How much capital inflow will Asia's first batch of virtual asset spot ETFs attract when they are listed in Hong Kong?

On April 30, the first batch of 6 virtual asset spot ETFs launched by Harvest International, China Asset Management (Hong Kong) and Bosera International were listed and traded on the Hong Kong Stock Exchange. According to the product list on the website of the Securities and Futures Commission of Hong Kong, the six products are: Harvest Bitcoin Spot ETF (03439.HK), Harvest Ether Spot ETF (03179.HK), ChinaAMC Bitcoin Spot ETF (03042.HK), ChinaAMC Ether Spot ETF (03046.HK), Bosera Bitcoin Spot ETF (03008.HK) and Bosera Ether Spot ETF (03009.HK).

This is the first batch of virtual asset spot ETFs to be launched in Asia, following the approval of the first batch of Bitcoin spot ETFs in the United States. The listing of bitcoin spot ETFs in the United States has attracted a large amount of new funds, driving a strong round of bitcoin market. Therefore, the market is also highly concerned about how much capital can be attracted to Hong Kong by the listing of Hong Kong virtual asset spot ETFs.

According to Flush data, as of the close of trading on April 30, the total turnover of the six BTC/ETH spot ETFs on the first day of listing was nearly HK$90 million. In addition, Bitcoin spot ETFs rose significantly, with Harvest Bitcoin Spot ETF, ChinaAMC Bitcoin Spot ETF, and Bosera Bitcoin Spot ETF rising by 1.57%, 1.53%, and 1.80% respectively. In contrast, the market performance of Ether spot ETFs was weaker, with Harvest Ether Spot ETF, ChinaAMC Ether Spot ETF and Bosera Ether Spot ETF falling 0.73%, 0.77% and 0.45% respectively.

How to invest

According to the product information, the investment objective of these six ETFs is to track the Chicago Mercantile Exchange (CME Group) Bitcoin or Ether Index. The investment strategy is slightly different, with Harvest International and Bosera International's products investing directly in Bitcoin and Ether in a passively managed manner through a virtual asset trading platform licensed by the Securities and Futures Commission of Hong Kong. Bosera International's official WeChat account said that it launched the product with cryptocurrency investment institution HashKey Capital Limited, which has also recently obtained an upgrade to the Hong Kong Asset Management (No. 9) license, exempting it from the clause that limits it can only provide services to professional investors. The investment strategy of ChinaAMC (HK) products is to directly acquire and hold Bitcoin and Ethereum.

The product information also shows that in addition to the Hong Kong dollar trading counter, the six ETFs have US dollar trading counters, and the products issued by ChinaAMC (Hong Kong) have also set up RMB trading counters. The management fees set by the three financial institutions for the listing of the Bitcoin/Ether spot ETF are also different, among which Harvest International's products charge 0.3% management fee and can be reduced within 6 months after listing, ChinaAMC Fund (Hong Kong) products charge 0.99% management fee, and Bosera International products charge 0.6% management fee and can be reduced within 4 months after listing.

The outside world has been very concerned about how to invest in products and what kind of investors are qualified investors. The Economic Observer Network learned from fund issuers and Hong Kong securities firms that as long as they have opened an account with a Hong Kong securities company, they can conduct transactions. Mainland individual investors can also open an account with a Hong Kong securities company with their Mainland identity card, and are required to provide a valid residential address proof in Hong Kong within 3 months and a bank account approved by the Hong Kong Securities and Futures Commission. The staff of Phillip Securities told the Economic Observer that it is not necessary to open a Hong Kong securities account to trade ETFs, and investors also need to pass the test of knowledge of virtual assets and derivatives.

The Hong Kong Bitcoin/Ether spot ETF not only allows cash redemption, but also physical redemption. Previously, Bitcoin spot ETFs in the U.S. market were only allowed to be purchased through cash. Industry insiders believe that increasing the way of physical delivery can not only attract traditional securities investors, but also attract crypto asset investors, which will help increase the flexibility of ETF products and improve market liquidity. Victory Securities is the only brokerage in Hong Kong that can support the physical subscription and redemption mechanism, and the brokerage staff told the Economic Observer that investors can transfer bitcoin or ether to securities accounts through electronic wallets, and the function will be launched in early May.

According to the above-mentioned brokerage, when there is a price difference between the ETF fund in the primary market and the secondary market, investors can buy the ETF fund at a low price in the primary market and sell the ETF fund at a high price in the secondary market to make a profit.

