Hong Kong Opens Virtual Asset ETF Channel: Is the $500 Million Size Expectation Conservative or Optimistic?
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Hong Kong Opens Virtual Asset ETF Channel: Is the $500 Million Size Expectation Conservative or Optimistic?
When measuring the scale of capital inflows, why do various institutions place such emphasis on southbound funds?
Navigating Web3 tides with focused insights
Produced by｜OKG Research
Author｜Hedy Bi
The approval of spot Bitcoin ETFs is no longer news. According to Reuters yesterday, at least three offshore Chinese asset management firms will soon launch Hong Kong-based spot virtual asset ETFs (spot Bitcoin and spot Ethereum ETFs). The Hong Kong government’s strong support for Web3 and its continuous policy incentives have become an industry-wide expectation. OKG Research has observed that the recent approval of Hong Kong's spot Bitcoin and Ethereum ETFs did not generate as much market excitement as the U.S. spot Bitcoin ETF approvals. However, in responding to media inquiries, we found that the key questions revolve around how much capital inflow this might bring and its broader implications. In this article, I will explore these issues from the perspective of a “Hong Kong stock trader.”
1. Why do institutions place such emphasis on southbound funds when estimating capital inflows?
Since July 2022, ETFs have been included in the "Stock Connect" program. This initiative allows mainland Chinese and Hong Kong investors to trade and settle stocks listed on each other’s exchanges through their local securities and clearing systems, giving rise to two categories: southbound funds (from mainland China to Hong Kong) and northbound funds (from Hong Kong to mainland China).
If southbound funds gain access, the virtual asset market represented by Bitcoin would become a new financial market connecting China and the United States. According to public data from the China Securities Regulatory Commission (CSRC), as of December 31, 2023, despite only eight southbound-eligible ETFs being available to mainland investors, their average daily trading volume reached RMB 108.3 billion (approximately USD 15 billion). This means that just 5% of eligible ETFs accessible via southbound funds attracted 16% of total capital inflows into Hong Kong Stock Exchange (via RMB channels).
However, we also note that the number of qualified ETFs accessible to Hong Kong’s ETF market through the Shanghai-Hong Kong or Shenzhen-Hong Kong Stock Connect channels remains very limited. Additionally, in its 2024 outlook, the Hong Kong Securities and Futures Commission (SFC) proposed strengthening Hong Kong’s position as a global leading offshore RMB center through initiatives such as “Swap Connect,” a “HKD-RMB dual-counter model,” and a dual-counter market maker mechanism. Considering the current mainland stance toward virtual asset trading, after discussions with financial markets and Web3 professionals in Shanghai and Hong Kong, OKG Research concludes: In the short term, it is highly unlikely that Hong Kong’s spot Bitcoin and Ethereum ETFs will be opened to mainland investors. Based on comprehensive input from regulators and industry insiders, mainland residents currently cannot invest in spot Bitcoin and Ethereum ETFs via the Shanghai-Hong Kong or Shenzhen-Hong Kong Stock Connect programs.
Moreover, funds withdrawn via Shanghai/Shenzhen-Hong Kong Connect can only return along the original path through the local settlement system—meaning RMB flows in and out through these channels without remaining in Hong Kong in other asset forms. This implies that offshore RMB is excluded from the Shanghai/Shenzhen-Hong Kong Connect pipelines.
2. U.S. Bitcoin ETF vs. Hong Kong ETF: Does Hong Kong still hold appeal?
We note that Bloomberg senior ETF analyst Eric Balchunas considers USD 500 million to be a relatively optimistic figure. Nevertheless, we firmly believe the potential of Hong Kong’s virtual asset ETF market far exceeds this number. This article analyzes the topic from three angles: risk appetite among Hong Kong ETF investors, the state of Hong Kong’s virtual asset market prior to the announcement, and differences in ETF design between the two regions:
While Eric Balchunas uses overall ETF market size for comparison—and indeed, Hong Kong’s ETF market is much smaller than the U.S.—we observe an interesting phenomenon. Among the top ten ETFs in Hong Kong by AUM, the largest single ETF accounts for 54% of total AUM, compared to 20% in the U.S. This indicates a highly concentrated investor base in Hong Kong’s ETF market, with over half of investments focused on the top players.
