The spot ETF has been listed for a week, and the dream of Hong Kong as a "cryptocurrency center" has just begun

After more than three months since the launch of the Bitcoin spot ETF in the United States, Hong Kong is catching up with the first batch of digital currency spot products.

Mainland China's traditional public funds, such as Huaxia, Jiashi, and Bosh, have not only launched Bitcoin spot ETFs in Hong Kong, but also globally debuted Ethereum spot ETFs. Some media outlets even shouted out slogans to seize pricing power.

During the initial fundraising stage, Hong Kong's ETFs lived up to expectations, but the subsequent trading situation was somewhat lackluster. On the first day of listing, the trading volume of the Hong Kong Bitcoin ETF was less than 1% of the total trading volume on the first day in the United States, and the trading volume in the following days did not exceed the first day.

In contrast, asset management institutions such as BlackRock, Fidelity, and Schroders saw crazy inflows after their Bitcoin spot ETFs were listed in the United States. Coupled with Bitcoin's price continuously breaking new highs amid expectations of halving, it was a scene of great excitement and prosperity.

However, the competition has just begun, as Hong Kong ambitiously aims to become the cryptocurrency trading center in Asia, it is still too early to determine the outcome.

Impressive Debut, Light Trading

On April 29, the Hong Kong Securities and Futures Commission approved the initial issuance of 6 digital currency spot ETFs under Huaxia (Hong Kong), Bosh International, and Jiashi International, which officially listed on the Hong Kong Stock Exchange on April 30.

Three of them are Bitcoin spot ETFs, and the other three are Ethereum ETFs. In addition to HKD counters and USD counters, Huaxia (Hong Kong) also set up an RMB trading counter for its ETFs.

During the subscription phase, Hong Kong ETFs performed well. According to SoSo Value data, the scale of the three Bitcoin ETFs reached $248 million on the first day of issuance, while the total net value of the first day of the U.S. Bitcoin spot ETF products, excluding Grayscale (GBTC) converted from trusts to ETFs, was only $130 million.

Among them, Huaxia's Bitcoin ETF absorbed HKD 950 million during the initial offering period, ranking sixth among the 82 ETFs launched in Hong Kong in the past three years, surpassing Southern Dongying's Bitcoin futures ETF, becoming the largest virtual asset ETF by market value in Hong Kong.

However, the trading situation on the first day was not as expected. Data from the Hong Kong Stock Exchange shows that the total trading volume of the 6 ETFs on the first day was HKD 87.58 million (approximately $11.20 million), with the trading volume of the three Bitcoin ETFs being HKD 67.50 million, as follows:

Huaxia Bitcoin ETF trading volume of HKD 37.17 million;

Jiashi Bitcoin spot ETF trading volume of HKD 17.89 million;

Bosh HashKey Bitcoin ETF trading volume of HKD 12.44 million;

In comparison, the total trading volume of the U.S. Bitcoin spot ETF on the first day exceeded $4.6 billion, with the trading volume of Hong Kong ETFs being less than 1% of that, and all 6 products in Hong Kong closed below their opening prices on the first dayAs of May 6th, the trading volume of the first batch of Bitcoin products in Hong Kong hovered below 60 million Hong Kong dollars, failing to surpass the performance on the first day.

Data Source: WIND

The start of ETF trading in Hong Kong has been unfavorable, largely due to the recent bleak cryptocurrency market.

With the cooling of the Fed's interest rate cut expectations, the price of Bitcoin sharply declined after hitting a historical high of $73,000 in mid-March, dropping below $60,000 at one point.

In this market environment, even the US spot Bitcoin ETF saw its largest single-day net outflow since its listing in January.

Moreover, comparing the trading volumes of Bitcoin ETFs in Hong Kong and the United States directly may be somewhat unfair given the market sizes of the two regions.

Bloomberg's Senior ETF Analyst Eric Balchunas pointed out that the market size of ETFs in Hong Kong is approximately $50 billion, which is 1/168th of the United States. Adjusting for market size, the first-day trading volume of Hong Kong's ETF is equivalent to around $1.6 billion.

Hong Kong's Ambition as a "Cryptocurrency Hub"

While the US is still hesitant about the Ethereum spot ETF, Hong Kong, in addition to launching a Bitcoin ETF, has taken the lead in approving the listing and trading of an Ethereum spot ETF, showing a strong desire not to fall behind.

Hong Kong has been striving to become the cryptocurrency trading hub in Asia. Last year, Hong Kong also approved upgrades for two major cryptocurrency exchanges, HashKey Group and OSL, to provide trading services to individual investors.

