Hong Kong’s crypto ETFs struggle to match U.S. success

A new range of Bitcoin exchange-traded funds (ETFs) in Hong Kong has failed to mirror the explosive launch of their US counterparts. Early data suggests inflows and assets under management in the first week were lackluster—raising fresh questions about investor interest.

Structural limitations

In the first week since their April 30 launch, the three Hong Kong-listed spot Bitcoin ETFs together amassed only $262 million in assets, with inflows of less than $14 million. That pales compared to the billions poured into U.S. spot Bitcoin ETFs upon their January launch.

For a first-of-its-kind offering, the pair of Ether ETFs managed a slightly more middling success, with $54.2 million in AUM and $9.3 million in inflows as of May 6. Analysts had higher expectations for this pioneering crypto offering.

Farside investors suggest that despite such benefits as multi-currency denominations and in-kind creation/redemption, the small and illiquid equities market of Hong Kong bars its ETF industry from matching American inflows. Indeed, with a total market cap of $4.5 trillion versus  $50 trillion across U.S. exchanges, Hong Kong cannot reasonably hope to match American inflows.

“That $310 million for the Hong Kong crypto ETF is relative to $50 billion in the U.S. market,” said Eric Balchunas, senior ETF analyst at Bloomberg Intelligence.

Yeah as we advised don’t expect big numbers in HK vs US (which is in league of own ETF-wise) but.. the the HK ETFs at $310m is equiv to $50b in US market. So in that regard these ETFs already as big to their local mkt as US ones are to its. https://t.co/4dIqAiZppJ

— Eric Balchunas (@EricBalchunas) May 6, 2024

One major hurdle is that Mainland Chinese investors are currently excluded; the ETFs are out of reach for them unless they hold Hong Kong residency. An OSL study found that nearly 80% of Hong Kong investors who are interested in cryptocurrencies plan to invest. 

Hong Kong’s  ETFs barriers to adoption

However, researchers at SoSoValue caution that the Hong Kong cryptocurrency ETF is still strict in qualifying investors, and mainland investors are not allowed to participate in transactions. The market is is looking forward to the trading of mainland funds through southbound Hong Kong Stock Connect, but current regulations do not allow it, and this is expected to be difficult to open for a long time.

Management fees on the Hong Kong ETFs on crypto are 0.85% to 1.99% per annum, following an initial period of low cost. That contrasts with the 0.25% average for U.S. ETF issuers, making long-term holding more economical.

SoSoValue researchers added that for institutional investors who are optimistic about the crypto market and, therefore, have a long-term holding view, the cost of holding would be lower for the U.S. Bitcoin ETF.

Indeed, slow growth in the Mainland, at least since 2022, has dampened economic activity and investor sentiment in Hong Kong. The region’s comparatively illiquid equities sector simply cannot realistically support the same level of ETF demand as more developed U.S. markets, at least for the time being.