Hong Kong Encryption Spot ETF Launch: Supply and Demand Analysis and Market Impact

Recently, the Hong Kong Securities and Futures Commission approved the listing of 6 cryptocurrency Spot ETFs, including 3 Bitcoin ETFs and 3 Ethereum ETFs. These products officially started trading on the Hong Kong Stock Exchange on April 30, attracting widespread attention from the market.

In terms of initial scale, the total net value of the 6 ETFs is close to $300 million, surpassing the first day's total net value of the first Bitcoin ETF in the U.S., (, excluding GBTC). However, the first day's trading volume was only $12.7 million, far below the performance of similar products in the U.S. This mismatch between scale and trading volume is worth further exploration.

Demand Side Analysis

There are certain restrictions on the investor qualifications for Hong Kong's encryption ETF. Currently, investors from the mainland are unable to participate in trading through the southbound Stock Connect, which somewhat limits potential investment demand.

From a cost perspective, the overall fee rate of Hong Kong encryption ETFs is generally higher than that of similar products in the United States, which may affect the choices of institutional investors holding long-term.

In the future, the demand for cryptocurrency ETFs in Hong Kong may mainly come from two aspects:

1. Local retail investors in Hong Kong, due to the relatively low threshold and trading hours that are more suitable for the Asian region.
2. Traditional investors interested in Ethereum, as Hong Kong is the world's first market to launch an Ethereum Spot ETF.

Supply Side Analysis

A major feature of the Hong Kong encryption ETF is that it supports both cash and physical redemption simultaneously. Physical redemption allows investors to directly exchange cryptocurrency for ETF shares, which provides larger holders with a more flexible way to participate. According to a certain service provider, physical subscriptions may exceed 50% of the first batch of ETF shares, which explains why the initial fundraising scale can reach nearly $300 million.

However, physical subscriptions will not bring new capital inflows to the encryption market; they merely represent a transfer of assets between different accounts. The ETF shares obtained through physical subscriptions may potentially convert into selling pressure in the secondary market in the future.

Investment Opportunities and Market Impacts

Given the complex supply and demand relationship of Hong Kong encryption ETFs, observing their premium and discount rate may be a more effective analytical indicator. The premium and discount of the ETF reflects the market supply and demand relationship, which may affect subsequent subscription and redemption behaviors, thereby impacting the overall encryption market.

On the first day of trading, most ETF products showed a positive premium, indicating relatively strong buying interest. If this trend continues, it may attract more investors to subscribe, driving the growth of ETF size; conversely, if it turns into a negative premium, potential redemption pressure should be watched out for.

Long-term significance

The launch of the Hong Kong encryption ETF provides a new way for the conversion of encryption assets and traditional financial assets. Through physical subscription, investors can convert cryptocurrencies into ETF shares that have fair value and liquidity, which opens up possibilities for the application of encryption assets in traditional financial markets (such as mortgage lending, building structured products, etc.).

From a more macro perspective, Hong Kong's approval of the encryption Spot ETF is an important milestone in the development of the global encryption market. This policy will have a profound impact on the financial landscape of the Chinese community and further signify the elevated status of cryptocurrencies within the global financial system.