The impact of Hong Kong crypto spot ETFs from a supply and demand perspective

Author: Tom Analysis, SoSoValue resident researcher

Hong Kong Securities and Futures Commission officially announces virtual asset spot ETF Approved list includes Bitcoin spot under China Asset Management (Hong Kong), Harvest Global, and Bosera International ETF, Ethereum Spot ETF In the column.These six spot ETF products will be available for subscription from April 25 to 26, and will be available in Hong Kong on April 30.exchangeGo public.

Through new subscription, 6Hong Kong spot onlyETFA good initial scaleAccording to SoSo Value data, the total net value of the three Bitcoin ETFs is US$248 million, and the total net value of the three Ethereum ETFs is US$45 million, with a total net value of nearly US$300 million; while the US Bitcoin spot ETF products, excluding Grayscale (GBTC), which was converted from a trust to an ETF, had a total net value of only US$130 million on the first day.

However, in terms of first-day trading volume, Hong Kong cryptocurrenciesETFMuch smaller than its American counterpartsAccording to SoSo Value data, the trading volume of the six Hong Kong crypto ETFs on their first day on April 30 was only US$12.7 million, far lower than the US$4.66 billion trading volume of the US ETFs on their first day of listing.

We observe that Hong Kong crypto ETFsThere was a huge mismatch between the initial scale and the first-day transaction volume.How big can the Hong Kong crypto spot ETF be, what impact can it have on the crypto market, and how should we seize related investment opportunities?I will go through Hong KongLet’s analyze this by looking at the supply and demand relationship of ETFs.

Figure 1: Hong Kong Crypto SpotETFData at a glance (data source:SoSo Value

Demand side: Mainland Chinese RMB investors are not allowed to buy, and the incremental funds may be limited, resulting in low transaction volume

This time Hong Kongcryptocurrency ETF, there are still strict restrictions on investor qualifications, and mainland investors cannot participate in transactions.Taking Futu Securities as an example, the account opening party is required to be a non-mainland & US resident before trading can be conducted.The market's expectation that mainland funds will be able to trade through the southbound Hong Kong Stock Connect is currently not allowed, and it is expected to be difficult to achieve for a considerable period of time.

Fee Level: Hong Kong Crypto ETF Not superior compared to the United States ETF, which is not very attractive to institutions that want to hold for the long term.According to SoSo Value data, the U.S. Xiaobai NavigationAmong the 11 Bitcoin spot ETFs, except for Grayscale and Hashdex, the management fee rates of the largest ones such as IBIT and CBOE are around 0.25%, while the comprehensive fee rates of the three Bitcoin ETFs in Hong Kong are relatively high, including 1.99% for Huaxia, 1.00% for Harvest, and 0.85% for Bosera, which is the lowest. Even with a short-term reduction in management fees, there is still no fee advantage. With the difference in fees, for institutional investors who are optimistic about the crypto market and want to hold for the long term, the holding cost of US Bitcoin ETFs is lower.

In the future, the demand side funds may mainly come from two sources: 1.)Hong Kong retail investors.For retail investors with a Hong Kong identity card, the threshold for purchasing Hong Kong crypto ETFs is lower.If you buy Bitcoin spot in the United States ETF , you need to have professional investor qualifications (PI)To apply for PI qualification, one needs to provide proof of an investment portfolio of HK$8 million or total assets of HK$40 million.This time, Hong Kong Bitcoin spot ETF Allowing retail investors to trade, and the trading hours are more in line with Asian schedules, which is an important incremental step.2) Traditional investors interested in Ethereum.The Hong Kong Ethereum spot ETF is the world's first launch, so investors who have substantial difficulties in holding coins and are optimistic about the prospects of Ethereum may bring incremental growth to the Ethereum ETF.

Figure 2：US Bitcoin SpotETFRate situation (data source:SoSo Value

Figure 3: Hong Kong Crypto SpotETFRate situation (data source:SoSo Value (edited)

Supply side: In-kind redemption)IncreaseETF share supply, increase initial scale

Hong Kong Crypto Spot ETFWith US Bitcoin SpotETFBiggest Differences:In addition to in-cash redemption,In addition, physical redemption (in-kind) method. This also directly determines thatETFAt the share level, Hong Kong cryptoETFs may have more suppliers

Physical subscription and redemption refers to when investors subscribe (create) or redeem ETF shares.Can be usedcryptocurrency(Bitcoin or Ethereum) to exchange instead of cash.When subscribing, investors provide a certain amount of cryptocurrency to the ETF in exchange for ETF shares; when redeeming, investors return the ETF shares in exchange for the corresponding cryptocurrency.

