The first Bitcoin spot ETFs ready for Hong Kong are expected

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Hong Kong could see the debut of Bitcoin and Ethereum exchange-traded funds (ETFs) next week following regulatory approval. However, analysts caution that the immediate impact of these ETFs may be limited by market size, investor restrictions and a less competitive structure compared to the US market.

According to Bloomberg ETF analyst Eric Balchunas, while the approval is a positive step for crypto adoption, the impact of the launch may be small compared to the US market.

Matrixport recently suggested that the approval of Hong Kong-listed Bitcoin ETFs could generate as much as $25 billion in demand from mainland China. This forecast is based on Chinese investors' access to the Southband Stock Connection program.

However, a reality check suggests a less rosy outlook. Balchunas believes this estimate is overly optimistic, given the launch of the Hong Kong ETF market, which currently has $50 billion in assets.

“We think they will be lucky to get $500m,” Balchunas said. “[Hong Kong’s ETF market] It's small, only $50 billion, and the Chinese locals can't afford these, at least officially.

Limited investment pools and small issuers are among the key limiting factors. According to Balchunas, Chinese investors have been restricted from accessing those ETFs by the government's crackdown on bitcoin, and are “not really on the Southband Connection program.”

Additionally, the companies that initially launched ETFs are not major players like BlackRock, which may attract fewer investors. Current ETF providers include HashKey Capital, Bosera Capital, Harvest Global and China Asset Management.

Other factors, such as liquidity and fee structure, are expected to influence the ETF's success. Balchunas notes that the trading infrastructure will lead to wider bid-ask spreads and prices that can exceed the actual value of Bitcoin.

Additionally, the analyst noted that management fees are estimated at 1-2 percent, which is significantly higher than the “dirt cheap fees” in the US market.

But he believes things can improve in the future. Despite those challenges, these ETFs are still positive for Bitcoin in the long run. They ultimately promote Bitcoin adoption by providing more investment channels.

Just to be clear, all of this is clearly positive as it opens up many avenues for investment, I would say it's child's play from the US. Also, some of these long-standing ones may disappear: more elite, tighter spreads, lower fees and larger issuers participating. But we have short/medium term…

— Eric Balchunas (@EricBalchunas) April 15, 2024

James Seifert, an analyst at Balchunas, highlighted the difference between mainland China's $325 billion ETF market and the US $9 trillion market, and pointed out that Hong Kong's Bitcoin ETFs have growth potential but will face an uphill climb to match the balance of the US market.

Yes, also @EthereanMaximus: There are more assets in US-listed #Bitcoin ETFs than in every single ETF listed in Hong Kong. Yes, it could be a big deal down the line. But it is a completely different animal.

The U.S. ETF market is worth nearly $9 trillion in assets — that…

— James Seyff (@JSeyff) April 12, 2024

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