Expansion of the alternative investment market Asia's first virtual currency spot ETF launched

Reporter Jiang Muyun and He Shasha report from Shanghai and Beijing

Recently, the first batch of spot virtual currency ETFs in Asia were officially listed on the Hong Kong Stock Exchange, including ChinaAMC Fund (Hong Kong), Bosera Fund (International), Harvest International's Bitcoin ETF and Ether ETF products, a total of 6 products. Analysts expect Hong Kong's virtual currency ETFs to attract between $500 million and $10 billion.

A number of industry insiders said in an interview with the reporter of China Business News that compared with the US market, the redemption mechanism of Hong Kong spot virtual currency ETF is more flexible, especially the Ether spot ETF as the first batch in the world, which not only provides global investors with new asset allocation options, but also may become a reference for virtual asset supervision and financial product innovation in other countries and regions. However, although virtual currency ETFs allow investors to diversify their asset allocation, the price trend of many types of virtual currencies, including Bitcoin, is still difficult to predict, and is affected by the international economic situation and various factors, as well as market sentiment and investor behavior.

The market potential is huge

According to public information, each of the three institutions issued 1 spot Bitcoin ETF and 1 spot ETH ETF, for a total of 6 ETFs. Investment strategies will closely align with investment results (before fees and expenses) as measured by the performance of the CME CF Bitcoin Index or the Ether Index Asia Pacific closing price.

In terms of issue price, the issue price of Harvest International and ChinaAMC (Hong Kong) is US$1 per share, and the initial issue price of Bosera Bitcoin ETF and Ethereum ETF is basically the same as 1/10,000 and 1/1000 of the tracking index on April 26, 2024, respectively, that is, the converted net value of fund shares corresponds to the price of about 0.0001 BTC and 0.001 ETH.

In terms of management fees, the annual management fee of Harvest Bitcoin ETF and Ether Spot ETF is 0.3% of the net asset value, the annual management fee of Bosera Bitcoin ETF and Ether Spot ETF is 0.6% of the net asset value, and the annual management fee of ChinaAMC Bitcoin ETF and Eth Spot ETF is 0.99%. Among them, the ETFs of Harvest and Bosera will be exempted from management fees for the first 6 months and 4 months of issuance, respectively.

Announcing the approval, Mr. Chu Haokang, Head of Digital Assets and Family Wealth Management, ChinaAMC (Hong Kong), said: "The launch of the Asia Spot Bitcoin and Ether ETFs provides retail and institutional investors with a safe, hilarious and convenient tool for allocating digital assets. He also said that Hong Kong's spot virtual currency ETF is expected to attract crypto asset investors who convert physical cryptocurrencies into ETF products.

Yu Jianing, President of UWEB, Co-Chairman of the Blockchain Committee of China Communications Industry Association, and Honorary Chairman of Hong Kong Blockchain Association, told reporters that the approval of Hong Kong virtual currency ETF is an important milestone for Hong Kong to enhance financial innovation and market competitiveness, and it means the expansion of virtual currency investment channels and the demonstration effect of financial product innovation for the global market. For the Hong Kong market, the approval of the virtual currency ETF not only enriches the investment options of local investors, but also brings innovative financial products to the Hong Kong financial market, which will help enhance Hong Kong's competitiveness as an international financial center. Globally, the launch of Hong Kong's virtual currency ETFs, especially the Ether spot ETF, is one of the first in the world, which means that Hong Kong is at the forefront of financial innovation in the field of virtual assets. This not only provides global investors with new asset allocation options, but also may serve as a reference for virtual asset regulation and financial product innovation in other countries and regions.

It is worth noting that in January 2024, the U.S. Securities and Exchange Commission (SEC) approved the Bitcoin spot ETF, which is seen as a sign that Bitcoin is recognized by the mainstream financial circle. According to statistics from Everbright Securities Research Institute, as of April 19, the cumulative net inflow of the 11 Bitcoin ETFs initially launched was about US$12.32 billion. With the US market already in place, how much inflow will Hong Kong's ETF attract this time? Eric Balchunas, a senior ETF analyst at Bloomberg, expects the size to be $500 million. However, there are also many views that the potential of Hong Kong's virtual asset ETF market far exceeds this figure.

Bi Lianghuan, chief researcher of the Ouke Cloud Chain Research Institute, told reporters that in terms of redemption mechanism, because Hong Kong has a comprehensive regulatory system in the virtual asset market, the physical redemption mechanism includes four ways: currency in and out, currency in and out, money in and out, and money in and out, which is more flexible than the cash redemption mechanism (the last one) in the United States. For Hong Kong investors who already hold BTC and ETH, it also reduces the probability of obtaining illegal funds when exchanging bitcoin for fiat currency, thereby protecting investors' assets.

"There seems to be a high level of enthusiasm for Bitcoin among the people of Hong Kong. Bi Lianghuan said, "At the end of last year, when the Ouke Cloud Chain Research Institute conducted field research in the Hong Kong virtual asset OTC market, it was found that as of January 2024, there are at least 200 physical encrypted OTC exchange shops in the Hong Kong virtual asset market. According to our estimates, the average annual transaction volume of the money changer channel is more than 10 billion US dollars. Before the ETF channel was introduced, Chainalysis also estimated the Hong Kong market: although Hong Kong's population is much smaller than that of the United States, Hong Kong's active OTC virtual currency market drove $64 billion in trading volume during last year's bear market (June 2022 to June 2023). Compared to the rest of Asia, Hong Kong dominates large institutional virtual currency transactions. 46.8% of the annual virtual asset transactions in Hong Kong are institutional transactions of more than US$10 million, which is higher than the global average for similar transactions. ”

Price movements can be complex and changeable

Why has virtual currency become more and more important to mainstream financial institutions in recent years?