Spot ETFs

In recent years, virtual asset investment has attracted more and more attention from investors. So, what is the difference between Bitcoin/Ether spot ETF and virtual asset investment? Zhou Teng, COO of Huasheng Securities, told the Economic Observer that in fact, the virtual asset investment that everyone discusses daily mainly revolves around cryptocurrencies, such as direct investment in Bitcoin or Ether. The Bitcoin/Ether spot ETF issued in Hong Kong is essentially an investment fund that is listed and traded on an exchange. Investors buy Bitcoin/Ether spot ETFs without the need to directly manage or store virtual assets, further reducing the risk of trading directly with cryptocurrencies. In addition, Bitcoin/Ethereum spot ETFs are listed and traded on exchanges in the form of stocks, while cryptocurrency trading is generally conducted on cryptocurrency exchanges.

This is not the first time that a virtual asset ETF has been issued in Hong Kong. As early as December 16, 2022, the Hong Kong Stock Exchange has listed two virtual asset futures ETFs, namely CSOP Bitcoin Futures ETF (03066.HK) and CSOP Ether Futures ETF (03068.HK), which track standardized, cash-settled Bitcoin futures contracts and Ether futures contracts traded on CME Group, respectively. In January 2023, the Samsung Bitcoin Futures Active ETF (03135.HK) was also listed on the Hong Kong Stock Exchange.

Zhou Teng said that although virtual asset spot ETFs and virtual asset futures ETFs invest in financial instruments related to virtual assets, such as bitcoin and ether, the subject of virtual asset spot ETF investment is the spot market of virtual assets and tracks the real-time price of virtual assets. Virtual asset futures ETFs invest in the futures contract market of virtual assets, tracking the price performance of virtual asset futures contracts, rather than the real-time price of the underlying asset. In general, because virtual asset spot ETFs such as Bitcoin and Ether directly track the price of virtual assets, investors can more intuitively understand the risks and opportunities brought by virtual asset price changes.

How attractive it is

In January this year, the U.S. Securities and Exchange Commission announced that it had approved the listing of the first batch of 11 Bitcoin spot ETFs. After the issuance of this batch of products, it attracted more than $10 billion in capital inflows in just two months. According to the statistics of coinglass, a crypto derivatives data analysis platform, as of mid-April, the fund management scale of Bitcoin spot ETFs in the United States exceeded $54 billion, of which BlackRock Group's Bitcoin spot ETF management scale exceeded $17.2 billion, and the latter reached $10 billion in management within a month of product issuance.

The listing of Bitcoin spot ETFs in the United States has attracted a large amount of new capital, driving the price of Bitcoin to break new highs repeatedly. According to British financial data, in March this year, the price of bitcoin soared to an all-time high of $73,000 per coin, an increase of more than 70% from the beginning of this year. The price of Ether once exceeded $4,000 per coin in March this year, and has risen by more than 40% since the beginning of this year.

In addition, the trading volume of Hong Kong's first batch of virtual asset futures ETFs also increased significantly after their listing in 2022. According to data from the Hong Kong Stock Exchange, the average daily trading volume of the three virtual asset futures ETFs listed in Hong Kong increased from HK$8.9 million in 2023 to HK$51.3 million in the first quarter of 2024, while also attracting HK$529 million in capital inflows. For the listing of the Bitcoin/Ether spot ETF, the market is also predicting whether it will attract more funds.

While continuing to launch virtual asset products, Hong Kong is also strengthening the regulation of virtual assets. In June 2023, Hong Kong introduced the Licensing Regime for Virtual Asset Trading Platforms, which requires the SFC to apply for a licence to operate a virtual asset exchange business, and that licensed virtual asset exchanges and their subsidiaries are required to submit their audited accounts and financial information to the SFC on a regular basis, and the SFC has the right to enter their premises for inspection and investigation when necessary.

Zhou Teng said that from the perspective of the industry, whether it is the new regulations on Hong Kong's virtual asset supervision last year or the listing of virtual asset spot ETFs this time, it means that Hong Kong's virtual asset industry will work together with the regulator to promote the development of Hong Kong's virtual asset market. In the long run, Hong Kong's continuous exploration in the field of virtual assets is expected to help Hong Kong cultivate a globally competitive Web 3.0 industry ecosystem, and further consolidate and enhance Hong Kong's status as an international financial centre.