Since April 30th, six virtual asset spot ETFs have been listed and traded in Hong Kong for half a month. How has the market performed? Will the physical subscription and redemption feature and the earlier launch of Ethereum spot ETF in the United States bring new growth to the Hong Kong market? What other stories can we expect in the future? With these questions in mind, based on data, the Ouke Cloud Chain Research Institute has reviewed the development of the Hong Kong virtual asset ETF market over the past half month.
1. Market Performance of Hong Kong Virtual Asset ETFs in the Past Half Month
On the first day of issuance, the three Bitcoin spot ETFs in Hong Kong reached a scale of 248 million US dollars, far exceeding the initial scale of 125 million US dollars for the US Bitcoin spot ETF (excluding Grayscale) on January 10th. However, the subsequent market performance was not as optimistic as expected. According to incomplete statistics from the Ouke Cloud Chain Research Institute, as of May 15, 2024, the total AUM (Assets Under Management) of the six Hong Kong virtual asset spot ETFs exceeded 2 billion Hong Kong dollars (approximately 264 million US dollars), with the Huaxia Bitcoin ETF accounting for around 40% of the total. The AUM of other spot ETFs is all less than 500 million Hong Kong dollars. Although the scale of the virtual asset spot ETF is relatively small compared to the US Bitcoin spot ETF (approximately 51.4 billion US dollars), considering the scale of the ETF market in Hong Kong (50 billion US dollars) and the US (85 trillion US dollars), the impact of the 264 million US dollars virtual asset spot ETF on the local financial market in Hong Kong is still significant.
In terms of trading, the total trading volume of Hong Kong virtual asset spot ETFs has exceeded 520 million Hong Kong dollars in the past half month. However, the daily trading volume has shown a fluctuating downward trend in recent days and has been below 40 million Hong Kong dollars for multiple consecutive trading days (as of May 14th).
Nevertheless, the trading volume does not directly reflect the impact of spot ETFs on the cryptocurrency market. Only the funds that actually flow into the market can affect market trends. The inflow of funds into Hong Kong ETF products is not optimistic either. The three Bitcoin spot ETFs have experienced net outflows for four consecutive days, and the Ethereum spot ETF has also experienced net outflows for multiple days. In fact, the overall demand for virtual asset spot ETFs in the global market seems to be weakening. Since the halving, the US Bitcoin ETF has also seen capital outflows: in the past month, there have been 14 trading days with net outflows totaling 783 million US dollars.
2. Why Didn’t the Ethereum ETF Bring “Surprises”?
Compared to the United States, the main advantage of Hong Kong’s Bitcoin spot ETF lies in its support for physical subscription and redemption. Although the specific proportions of physical and cash subscriptions have not been disclosed by each institution, according to previous reports, the proportion of physical subscriptions in the initial issuance scale may exceed 50%. However, it seems that physical subscriptions did not bring sustained growth to the Hong Kong spot ETF market.
In theory, physical subscription and redemption are more attractive to native cryptocurrency investors, and Bitcoin miners are expected to be the main group interested in Hong Kong Bitcoin spot ETFs. However, from on-chain data, miners seem to be more inclined to “continue to wait and see” under the current market conditions, rather than invest Bitcoin through physical subscription into the ETF market. From the balance of miners’ wallets, the amount of Bitcoin sold by miners has dropped to the lowest point in half a year. In addition, Hong Kong does not have an advantage in terms of fees. It is unlikely that the mining community will change their minds in the short term and inject incremental funds into the Hong Kong ETF market.
Furthermore, observing the overall on-chain data changes in the Bitcoin market recently, we found that both Bitcoin trading volume and market liquidity are decreasing. On the one hand, this is due to the influence of US macro expectations, which has led investment elites, led by Wall Street, to be reluctant to release liquidity easily at the current stage. On the other hand, it is also because the Bitcoin ecosystem has been weak recently, resulting in a lack of enthusiasm among Bitcoin holders to participate in trading within the current price range and a decreased demand for ETF products.
The highly anticipated Ethereum spot ETF has also not brought any surprises in the short term. In the current Hong Kong virtual asset spot ETF market, the share of Ethereum spot ETF is only 15.11%, with an AUM of approximately 327 million Hong Kong dollars, which is lower than the initial scale. On the one hand, this is due to the recent weak performance of Ethereum. The previous upgrade of Constantinople did not bring about a collective outbreak of Layer2 projects. Although gas fees have dropped to historical lows, it has not improved the activity on the chain. On the contrary, due to the adjustment of the transaction fee structure brought about by the Constantinople upgrade, Ethereum has been in an inflation state for more than a month, to some extent, affecting market expectations for Ethereum.
On the other hand, the lack of support for staking in the current stage of the Hong Kong Ethereum spot ETF may be one of the factors affecting its attractiveness to investors. We believe that whether or not it supports staking may be the key to determining the scale of the Ethereum spot ETF product. Currently, the yield for Ethereum staking is about 3.7%. From both a narrative and an economic perspective, the additional income brought by staking is likely to be an important factor in attracting investors, especially traditional financial investors. It is also a major characteristic that distinguishes Bitcoin from Ethereum. Existing Ethereum holders may be unwilling to participate in the ETF because they cannot stake their Ethereum and have to give up staking income. New investors will also lean towards Bitcoin ETF rather than Ethereum ETF unless they have a special optimism about the Ethereum ecosystem.
3. What Can We Expect for the Future of Hong Kong Virtual Asset ETFs?
Since it is widely believed that the US SEC is unlikely to approve the Ethereum spot ETF application this month, it means that the current Ethereum ETF products in Hong Kong will have a first-mover advantage in the near future. If the Ethereum ecosystem turns the tide, we believe that Hong Kong still has the opportunity to attract more incremental funds interested in Ethereum into the ETF market.
In addition, there are more aspects of the future of Hong Kong virtual asset spot ETFs worth looking forward to:
Firstly, considering that Hong Kong has approved the application of Ethereum spot ETF based on the PoS mechanism, it is possible to accept more mainstream public chain tokens in the future, such as Solana, which also supports the PoS mechanism, to enter the mainstream financial market through the issuance of ETFs. This will greatly increase Hong Kong’s attractiveness to various Web3 projects and enhance the future imagination of Hong Kong virtual asset ETFs.
Furthermore, virtual asset spot ETFs are essentially similar to token securitization, which transforms relatively niche virtual assets into securities assets accepted by the mainstream market through a series of compliant processes. After virtual assets such as Bitcoin complete “identity transformation,” financial institutions can use ETF products to launch more derivative products such as leverage, lending, and asset management, realizing financial innovation that was difficult to achieve with direct use of physical Bitcoin assets and meeting the needs of various investors for virtual assets.
Guotai Junan International has currently launched structured products based on virtual asset spot ETFs in Hong Kong, while ChinaAMC and Huaxia Fund are also advancing the securitization of ETF products. We believe that as frictionless trading tools, virtual asset spot ETFs will stimulate more financial innovations, and various structured products and derivatives based on spot ETFs will bring more possibilities to the Hong Kong market, accelerating the connection between the Hong Kong financial system and the virtual asset market.
More importantly, the Ouke Cloud Chain Research Institute mentioned in an interview with the South China Morning Post and other media that the significance of issuing virtual asset spot ETFs in Hong Kong does not lie in bringing about significant changes to the market in the short term. Instead, it marks that Hong Kong financial institutions will accelerate their embrace of virtual assets. Perhaps in the near future, we will see more financial institutions in Hong Kong participating in the Bitcoin and Ethereum spot ETF markets or accelerating their business layouts in virtual assets through other means to provide virtual asset products and services to a wider range of users.
