Founder's Column: Hong Kong's Bitcoin ETFs Show Promise

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On April 30, three Bitcoin spot ETFs were listed and began trading on the Hong Kong Stock Exchange. As of May 3, here are the inflows for these ETFs:

• ChinaAMC: +2,037 BTC

• Harvest Global: +1,108 BTC

• Bosera-Hashkey: +1,019 BTC

• Total: 4,164 BTC

In U.S. dollar terms, this equates to an inflow of about $240 million. Bloomberg analyst Eric Balchunas had predicted that the ETF market in Hong Kong, which is relatively small, would see a maximum of $500 million in total inflows. However, just three days after trading began, inflows have already reached half that estimate.

In comparison, the more mature U.S. ETF market saw significant activity; excluding Grayscale's GBTC, which transitioned from a trust to an ETF, the nine U.S. spot ETFs recorded inflows of 18,391 BTC on their first trading day, January 11. For Hong Kong's ETFs to reach a similar scale, daily inflows would need to increase at least fourfold.

This increase could be possible if mainland Chinese funds were permitted to invest directly in Hong Kong Bitcoin ETFs. Currently, such investments are blocked, but I anticipate this will change soon. China generally prohibits outbound direct investment, but access to the Hong Kong stock market is available through several channels. As of July 4, 2022, a total of 87 ETFs are part of the cross-trading system between the mainland and Hong Kong markets, including 53 in Shanghai, 30 in Shenzhen, and four in Hong Kong. External investors with accounts in Hong Kong can trade 83 ETFs listed on the Shanghai and Shenzhen exchanges through the Hong Kong Stock Exchange, while mainland Chinese investors can trade four ETFs listed in Hong Kong through the Shanghai and Shenzhen exchanges.

The three Bitcoin spot ETFs listed today are expected to join this system soon. Meanwhile, the mainland Chinese stock market has struggled, with the CSI 300 index dropping to a five-year low in January of this year. The real estate sector, which represents 70% of Chinese people's assets, is faring even worse, with an estimated 65 million to 80 million newly built apartments currently vacant.

Against this backdrop, the Chinese authorities' various Connect programs with Hong Kong aim to reinforce the city's status as China's primary gateway to the international scene, an Asian financial hub, and an offshore hub for the renminbi. Chinese President Xi Jinping frequently highlights the necessity to preserve Hong Kong's strengths in international finance, trade, and other areas.

Currently, there are 694 ETFs trading in Shanghai and Shenzhen, with a combined value of 1.5 trillion yuan (US$200 billion). In contrast, Hong Kong has only 150 ETFs, with a market size of HK$405.9 billion (US$51.7 billion), significantly smaller than China's market. However, the introduction of Bitcoin ETFs in Hong Kong could shift this dynamic, as Chinese investors, weary from the prolonged downturn in domestic stocks and real estate, look for alternative investments. If just 10% of the total market capitalization of Chinese ETFs were to flow into Bitcoin ETFs listed on the Hong Kong stock exchange, it would represent an inflow of around $20 billion, equivalent to the funds attracted by US ETFs, excluding GBTC, in the past four months.

The growing demand for alternative investment options in China is demonstrated by two examples. Currently, the most sought-after gift among Generation MZ in China is "golden beans," small gold pieces priced between $50 and $120 each. These are also the most popular anniversary gifts that Gen MZ women give their boyfriends.

Why are gold beans so popular? It's largely because uncertainty about the future and distrust in government economic policies have established gold as a safe investment. For China's younger generation, gold is viewed as a means to combat inflation and the widening wealth gap. The appeal of gold beans lies in their low cost, small size, and lightweight, which makes them easy to store and transport. They serve as an accumulative investment; you can save gradually and eventually melt them down to create personalized accessories. However, a significant drawback is the increasing cost of storage as quantities grow. If stolen, it can lead to a total loss of wealth.

Consequently, young people in China are increasingly turning to alternative assets that are simple to store and potentially appreciate independently of government policy. Bitcoin is expected to become more favored due to its ease of storage and potentially higher price appreciation in the next year or two. Once investing in a Hong Kong Bitcoin ETF becomes possible, there will likely be an initial rush to invest through ETFs before buying Bitcoin directly.

Additionally, the competitiveness of the Hong Kong Bitcoin ETF itself is notable. Unlike U.S. ETFs, it uses a physical setup and redemption approach, which attracts a broader range of market makers. Companies with revenues derived from Bitcoin, such as cryptocurrency exchanges and mining companies, can easily participate as market makers. This competition among market makers narrows the price gap between the Hong Kong ETF and Bitcoin itself, enhancing the ETF’s attractiveness compared to U.S. products.

Investors from regions without Bitcoin ETFs, such as Singapore and the Middle East, might find Hong Kong ETFs more appealing due to their geographic proximity compared to the U.S. While the U.S. market for Bitcoin spot ETFs is currently extensive, the Hong Kong market offers trading during Asian hours, which is more convenient for institutional investors from neighboring regions.

A recent JPMorgan report indicated that many family offices in Asia and elsewhere prefer alternative investment assets, including Bitcoin, over traditional stocks and bonds. These investments often include unlisted equities, venture capital, real estate, and commodities. Although it's not precisely clear what percentage of their portfolios is allocated to Bitcoin, the more family office managers recognize its value, the more substantial the potential inflows into Hong Kong's Bitcoin ETF could be.

Sui Chung, CEO of CF Benchmark, the creator of the CME CF BRR Index used by U.S. Bitcoin ETF managers to track the spot price of Bitcoin, anticipates that Hong Kong's Bitcoin ETFs will total $1 billion in assets under management by the end of 2024. He also forecasts that South Korea and Israel will follow Hong Kong's example and approve Bitcoin ETFs within the year.

Whether this will trigger a significant rally like the one earlier this year following the approval of Bitcoin ETFs in the U.S. is uncertain, but with the upcoming halving of Bitcoin's supply, even a modest increase in demand could result in a more pronounced price rise than previously observed. This underscores the importance of monitoring the developments of the Hong Kong Bitcoin ETF. 

PS -

Just wrapped up my talk at the 2024 Seoul Money Show. Looking out from the stage, the audience wasn’t just filling the seats; people were packed into the aisles too, and it looked like over a thousand folks came to listen. The audience was super diverse in age and gender, and I was really surprised by the high-quality questions during the Q&A session.

It’s awesome to see this kind of interest in Bitcoin here in Korea. Our country has gone through the IMF crisis where major banks failed overnight and withdrawals were frozen, so it's no wonder people have a keen interest in real estate and other solid assets—they’ve seen firsthand the value and importance of having reliable investments through numerous crises.

So, my talk at this year’s Seoul Money Show focused on why Bitcoin is such a premium asset among premium assets. "Bitcoin growing by the same rules as a city" – isn’t that a cool topic? Investing in Bitcoin is like betting on a digital megacity poised for explosive growth, much like Seoul in the 1970s. Hands down, it’s the best investment strategy out there!

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Disclaimer: This newsletter is for the brainy and the brave. It's for informational purposes only and not a substitute for investment advice. Always do your own research.