Hong Kong Bitcoin ETF to Become a Channel for Dumping? Bloomberg Analyst Estimates Issuance of Only Five Billion Hong Kong Dollars, Chinese Retail Investors Unable to Enter

Yesterday, Hong Kong approved Bitcoin and Ethereum spot ETFs, but it only briefly supported the coin prices. According to Bloomberg analyst Eric Balchunas, the issuance of the two will only be around 500 million USD. Southbound funds are unlikely to be approved by the Chinese government, and it may become a negative impact as Chinese individuals who hold Bitcoin may deposit them into the ETF for redemption.

China Huaxia Fund: Approved by Hong Kong regulators, plans to issue Bitcoin and Ethereum spot ETFs.

Latest on HK spot Bitcoin ETFs: They have been approved to exist but not launch (yet). Rumor has it launching next wk so to not compete w Dubai conf. Don't expect a lot of flows (I saw one estimate of $25b that's insane). We think they'll be lucky to get $500m. Here's why:
1. HK…

— Eric Balchunas (@EricBalchunas) April 15, 2024

Hong Kong Cryptocurrency ETF Assets Only $500 Million

Bloomberg analyst Eric Balchunas estimates the total issuance of Bitcoin and Ether in the Hong Kong ETF market to be only $500 million for the following reasons:

• The Hong Kong ETF market is relatively small, around $500 billion, and mainland China residents are unable to purchase, at least according to official statements.
• The approved three issuers also have relatively small scales.
• The liquidity/efficiency of the underlying ecosystem is lower, which may lead to larger spreads and premium/discount levels for these ETFs.
• The expense ratio may range from 1% to 2%, significantly higher compared to the low expense ratios in the United States.

However, Balchunas still believes this is beneficial for Bitcoin as it opens up more investment avenues, but the market is indeed much smaller compared to the United States. According to another analyst, James Seyffart, the difference in asset size is 18,000 times!

Hong Kong ETF: $500 billion X

Mainland China ETF: $3.25 trillion 6.5X

U.S. ETF: $9 trillion 18,000X

Will Southbound Funds Flow In as a Result?

As for the concern whether funds from mainland China will flow into Bitcoin and Ethereum spot ETFs through southbound funds, given the 6.5 times difference in overall fund size, a substantial influx of funds could further drive the price trend of cryptocurrencies.

The so-called southbound funds refer to funds from mainland China investing in Hong Kong stocks, which need to enter Hong Kong from the mainland through the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect. The combined funds from both channels are referred to as southbound funds, reflecting the flow of funds from mainland China.

According to the regulatory requirements for southbound trading released by the Hong Kong Monetary Authority, funds from southbound trading must be registered and approved by the Hong Kong Securities and Futures Commission, and the Hong Kong banks selling the product must rate it as low to medium risk and non-complex. As WuBlock Blockchain also mentioned, several Bitcoin ETF issuers in Hong Kong stated that southbound funds absolutely cannot purchase cryptocurrencies or related ETFs. However, everything depends on the confirmation from the issuers.

Bloomberg analyst Eric Balchunas believes that the probability of southbound trading is low, but it is very likely that Chinese individuals who own Bitcoin, such as miners, will deposit their cryptocurrencies into ETFs for redemption, which could have a negative impact.

Note: Hong Kong ETFs allow for physical creation, so investors can deposit Bitcoin and Ether into the exchange in exchange for ETF shares, which can later be sold to cash out.