Referring to the comparison of the Hong Kong cryptocurrency subscription process in Figure 2, we can see that there are two major differences between physical subscription and cash subscription:

1) Coin holders can subscribe directly with coins:For some large holders of coins, such as miners, it is easy to convert their coins intoETFshare, andIn addition to holding ETF shares, they can also be redeemed for cash or sold directly for cash on the Hong Kong Stock Exchange, providing a very flexible processing method.

2) For the crypto market, physical subscription does not bring incremental capital into the market, it is just the transfer of cryptocurrencies between different accounts. Cash subscription will bring actual buying power to the crypto assets on the chain.

Therefore, the subscribers of Hong Kong crypto ETF shares include both traditional cash subscribers and large currency holders. Although the specific proportions of physical subscriptions and cash subscriptions have not yet been disclosed by each company, according to OSL's public communication, the proportion of ETF shares in the first batch of physical subscriptions may exceed 50%.This also explains why Hong Kong is encryptedETFThe initial fundraising scale can reach nearly3The physical subscription has contributed greatly to the US$1 billion. But on another level, these physical subscriptionsETF shares may be converted into selling orders in subsequent secondary market transactions.

Figure 4: Hong Kong Crypto SpotETFPhysicalVS Cash Subscription Process Comparison

Consider supply and demand, pay attention to the discount and premium rate to seize investment opportunities

According to the above comprehensive analysis of both supply and demand, unlike the US Bitcoin spot ETF, we can track the daily net inflow of ETF funds (Total Net Inflow, see https://sosovalue.xyz/assets/us-BTC-spot), to intuitively judge the impact of the incremental funds brought by Bitcoin ETF on the price of crypto assets. The supply and demand of Hong Kong crypto spot ETF is more complicated, and the data released by various fund companies cannot clearly distinguish the subscription and redemption volume of physical and cash. In this context, we believe thatThe premium or discount rate in the open market (trading on the Hong Kong Stock Exchange) may be a better indicator to observe.

As we analyzed above,In Hong Kong Stock Exchange trading, discounts and premiums are the best reflection of the power of supply and demand.If the ETF is discounted, it means that the seller is more willing to sell and there is oversupply. Market makers have the motivation to purchase ETF shares at a discount on the Hong Kong Stock Exchange and then go to the ETF issuer over the counter to redeem the shares, thereby earning the difference. The overall net assets of the ETF will shrink and funds will flow out, which will have a negative impact on the overall crypto market.The whole process can be simply summarized as:ETFDiscount–>Stronger selling–>Possible redemption–>Negative impact on the crypto market. On the contrary, assumingETFPremium–>Stronger buying–>Possible subscription–> Positive impact on the crypto market.

According to SoSo Value data, as of the close of April 30, except for the Harvest Bitcoin Spot ETF (3439.HK) and the Harvest Ethereum Spot ETF (3179.HK), which generated negative premiums of -0.18% and -0.19% respectively, all other products had positive premiums, and the highest positive premium during intraday trading was 0.33%. The selling on the first day was restrained, and the buying was relatively strong. Considering the influence of market makers on the first day of ETF listing,This premium/discount data can be continuously observed. If the positive premium can be maintained continuously, it is expected to continue to attract investors to subscribe, especially the subscription of investors holding coins.ETFThe scale will exceed5If the premium turns negative, be wary of arbitrage trading redemptions.ETFShare,ETF issuers sold cryptocurrencies, driving the crypto market downward.

Figure 5: Hong Kong Crypto SpotETFSupply and demand impact mechanism (data source:SoSo Value (edited)

Hong Kong crypto ETFs also have an important value for investors: adding a conversion and circulation path for crypto assets and tradable financial assets

The rapid approval of Hong Kong’s crypto spot ETFs may have a smaller short-term impact on the crypto market than US spot ETFs.But in the medium and long term, Hong Kong's cryptoETFThe physical redemption mechanism also provides a channel for crypto assets to be converted into traditional financial assets.Through physical subscription, cryptocurrencies are converted into ETF shares, and ETF shares have fair value and liquidity priced in traditional financial markets.Holding crypto assetsETFCan be used as asset proof in traditional financial markets, which can be used for various leverage operations, such as mortgage lending, building structured products, etc., the channel between crypto assets and traditional finance will be further opened up, and the value of crypto assets can be more fully reflected and realized.

From a more macro and long-term perspective, Hong Kong's approval of Bitcoin and Ethereum spot ETFs is an important development in the global crypto market. This policy will have a long-term impact on the financial landscape of the Chinese community and is also an important step in further legalizing cryptocurrencies in the global financial system.

The article comes from the Internet:The impact of Hong Kong crypto spot ETFs from a supply and demand perspective

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