From April 30 to now, six virtual asset spot ETFs in Hong Kong have been listed and traded for half a month. How is the market performance? Will the highly anticipated physical subscription and redemption and the Ethereum spot ETF launched earlier than the United States bring new growth to the Hong Kong market? What other stories are worth looking forward to in the future market? With these questions, OKLink Research Institute reviewed the development of the Hong Kong virtual asset ETF market in the past half month based on data.
1. Hong Kong virtual asset ETF market performance in the past half month
The issuance scale of three Bitcoin spot ETFs in Hong Kong reached US$248 million on the first day of April 30, far exceeding the initial issuance scale of about US$125 million of the US Bitcoin spot ETF on January 10 (excluding Grayscale). However, the subsequent market performance was not as optimistic as expected: according to incomplete statistics from the OKLink Research Institute, as of May 15, 2024, the total asset management scale of six Hong Kong virtual asset spot ETFs exceeded HK$2 billion (about US$264 million), of which Huaxia Bitcoin asset management scale reached HK$816 million, close to 40% of the total, and the current scale of other spot ETFs is less than HK$500 million. Although it pales in comparison with the scale of the US Bitcoin spot ETF (about US$51.4 billion), considering the comparison of the ETF market scale of Hong Kong (US$50 billion) and the United States (US$8.5 trillion), the impact of the US$264 million virtual asset spot ETF on Hong Kong's local financial market is equally huge.
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Judging from the trading situation, the total trading volume of Hong Kong virtual asset spot ETF has exceeded HK$520 million since its listing half a month ago, but the daily trading volume has fluctuated downward in recent days and has been below HK$40 million for several consecutive trading days (as of May 14).
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However, trading volume cannot show the direct impact of spot ETFs on the crypto market. Only the funds that actually flow into the market can affect market trends. However, the inflow of funds into Hong Kong ETF products is not optimistic: 3 Bitcoin spot ETFs have experienced net outflows for 4 consecutive days, and Ethereum spot ETF has also experienced net outflows for many consecutive days. In fact, the overall demand for virtual asset spot ETFs in the global market now seems to be weakening. Since the halving, US Bitcoin ETFs have also generally experienced capital outflows: in the past month, US Bitcoin ETFs have experienced net outflows on 14 trading days, with a total outflow of US$783 million.
2. Why did the Ethereum ETF fail to bring "surprises"?
Compared with the United States, the main advantage of Hong Kong Bitcoin spot ETF is that it supports physical subscription and redemption. Although the specific proportion of physical subscription and cash subscription has not yet been disclosed, according to previously disclosed information, the ETF share of physical subscription may exceed 50% of the initial issuance scale, but it does not seem to have brought sustained growth to the Hong Kong spot ETF market afterwards.
In theory, physical subscription and redemption are more attractive to native crypto investors, and Bitcoin miners are the main group expected to be interested in Hong Kong Bitcoin spot ETFs. However, judging from the on-chain data, miners seem to be more inclined to "continue to wait and see" in the current market, rather than invest Bitcoin in the ETF market through physical subscription. Judging from the balance of miners' wallets, miners' shipments have dropped to the lowest point in half a year. In addition, Hong Kong has no advantage in terms of fees, and it is unlikely that the miners will change their minds in the short term and inject incremental value into the Hong Kong ETF market.
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In addition, observing the recent changes in the overall on-chain data of the Bitcoin market, we find that Bitcoin trading volume and market liquidity are declining. On the one hand, this is due to the impact of the US macroeconomic expectations, which has led to the unwillingness of investment elites led by Wall Street to easily release liquidity at this stage. On the other hand, due to the recent weak performance of the Bitcoin ecosystem, Bitcoin holders are not enthusiastic enough to participate in transactions within the current price range, and the demand for ETF products has also decreased.
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(Note: Velocity is an indicator that measures the speed at which units circulate in the network. The higher the value, the faster the Bitcoin chain circulates and the higher the transaction activity.)
The much-anticipated Ethereum spot ETF did not bring any surprises in the short term. In the current Hong Kong virtual asset spot ETF market, Ethereum spot ETF accounts for only 15.11%, and the asset management scale is about HK$327 million - this is actually lower than the initial scale. This is partly due to Ethereum's recent weak performance. The previous Cancun upgrade did not bring about a collective outbreak of Layer2 projects. Although the Gas fee once dropped to a historical low, it still did not improve the activity of on-chain activities; on the contrary, due to the adjustment of the transaction fee structure by the Cancun upgrade, Ethereum has been in a state of inflation for more than a month, which to some extent has affected the market expectations for Ethereum.
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On the other hand, the fact that the Hong Kong Ethereum spot ETF does not support staking at this stage may be one of the factors that affect its ability to attract more investors. We believe that whether or not to support staking may be the key to determining the scale of Ethereum spot ETF products. The current yield on Ethereum staking is about 3.7%. Whether from a narrative perspective or an economic perspective, the additional income brought by staking is likely to be an important factor in attracting investors, especially traditional financial investors, and is also the main feature that distinguishes Bitcoin from Ethereum. Existing Ethereum holders may be reluctant to participate in ETFs because they cannot stake, because subscribing to ETFs means they have to give up staking income; unless new investors are particularly optimistic about the Ethereum ecosystem, they will also prefer the former when choosing between Bitcoin ETFs and Ethereum ETFs.
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3. What else should we expect from Hong Kong’s virtual asset ETF in the future?
Since the industry generally believes that the US SEC will not approve the Ethereum spot ETF application this month, this means that Hong Kong's current Ethereum ETF products will still have a first-mover advantage for some time to come. If the Ethereum ecosystem reverses its downward trend, we believe that Hong Kong still has the opportunity to attract more incremental funds interested in Ethereum to flow into the ETF market.
In addition, there is more to look forward to in the future of Hong Kong virtual asset spot ETFs:
First, considering that Hong Kong has approved the application for a spot ETF for Ethereum 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, and enter the mainstream financial market by issuing ETFs. This will greatly increase Hong Kong's attractiveness to various Web3 projects and enhance the future imagination of Hong Kong's virtual asset ETFs.
In addition, virtual asset spot ETFs are essentially similar to token securitization, that is, through a series of compliance processes, relatively niche virtual assets are transformed into securities assets that are more accepted by the mainstream market. After virtual assets such as Bitcoin complete their "identity conversion", financial institutions can use ETF products to launch more derivative products such as leverage, lending, and asset management, achieving financial innovations that were previously difficult to implement directly using physical Bitcoin assets, and meeting the needs of various investors to deploy virtual assets.
Guotai Junan International has launched structured products based on virtual asset spot ETFs in Hong Kong, and Harvest Global and China Asset Management are also promoting the collateralization of ETF products. We believe that virtual asset spot ETFs, as frictionless trading tools, will stimulate more financial innovations, and various structured products and derivatives based on spot ETFs will also bring more possibilities to the Hong Kong market, accelerating the connection between Hong Kong's financial system and the virtual asset market.
More importantly, the significance of Hong Kong's issuance of virtual asset spot ETFs is not that it can bring major changes to the market in the short term, but that it indicates that Hong Kong's financial institutions will accelerate their embrace of virtual assets. Perhaps in the near future we will see more financial institutions participating in the Bitcoin and Ethereum spot ETF markets in Hong Kong, or accelerating the layout of virtual asset businesses through other means, and providing virtual asset products and services to a wider range of users.
