StakingMarketRegulationCryptostake ExplainsUncharted
Bitcoin and Ethereum ETFs Receive the Seal of Approval in Hong Kong. How Will It Affect the Crypto Market?

Hong Kong is first to approve Ethereum ETFs, second to give thumbs-up to Bitcoin ETF. But will it push the market in the bullish direction?  

While the U.S. Securities and Exchange Commission (SEC) continues to hold off on approvals for a spot Ethereum ETF, its Asian counterpart, the Hong Kong Securities and Futures Commission (SFC), surprised the market on Monday, April 15th, by giving it the green light. 

This move comes just months after the U.S. finally approved its first spot Bitcoin ETF on [Insert Date of U.S. Bitcoin ETF Approval], which triggered a parabolic rally that saw Bitcoin reach a new all-time high of over $71,000. With the crypto market currently experiencing a cooling down period after five weeks of gains, the question remains: will the SFC's approval of the Ethereum ETF ignite a similar surge in the price of Ethereum and potentially influence the broader market's trajectory? 

Key Takeaways: 

  1. Three asset management firms were given permission to trade ETFs. 
  2. Capital influx from mainland China could be much lower than expected. 
  3. Hong Kong’s ETFs are unlikely to be as impactful as those in the U.S. market.

All you need to know about SFC’s approval of Bitcoin and Ethereum ETFs 

Hong Kong's SFC granted both exchange-traded funds conditional approval, allowing several prominent Chinese asset management firms to capitalize on this regulatory decision. The Hong Kong subsidiaries of Harvest Fund Management and Bosera Asset Management were given a nod to launch their respective spot Bitcoin and Ethereum ETFs. Additionally, China Asset Management's Hong Kong unit, ChinaAMC (HK), has secured regulatory clearance for virtual asset management services, though their own spot Bitcoin and Ethereum ETFs remain in the works.

It is important to note that the SFC's approval process involves conditional authorization letters. While these applications meet the core criteria, further requirements such as fee payments and document submissions must be fulfilled before launch. Specific details regarding the composition and functionality of these virtual asset spot ETFs remain undisclosed by the SFC. For instance, it's unclear whether retail investors from China would be given access to these financial products.

SFC's decision comes just three months after the United States launched its first spot Bitcoin ETFs, which have already sparked significant investor interest, attracting approximately $12 billion in inflows. While mainland China maintains a ban on cryptocurrencies,

Hong Kong's initiative aligns with an ambition to become the hub for innovation within the Asian financial sector. While the ETF approval in Hong Kong will undoubtedly pull more capital into the respective market, there is a doubt whether it would make any noticeable difference in terms of market direction.

 When expectations may not meet the reality 

In the lead-up to the SFC's decision, anticipation crackled through the crypto community. Forecasts swirled, with some members predicting a significant influx of capital from mainland China. Estimates suggested the Hong Kong ETF approval could draw up to $25 billion of Chinese money into the crypto market, fueled by investor interest previously stifled by the mainland ban.

However, there are some key factors that might temper initial expectations. Hong Kong's overall ETF market is way too small compared to the capitalization of the behemoth that is its US counterpart. With a current capitalization of around $50 billion, it's dwarfed by the US market, which boasts a staggering $6.8 trillion (as of Q1 2024) and a robust ecosystem of various ETF types. 

Again, mainland Chinese investors are currently restricted from officially participating in these Hong Kong ETFs. While workarounds might emerge, the vast pool of Chinese capital many envisioned flooding the market remains out of reach for now. In addition, it's highly doubtful that Chinese media had shilled for ETFs even remotely as much as the global media did prior to the SEC's approval. Therefore, many crypto holders in China may not be aware of such an opportunity.

Not enough financial muscle 

The three asset managers approved – Bosera, China AMC (HK), and Harvest –  manage considerably less capital compared to the American industry giants. Bosera boasts an impressive $120 billion in AUM, while China AMC (HK) and Harvest hover around the $50 billion mark.

These figures are nothing by the colossal $10 trillion AUM powerhouse, BlackRock. This disparity in asset management capabilities suggests that Chinese firms won't be able to inject the same level of capital to the table as Wall Street giants, thus their impact on Bitcoin and Ethereum price will be insignificant.

Mind the ETF fees 

The underlying cryptocurrency market in Asia, particularly compared to the US, is less liquid and efficient, which translates to wider bid-ask spreads and potential premium discounts on the ETFs themselves. Crypto investors accustomed to the razor-thin spreads seen in established US markets might encounter less favorable pricing dynamics in Hong Kong.

Early reports suggest management fees for these ETFs could fall within the 1-2% range, significantly higher than the sub-1% fees offered by some US competitors like Fidelity's Wise Origin Bitcoin Trust (0.39%). This fee structure could eat into potential returns, especially for long-term investors.

Bottom line: Hong Kong ETFs will have a very moderate effect on the market 

In conclusion, while Hong Kong's ETF approval is undeniably a positive step for Asian crypto acceptance, it's unlikely to be a game-changer. The fledgling market size, restricted Chinese access, and smaller asset managers involved suggest a more measured impact.  Instead of a dramatic surge, these ETFs might spark a mild rally, fueled by initial investor enthusiasm.  However, the long-term influence on the broader market picture remains to be seen.