A BATCH of exchange-traded funds (ETFs) investing directly in crypto will debut in Hong Kong on Tuesday (Apr 30), heralding potential competition for US Bitcoin products whose popularity stoked a record rally in the digital asset.

Harvest Global Investments, the local unit of China Asset Management, and a partnership between HashKey Capital and Bosera Asset Management (International) are each listing Bitcoin and Ether ETFs in the city.

The level of demand for the funds will provide clues on whether Hong Kong’s push for a tightly regulated digital asset hub is gaining traction. Officials are hoping the crypto pivot will help to restore the city’s reputation as a modern financial centre, a standing that was tarnished by a crackdown on dissent.

US spot-Bitcoin ETFs from issuers including BlackRock and Fidelity Investments went live in January and have US$53 billion of assets so far in a historic rollout. For Hong Kong, Bloomberg Intelligence’s Rebecca Sin estimates the city’s Bitcoin and Ether funds may amass US$1 billion over two years.

West and East

Such a projection is “too small”, Han Tongli, the chief executive officer of Harvest Global, said. That’s partly because financial products and services in Hong Kong are “accepted by investors both in the West and in the East” whereas the US caters mainly to the former, he said.

Possible sources of inflows for the Hong Kong offerings include Chinese wealth parked in the city, as well as crypto exchanges and market makers active in the Asia-Pacific. Crypto trading is banned on mainland China – driving activity underground – and the upcoming fund launches will likely remain beyond the scope of a programme giving Chinese investors access to some Hong Kong ETFs.

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Hong Kong is adopting an in-kind ETF subscription and redemption mechanism, which allows for the underlying assets to be swapped for fund units and vice versa, whereas the US Bitcoin funds use a cash redemption model.

Harvest Global’s Han said the in-kind approach burnishes the appeal of the city’s products and is among the reasons why the eventual take-up of the Hong Kong ETFs could be as much as three times bigger than for the US funds.

Asian trading

Others have cautioned that expected demand must be calibrated in line with Hong Kong’s smaller financial sector. The city already allows crypto-futures-based ETFs but their total assets of about US$164 million are a fraction of the US$2.3 billion ProShares Bitcoin Strategy ETF, a derivatives-based product in the US.

Hong Kong may lag behind the US in launching spot-crypto ETFs and have a smaller market for passive funds, but the local products will still be appealing for ease of access, especially for Asian trading hours, Bosera Asset Management (International)‘s head of products Ethan Li said.

Chief executive officer Doris Lian said Bosera is looking to expand its team and digital-asset product pipeline. “Hong Kong will have a significant place in the global virtual-asset sphere,” she added. “We are very confident of that.”

Digital assets have revived from a deep rout in 2022: Bitcoin is up about 275 per cent since the start of last year and hit a record of US$73,798 in March, while Ether is up 165 per cent. The rallies stalled lately, and Bitcoin was roughly US$12,000 below the high on Monday in New York.

Investors will likely scour incoming data from issuers to gauge net inflows for the Hong Kong vehicles. The equivalent figures for the US funds sometimes led to swings in crypto prices as demand waxed and waned. BLOOMBERG