The Bitcoin spot ETF eliminates investors' concerns about the security and legality of directly trading digital currencies. At the same time, investors can invest in Bitcoin spot ETFs like trading stocks through familiar brokers on familiar platforms, significantly reducing the "technical threshold."

However, the first batch of cryptocurrency spot ETFs in Hong Kong has strict restrictions on investor qualifications, with mainland Chinese investors unable to participate in trading. Nevertheless, these products are expected to attract local and international investors from countries like South Korea and Russia.

For interested investors, choosing between Wall Street and Central is a question.

Spot ETF products differentiate in terms of fees and liquidity. In these two aspects, the US Bitcoin spot ETF has a clear advantage with lower fees and a significantly larger scale. For example, IBIT under BlackRock's umbrella has nearly $15 billion in assets under management just two months after listing.

However, Hong Kong's innovative physical creation and redemption mechanism for Bitcoin ETFs may provide it with an opportunity to outperform

Allowing in-kind creation and redemption, a chance for Hong Kong to overtake the curve?

The biggest highlight of the Hong Kong spot Bitcoin ETF lies in allowing in-kind creation and redemption, which means allowing direct application and redemption of ETF using cryptocurrencies, not limited to fiat currencies such as USD and HKD.

This is also the biggest difference between these cryptocurrency ETFs in Hong Kong and those in the United States.

One of the reasons why the US regulators were hesitant to approve Bitcoin spot ETFs initially was due to compliance issues with authorized participants (AP) trading cryptocurrencies in the in-kind creation and redemption model.

In the in-kind creation and redemption model, APs need to exchange a basket of bitcoins for ETF shares when purchasing, and exchange ETF shares for a basket of bitcoins when redeeming. However, these APs are registered broker-dealers in the US stock market, and regulations do not clearly allow broker-dealers to handle cryptocurrencies.

As a compromise, US ETFs adopted the current cash creation and redemption model. This means that when new ETF shares need to be created during a purchase, APs purchase fund shares from the ETF issuer using USD, and the ETF issuer will use cash to purchase bitcoins. Conversely, when shares are redeemed, the issuer will sell bitcoins to obtain cash.

This pure cash redemption model may bring additional trading and tax costs, reduce the pricing efficiency of the ETF, affect its ability to accurately track the price of Bitcoin, and lead to the possibility of the net asset value of the asset being at a premium or discount, especially during periods of high market volatility.

Allowing in-kind creation and redemption in Hong Kong helps to maintain the consistency between the ETF price and its net asset value, and is also more friendly to investors who directly hold cryptocurrencies.

For example, investors who already hold bitcoins can buy ETFs through this in-kind model, transforming their alternative assets into mainstream assets. Cryptocurrency assets that were originally not recognized by the traditional financial sector can thus be used for various leveraged operations, such as mortgage lending, building structured products, bridging the gap between cryptocurrency assets and traditional finance.

Han Tongli, CEO and Chief Investment Officer of CSOP International, believes that the in-kind creation and redemption method significantly increases the attractiveness of Hong Kong Bitcoin ETFs, and expects the scale of Hong Kong ETFs to reach three times that of similar funds in the United States.

Fee Battle: Hong Kong ETFs are relatively expensive

For spot ETFs, the price war seems to be an eternal theme, as fees and liquidity are the main considerations for investors when choosing spot ETFs with the same underlying assets.

In the US, the price war started before the products were even listed, with institutions such as Invesco, Bitwise, Valkyrie, and WisdomTree rushing to update their application documents to lower fees before the SEC officially announced approval. After listing, the price war has become even more intense, with the speed of fee updates on various platforms unable to keep up with the speed of price reductions.

Competition among the three fund companies in Hong Kong in terms of management fees is also fierce. Currently, CSOP Bitcoin ETF has the lowest fee at 0.3%, with a 6-month fee waiver period, Bosera's product has a fee of 0.6% and a 4-month waiver, while Huaxia ETF has a relatively higher fee of 0.99% and no waiver offerHowever, compared to American ETFs, the overall fees of Hong Kong ETFs are relatively high. Among the first batch of products listed in the United States, except for Grayscale, the fees for other products range from 0.19% to 0.25%, with some products offering fee waivers for up to one year.

Source: Second Home Researcher, original title: "One week after the listing of spot ETFs, the dream of Hong Kong as a 'cryptocurrency center' has just begun"