Hong Kong Opens Doors to Bitcoin and Ether ETFs

On Monday, Hong Kong regulators granted approval for asset managers to launch exchange-traded funds (ETFs) directly linked to Bitcoin and Ether, expanding cryptocurrency investment options in the Asia-Pacific region. Previously, investors in the region could only access futures-based crypto products, which track the future price of the cryptocurrency instead of holding the actual asset. The introduction of these ETFs, which hold the underlying Bitcoin and Ether, is expected to broaden the investor base in the crypto market.

This approval follows similar launches in the U.S. earlier this year, which attracted significant investor interest. Bitcoin prices have increased by 38% since those launches, though other factors may also contribute to this rise. The announcement in Hong Kong initially boosted both Bitcoin and Ether prices, but the gains subsided later. That said, this regulatory approval came sooner than expected, with analysts initially predicting launches later in the year. Hong Kong regulators aim to position the city as a regional leader by expediting the process for these innovative financial instruments.

Globally, the crypto ETF market has grown to $85 billion, representing a small but rapidly expanding segment of the traditional $12.7 trillion ETF market. In the U.S., Bitcoin ETFs have quickly become major players, attracting inflows comparable to established broad market funds. They currently account for 0.68% of the overall U.S. ETF market, with a total value of $60.6 billion.

In contrast, Hong Kong's crypto ETF market is valued at just $138 million, or 0.3% of the local market. Analysts project potential growth to $311 million if it mirrors the proportional expansion seen in the U.S. market. Additionally, they estimate that mainland China investors, eligible to invest in Hong Kong-listed shares through the Southbound Stock Connect program, could contribute a significant $25 billion in untapped demand.

However, some analysts, including Eric Balchunas from Bloomberg Intelligence, urge caution against overly optimistic forecasts, particularly the $25 billion estimate from mainland China, which he deems unrealistic due to the speculative nature of such projections.

The timing of Hong Kong's move coincides with similar developments elsewhere. The London Stock Exchange plans to accept applications for Bitcoin and Ether ETFs starting in May.

Notably, this approval is granted despite mainland China's ban on cryptocurrency trading. Hong Kong subsidiaries of Chinese financial giants such as China Asset Management and Harvest Fund Management have received authorization to manage portfolios with over 10% exposure to virtual assets, indicating increasing interest in crypto assets from offshore Chinese institutions.