, HashKey Capital Secondary Fund
On May 24, the U.S. Securities and Exchange Commission (SEC) officially approved the 19b-4 forms for 8 Ethereum spot ETFs,
indicating a shift in the regulatory stance from strict to lenient. The launch of Ethereum spot ETFs in the U.S. seems to be just around the corner, and market sentiment has recently been ignited, with the secondary market booming.
In stark contrast, as early as April 30, Hong Kong launched 6 crypto asset ETFs covering Bitcoin and Ethereum, becoming the "first mover." However, in the past month, these ETFs have appeared rather lonely, even facing criticism due to "disappointing" market data performance.
The market tends to overestimate the short-term effects of new things while underestimating their long-term impact. This article aims to clarify how Hong Kong's crypto ETFs have performed over the past month, what underlying factors are at play, and which variables the market has overlooked, as well as the potential paths ahead.
"Lethargy" and Variables in the Data
On April 30, the Bosera HashKey Bitcoin ETF (3008.HK), Bosera HashKey Ethereum ETF (3009.HK), Huaxia Bitcoin ETF (3042.HK), Huaxia Ethereum ETF (3046.HK), Harvest Bitcoin Spot ETF (3439.HK), and Harvest Ethereum Spot ETF (3179.HK) officially listed on the Hong Kong Stock Exchange and opened for trading.
From the initial data, the three Bitcoin spot ETFs had a first-day issuance scale of $248 million (the Ethereum spot ETF was $45 million), which far exceeded the approximately $125 million first-day scale of U.S. Bitcoin spot ETFs on January 10 (excluding Grayscale), indicating high market expectations for the subsequent performance of Hong Kong's crypto ETFs.
The criticism of these 6 Hong Kong crypto ETFs mainly focuses on their relatively "lethargic" trading volumes compared to U.S. crypto ETFs: on the first day of listing, the total trading volume of the 6 crypto ETFs in Hong Kong was HKD 87.58 million (about USD 11.2 million), with the three Bitcoin ETFs accounting for HKD 67.5 million, which was still less than 1% of the total trading volume of U.S. Bitcoin spot ETFs on their first day (USD 4.6 billion).
Subsequently, trading volumes continued to decline, dropping below USD 1 million on May 23.
However, it is noteworthy that the trading volume of Hong Kong's crypto ETFs has shown a clear inverse trend with the assets under management: as of May 23, 2024, the total assets under management of the 6 Hong Kong virtual asset spot ETFs exceeded USD 300 million, with the Bitcoin spot ETF holding a total of 3,660 BTC and a total net asset value of USD 254 million; the Ethereum spot ETF held a total of 13,380 ETH and a total net asset value of USD 50.83 million, showing a slight increase compared to the first day.
Although in absolute terms, a scale of USD 250 million is still far less than the USD 57.3 billion scale of U.S. Bitcoin spot ETFs, this actually overlooks the objective "pool size difference" between the Hong Kong ETF market and the U.S. ETF market— the total size of the Hong Kong ETF market is only USD 50 billion, while the U.S. ETF market size reaches USD 8.5 trillion, a difference of about 170 times.
Therefore, in terms of relative proportion, the USD 250 million Bitcoin spot ETF accounts for 0.5% of the Hong Kong ETF market, while the USD 57.3 billion accounts for 0.67% of the U.S. ETF market, indicating that there is not a significant difference in magnitude between the two, and this is still the performance within less than a month of launch, which also indirectly shows that Hong Kong's crypto ETFs have a significant impact on the local financial market.
If we take a closer look at the internal data changes of Hong Kong's crypto ETFs over the past month, we can see a trend of mutual rise and fall among Bosera, Harvest, and Bosera HashKey:
The BTC and ETH holdings of Huaxia and Harvest have shown a significant decline, while Bosera HashKey has maintained a decent growth momentum, with total assets under management exceeding USD 100 million, accounting for over 33% of the total, and increasing by USD 30 million compared to the first day—currently, Bosera HashKey holds the most ETH, while BTC holdings are second only to Huaxia, with the gap rapidly narrowing from over a thousand to less than 500.
"Sweet Troubles" Behind the Unexpected Approval
Data does not lie; the inverted trend of trading volume and scale of Hong Kong's crypto ETFs actually reflects a kind of "structural" undercurrent—multiple stakeholders with vested interests are refining processes and clearing bottlenecks.
Looking back at the pace at which Hong Kong regulators approved and launched 6 crypto ETFs, the main market feedback can be summarized as "expected yet unexpected":
- The expectation stems from the fact that since the Hong Kong government embraced virtual assets and Web3 in 2022, a series of related policies and regulatory frameworks have been steadily advancing, including the eagerly anticipated crypto asset ETFs. Thus, various stakeholders had already begun intensive preparations;
- The unexpected part is that judgments regarding the approval of ETFs were mostly concentrated in the third quarter or the second half of the year, leading to a gradual refinement of operational processes and technical integrations. However, the Hong Kong government unexpectedly accelerated the pace in April, greatly exceeding market expectations for the approval process, forcing all parties to focus their efforts on material submissions, while the originally planned deployment strategy became unsuitable.
In short, this led to stakeholders prioritizing application work, while the issues related to operations, channels, and products that were originally intended to be meticulously refined had not been fully resolved, thus they could only "catch up" after the ETF launch, resulting in some obvious "sweet troubles."
