Hong Kong Bitcoin and Ethereum ETFs to Begin Trading, Can They Compete with US?

Key Takeaways

• Bitcoin and Ethereum ETFs are to debut in Hong Kong on April 30, 2024.
• Hong Kong could dominate spot ETH ETF markets globally if the US fails to approve.
• These funds could accrue $1 billion in assets under management within two years.

Bitcoin (BTC) and Ethereum (ETH) spot exchange-traded funds (ETFs) are set to debut in Hong Kong on April 30, 2024. Despite being considerably smaller than those the US they do have some notable differences that could give them a competitive edge.

In addition, the fact that they’ll be offering the first spot ETH ETF ahead of the US could give it Ethereum ETF market dominance in Asia, if not globally.

Hong Kong ETF Fee War

The SFC hasn’t officially published an entire list of approved ETF issuers. However, Victory Securities, a Hong Kong-based investment firm that may be on this list, recently had its proposed, and rather competitive, fee structure revealed.

Victory’s application and redemption fees for primary market Bitcoin and Ethereum transactions will incur fees ranging from 0.5% to 1%, with minimum fees of $850. For cash redemptions, fees will range from 0.1% to 0.15% of the transaction amount, with the minimum fee set at $500.

These are somewhat comparable to the fee structures of US, spot BTC ETF issuers. The largest fund, the Grayscale Bitcoin Trust (GBTC), has a management fee  of 1.5%. Many others such as BlackRock’s iShares Bitcoin Trust (IBIT) and Wise Origin Bitcoin trust by Fidelity (FBTC), have markedly lower fees at 0.25%. Though these rates are the result of temporary fee waivers.

That said, it seems that Hong Kong spot crypto ETF issuers are setting up for their own fee war, with the latest reports suggesting the lowest fees could come in at 0.3% following a fee waiver.

A More Efficient ETF?

Hong Kong ETF issuers are looking to adopt an “in-kind” subscription and redemption model. This allows for the exchange of underlying assets of the fund for ETF units and vice versa. This is considerably different to the cash redemption model employed by American issuers.

This is significant as the in-kind process is more tax efficient, minimizes transaction costs, and offers arbitrage opportunities. Conversely, the US approach of cash redemption ETFs has more tax implications and increased trading costs.

In short, the swapping of assets (in-kind) does not create a taxable event, whereas the conversion of assets to cash does. For investors, this is a massive difference.

Low Exposure?

At present, there are three listed crypto-futures-based ETFs trading in Hong Kong. These are the Samsung Bitcoin Futures, CSOP Ether Futures, and CSOP Bitcoin Futures. These funds have a total of around $175 million in assets under management (AUM).

This is a relatively meager figure when compared to those already trading in the US, though this dynamic could shift should more funds begin to issue their own ETF products.

BlackRock, Fidelity, and other major industry giants attract global interest for their many investment vehicles. As noted by  One Satoshi co-founder, Roger Li:

“Hong Kong doesn’t have the ‘BlackRock’ effect to call on”.

At this point, they’re household names with strong brand recognition. That doesn’t mean, however, that funds in Hong Kong can’t reach a similar status, at least within their region.

Limited Access

Unfortunately, given China’s ban of crypto trading and crypto activities, investors may not be able to purchase said ETFs. Naturally, this could affect the performance of the crypto ETFs.

As pointed out  by a Bloomberg analyst, these funds could still rake in a “healthy” $1 billion in the first two years. Although the market landscape of Hong Kong and the US are almost incomparable, it would still position Hong Kong as a regional leader.

Previously, we reported that, despite China’s ban on crypto, investors can still take advantage of Hong Kong’s unique economic status to purchase crypto.

There are many over-the-counter (OTC) trading desks facilitating billions in trades in China. Furthermore, wealthy individuals and institutional investors can register businesses or entities in Hong Kong to get access.

Chinese state-owned companies are allowed to launch crypto investment funds in Hong Kong. This could suggest that the $1 billion in AUM by 2026 is a conservative estimation.

The Spot Ethereum ETF Edge

Perhaps most notable of all is Hong Kong has approved spot ETH ETFs before its American counterparts. Now that the decision to approve Ethereum ETFs in the US has been delayed again, Hong Kong investors may have a brief – but noticeable – competitive edge.

With fewer alternatives for Ethereum exposure, the impact of a spot ETH ETF may be understated. As the first global financial hub to authorize this product, more funds may be encouraged to issue the ETFs in Hong Kong.

These developments could see Hong Kong become the second-largest spot Bitcoin ETF market globally and, perhaps until the US catches up, the largest spot Ethereum ETF market globally.