Furthermore, the largest ETF in Hong Kong by AUM is the SPDR Gold Trust, which uses gold as its underlying asset—a product often compared by Bitcoin investors—with approximately USD 69.8 billion in AUM. In contrast, the largest ETF in the U.S. ETP market tracks the S&P 500 with about USD 518.7 billion in AUM, making the SPDR Gold Trust equivalent to just 13.5% of the top U.S. ETF. This further supports the conclusion that Hong Kong’s ETF market exhibits a more pronounced concentration at the top. Moreover, while U.S. ETF investors tend to favor equities like the S&P 500, Hong Kong investors show stronger interest in gold. This suggests differing risk appetites and understandings of economic cycles between the two markets. Hong Kong investors are likely to exhibit greater acceptance of Bitcoin as “digital gold.”
Data source: HKEX, ETFdatabase
Hong Kong residents appear to show even greater enthusiasm for Bitcoin. At the end of last year, OKG Research conducted field research in Hong Kong’s OTC virtual asset market and found that, as of January this year, there were at least 200 physical crypto OTC exchange shops in Hong Kong. Our estimates suggest that through OTC shops alone, annual average trading volume exceeds USD 10 billion. Even before the availability of ETFs, Chainalysis estimated Hong Kong’s market activity: despite having a much smaller population than the U.S., during the bear market period (June 2022 to June 2023), Hong Kong’s active OTC crypto market facilitated USD 64 billion in transaction volume. Compared to other parts of Asia, Hong Kong dominates large-scale institutional crypto trading. In Hong Kong’s annual virtual asset transactions, 46.8% involve institutional trades exceeding USD 10 million, surpassing the global average for similar transactions.
Data source: Chainalysis
Additionally, in terms of redemption mechanisms, Hong Kong’s comprehensive regulatory framework for virtual assets enables more favorable in-kind redemption options for “Crypto-native” investors. The four methods—crypto-in cash-out, crypto-in crypto-out, cash-in crypto-out, and cash-in cash-out—are significantly more flexible than the U.S. cash-only redemption mechanism (the last option), creating arbitrage opportunities. Furthermore, for Hong Kong investors already holding BTC and ETH, these mechanisms greatly reduce the risk of receiving illicit funds during fiat conversion, thereby better protecting investor assets.
Regarding spot Ethereum ETFs, although Ethereum’s current market cap stands at USD 371.7 billion—significantly smaller than Bitcoin’s USD 1.25 trillion—issuers have stronger incentives to push forward. Besides price appreciation, spot Ethereum ETFs offer additional yield through staking rewards. As early as February 7, 2024 (local time), Ark Invest submitted an updated S-1 filing that included a new clause: “The sponsor may from time to time stake a portion of the trust’s assets on one or more trusted third-party staking platforms.”
For qualified Hong Kong investors, especially high-volume traders, management fees for Hong Kong products are not yet competitive. However, other factors affect capital inflows. For example, FBTC, which currently charges a 0% fund fee, does not rank first in capital inflows—possibly because FBTC uses self-custody rather than custody through third parties (such as Coinbase or Gemini).
Data source: The Block, Public Info
Hong Kong’s strategic push into Web3 and opening of widely recognized ETF channels carries deeper significance. This move not only benefits financial institutions facing balance sheet contractions due to overall asset shrinkage but also positions Hong Kong as a key player—or even a leader—at the new financial table. With fundamental tailwinds such as the Bitcoin halving, the future potential of Hong Kong’s spot virtual asset ETFs is something we eagerly anticipate!
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