It is also worth mentioning the innovative physical subscription and redemption model pioneered by Hong Kong's cryptocurrency ETFs (i.e., holding coins for subscription), which allows investors to directly use Bitcoin and Ethereum to subscribe for ETF shares—investors can directly hold BTC and ETH to purchase ETF shares, supporting cash redemption, while cash subscriptions for ETF shares also support BTC and ETH redemption. For example, for Bosera HashKey's 3008.HK and 3009.HK, each share of 3008 corresponds to 1/10,000 of a BTC, and each share of 3009 corresponds to 1/1,000 of an ETH.
Participating brokers: China Merchants Securities International, Mirae Asset Securities, Victory Securities, and Ade Securities.
Market makers: Eclipse Options (HK) Limited, Jane Street Asia Trading Limited, Optiver Trading Hong Kong Limited, Vivienne Court Trading Pty. Ltd.
The advantage of this innovative mechanism lies in helping investors achieve two-way circulation between virtual assets and traditional assets, but it also involves multiple stakeholders with vested interests:
- Participating dealers (PD) are institutions chosen by the ETF issuers (Bosera HashKey, Huaxia, Harvest) responsible for adding new ETF units in the primary market. Currently, there are Victory Securities, China Merchants Securities International, and Huaying Securities, among others;
- Brokers are the main channels for investors to trade ETFs in the secondary market, allowing investors to buy and sell ETF shares through their brokerage accounts like stock trading;
- Custodians are responsible for safeguarding the corresponding crypto assets of the ETFs and ensuring the security of the assets;
- Market makers provide ETF market-making services, responsible for buying and selling ETF shares in the secondary market to ensure market liquidity;
Thus, it is necessary for different institutions such as participating dealers (PD), brokers, custodians/exchanges, and market makers to collaborate to clear the bottlenecks throughout the trading chain.
In other words, the efficiency of coordination at each stage becomes a major issue that all parties need to address after the ETF goes live. Taking the coin subscription of Bosera HashKey's crypto ETF as an example:
- Investors need to first open an account with the PD;
- Then, within the specified time, submit the ETF share creation instruction;
- Next, they need to transfer coins to the PD, and the coins will be custodied in HashKey's custody service;
- Subsequently, the Hong Kong Central Clearing and Settlement System creates ETF shares and sends them to the PD, which then delivers them to the brokers;
- Finally, ordinary investors need to trade through the brokers;
This process involves the integration of investors' KYC information during the PD/broker account opening, the creation of shares in the primary market, the coordination between PD and custodians, and between PD and brokers, etc. This is currently a major bottleneck, which is why many funds, especially those in the primary market, are still on the sidelines, leading to a negative feedback loop: low trading volume → slow entry of arbitrage institutions → continued low trading volume.
However, everything is slowly being resolved, and the trend of changes in assets under management over the past month is a clear example.
Crypto ETFs May Still Need 2 Months to Ferment
Therefore, from this perspective, the actual performance of Hong Kong's crypto ETFs still requires time to ferment. Based on the current situation, it is estimated that at least 1-2 more months will be needed to refine and streamline relevant operational processes, channels, technical integrations, and other details.
Let us look ahead: what changes can we expect in the Hong Kong crypto ETF market in 2 months?
First, as operational processes and technical integrations are optimized, more PDs, brokers, and other roles will enter the market, and their original customer bases will naturally become a seed pool for incremental users, achieving a leap in the scale of covered users and accessible funds, which will undoubtedly greatly expand the future imagination of Hong Kong's crypto ETFs.
At the same time, in 2 months, traditional financial institutions that are currently on the sidelines and need more time for evaluation can also launch leveraged, lending, asset management, and other derivative products based on ETF products, achieving financial innovations that were previously difficult to implement directly using Bitcoin physical assets, meeting the needs of various investors to allocate crypto assets.
The two can also promote each other, forming a positive feedback path—more PDs and brokers connecting with more users will further promote more financial innovations in crypto ETFs, while various structured products and derivatives based on spot ETFs will bring more possibilities to the Hong Kong market, achieving a virtuous cycle.
Meanwhile, there is another significant variable worth paying special attention to— for institutions, Hong Kong's Ethereum spot ETF has become a "window of opportunity" to "race ahead" of U.S. ETFs.
The reason is that although the SEC has approved the 19b-4 forms for 8 Ethereum spot ETFs, it is still in the "waiting for the final shoe to drop" phase, and the market generally expects that it will take at least 1-2 more months before the official launch.
Thus, during this window period, institutions interested in Ethereum spot ETFs, especially those looking to position themselves ahead of the influx of funds and a large-scale rise in ETH, can use the Hong Kong ETF as a safe and compliant channel to achieve a "head start" compared to other players, taking the lead in positioning this almost certain Alpha opportunity.
Conclusion
In "Waiting for Godot," Godot symbolizes hope and a bright future, and for today's Hong Kong crypto ETFs, the current Godot is the optimization of the entire trading process among different institutions.
Behind the inverted trend of trading volume and scale, multiple stakeholders with vested interests are refining processes and clearing bottlenecks. Perhaps in 2 months, it will be the key node for Hong Kong ETFs to gain traction and truly kick off.
