# Hong Kong’s Bitcoin and Ethereum Spot ETFs Set to Attract $20 Billion, Citing Key Advantages

Hong Kong’s upcoming Bitcoin and Ethereum spot ETFs may witness inflows of up to $20 billion in their first year, outshining their U.S. counterparts, according to cryptocurrency research and trading firm Presto. The company highlighted three key strengths of Hong Kong’s ETFs that are likely to capture the attention of Chinese investors.

Presto’s analysis, released on the 15th, underscores the approval granted by Hong Kong financial regulators for Bitcoin and Ethereum spot ETFs. They argue that the market efficiency and liquidity provided by Hong Kong’s in-kind creation and redemption mechanism are pivotal.

## Key Strengths of Hong Kong’s Spot ETFs

1) **In-Kind Creation and Redemption**: Presto points out that Hong Kong’s spot ETFs benefit from the in-kind creation and redemption process, which improves market efficiency and addresses liquidity issues.

2) **24-Hour Liquidity and Competition**: The demand for 24-hour liquidity and competition with New York-listed ETFs are also cited as critical factors contributing to Hong Kong’s potential success.

3) **Chinese Investor Demand**: The strong interest in politically neutral global currency assets among Chinese investors is another significant driver.

Based on these factors, Presto estimates that Hong Kong’s Bitcoin spot ETFs could attract between $10 billion and $20 billion in the first 12 months post-launch.

## Support from the Chinese Government

Understanding the interest in Hong Kong’s Bitcoin spot ETFs requires an examination of the political and economic changes in the region over the past few years. Chinese President Xi Jinping reaffirmed the “one country, two systems” principle during his visit marking the 25th anniversary of Hong Kong’s return to China. This principle has brought mutual prosperity to both China and Hong Kong.

Aligned with this, the Hong Kong government has introduced various policies aimed at restoring its competitiveness as a global financial hub. Leveraging digital assets is a core strategy, with a strong push towards establishing regulated cryptocurrency exchanges and a framework for tokenization and stablecoins.

## Competition Between Hong Kong and New York

Hong Kong’s Securities and Futures Commission (SFC) has approved the in-kind creation and redemption for ETFs. This allows ETFs to be directly exchanged with their underlying Bitcoin assets, contrasting with the cash-only setup in the U.S. The in-kind method reduces tax inefficiencies and transaction costs associated with cash redemptions. While 22 percent of global ETFs are cash-only, only 7.4 percent of asset-specific ETFs follow this model. Hong Kong’s approach is set to be more efficient.

## Addressing Liquidity Concerns

The SFC’s endorsement of spot ETFs positions Hong Kong to outperform U.S. competitors by resolving market functionality, particularly liquidity issues. Currently, only the OSL and HashKey exchanges in Hong Kong have received cryptocurrency trading licenses from the SFC, which could lead to insufficient trading volume essential for ETF market functionality. In-kind creation and redemption are expected to mitigate these concerns.

## Competitive Advantage of Hong Kong ETFs

Can Hong Kong’s Bitcoin spot ETFs surpass U.S. spot ETFs? Although it’s challenging to predict the exact inflows, the historical success of Hong Kong’s gold ETFs suggests that Chinese investors may show significant interest in Bitcoin, often referred to as ‘digital gold.’ Long-term success for Hong Kong’s Bitcoin spot ETFs heavily relies on the Hong Kong government’s pro-cryptocurrency policies. Success in this space could cement Hong Kong’s drive to become a digital financial market hub.

Several factors favor Hong Kong’s Bitcoin spot ETFs. Firstly, U.S. ETF investors who desire 24-hour trading may find Hong Kong-listed ETFs appealing, especially given that the underlying assets trade round the clock. Secondly, Hong Kong’s gold ETFs have performed well historically, indicating a strong preference among Chinese investors for politically neutral global currency assets. The narrative of ‘digital gold’ could equally attract considerable attention.

Recognizing China’s strategic use of sandbox policies for growth, Hong Kong essentially operates as a sandbox for free financial markets within China’s framework.