Bi Lianghuan told reporters that virtual asset investment can be regarded as a kind of alternative investment at present, and investors can reduce the overall investment risk by diversifying their investment. At the same time, the decentralization, transparency and non-tampering characteristics of blockchain technology make virtual assets have incomparable advantages in terms of security and convenience compared with traditional currencies. These technological innovations provide a strong growth driver for virtual assets. With the further maturity of blockchain technology and the expansion of application scenarios, the scale of the virtual currency market is expanding year by year, attracting more and more investors and institutions to participate.

In addition, Bi Lianghuan also said that Hong Kong's increased layout of Web3 and the opening of the more well-known ETF channel are not only a good adjustment for the balance sheets of financial institutions due to the "shrinkage" of overall assets, but also a strategic strategy to stay at the "table" and even form a new financial table. "Ouke Cloud Chain Research Institute previously analyzed the global Web3 regulatory policy that the United States has taken the lead in opening ETFs, Hong Kong needs to consolidate its status as an international financial center, since the Hong Kong government's Web3 government declaration, it is obvious that Hong Kong's relevant policies are at the forefront of global Web3 development. With a sound regulatory system and clear regulatory regulations, Hong Kong's Web3 will also attract more and more financial institutions to join. HOWEVER, AS THE CRYPTO ASSET MARKET AND FINANCIAL MARKET CONTINUE TO EXPAND CONNECTIVITY, INVESTORS HAVE CONCERNS ABOUT TECHNICAL SECURITY, CUSTODY SECURITY, AND LACK OF MONITORING, AND WEB3 COMPANIES THAT HELP ON-CHAIN DATA SECURITY AND COMPLIANCE SUCH AS OOKE CLOUD CHAIN WILL ALSO USHER IN THEIR OUTLET. He said.

Yu Jianing said that virtual currency ETFs represent an innovative financial derivative instrument, which provides investors with a new way to enter the virtual currency market without directly bearing the risks and complexities of holding virtual currencies. The emergence of such ETFs allows investors to participate in emerging asset classes through traditional securities markets, thereby diversifying their asset allocation without sacrificing the security of traditional investments. From the perspective of investment diversification, virtual currencies act as risk diversifiers in portfolios due to their low correlation with traditional financial assets, helping investors balance and diversify overall investment risk. In addition, virtual currency ETFs are subject to a stricter regulatory framework, providing additional confidence to institutional investors seeking a compliant investment path.

Yu Jianing further said that the increasing focus of investment institutions on virtual currencies is partly due to the high growth potential shown by these asset classes. With the maturity and popularity of blockchain technology, the innovative technology behind virtual currencies has brought revolutionary changes to the fintech field. These institutions recognize the underlying logic of Bitcoin as a store of value as a tool for portfolio diversification and diversification, increasing the Sharpe ratio of the portfolio. There are also some who recognize the development of the virtual currency world and lay out the key track of the blockchain for a long time. Bitcoin is the "general equivalent" of virtual currency, and the expected increase in demand for blockchain applications and virtual currency in the future will be reflected in the price of Bitcoin. In addition, with the increasing acceptance of virtual currencies in the global financial market, investment institutions are gradually adapting to this market trend to avoid missing out on potential investment opportunities.

It should be pointed out that in the digital era, Bitcoin is now regarded as "digital gold" by many investment institutions, but compared with the more stable gold price, the price direction of Bitcoin is still difficult to predict. Not long ago, Bitcoin completed the fourth "halving", that is, the number of bitcoins produced by miners per day by validating transactions was reduced from 900 to 450, and the rewards received by miners were reduced from 6.25 bitcoins to 3.125. In the past, the Bitcoin halving was often seen as a signal to drive the price up, but the price action after this halving was slightly "weak", and as of 16:30 on April 29, Bitcoin fell 2.4% to $62,400 on the day, the lowest level in the past week.

Yu Jianing believes that in the context of multiple economies such as the halving of bitcoin and the Federal Reserve's interest rate hike, the trading activity and price trend of Hong Kong virtual currency ETFs after listing may show a complex and changeable trend. Historically, Bitcoin halving events have often triggered market expectations of higher Bitcoin prices, which may increase investor interest in virtual currency ETFs, thereby increasing trading activity. However, since the market's expectations for the halving may have been partially reflected in the current price, its direct effect on prices may be weakened. The future should be a cycle of interest rate cuts, which are often aimed at stimulating economic growth and may increase liquidity in the market, thereby increasing investors' appetite for risky assets, including virtual currency ETFs. A cut in interest rates could make it less attractive for investors to hold US dollar assets, prompting capital flows to other asset classes, including virtual currencies. But at the same time, the rate cut could also be a reflection of the economic slowdown, and this macroeconomic uncertainty could bring volatility to all risk assets, including virtual currency ETFs.

"In addition, the virtual currency market is heavily influenced by market sentiment and investor behavior. If investors are optimistic about the long-term prospects of virtual currencies, then the listing of ETFs may attract more inflows and increase trading activity. Changes in the global macroeconomic conditions and policy environment, as well as Hong Kong's regulatory policies on virtual currencies, will have a significant impact on the performance of ETFs. A favourable regulatory environment is likely to increase investor confidence, which in turn will increase trading activity and prices. Yu Jianing said.

(Editor: He Shasha Review: Zhu Ziyun Proofreader: Yan Jingning)