A batch of exchange-traded funds investing directly in crypto debuted in Hong Kong on Tuesday, heralding potential competition for U.S. Bitcoin products whose popularity stoked a record rally in the digital asset.

Harvest Global Investments Ltd., the local unit of China Asset Management, and a partnership between HashKey Capital Ltd. and Bosera Asset Management (International) Co. each listed 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 center, a standing that was tarnished by a crackdown on dissent.

U.S. spot-Bitcoin ETFs from issuers including BlackRock Inc. and Fidelity Investments went live in January and have US$52 billion of assets so far in an historic rollout. For Hong Kong, Bloomberg Intelligence’s Rebecca Sin estimates the city’s Bitcoin and Ether funds may amass $1 billion over two years. 

Such a projection is “too small,” Han Tongli, the chief executive officer of Harvest Global, said in an interview. 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 U.S. caters mainly to the former, he said.

The six new ETFs saw a combined $11 million of trading volume in the first session, data compiled by Bloomberg show. That’s a far cry from the $4.6 billion in total volume the 10 U.S. spot-Bitcoin products recorded in their debut.

Issuers are expecting in the region of $300 million in combined first-day inflows for the new Hong Kong spot-crypto ETFs, tilted in favor of the Bitcoin funds, BI’s Sin said. Possible sources 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 new funds are outside the scope of a program giving Chinese investors access to some Hong Kong ETFs. One key question is whether that program could be widened over time.

The launch of the ETFs “opens the door for a lot of RMB holders” seeking alternative investments, China Asset Management’s Chief Executive Officer Yimei Li said in a Bloomberg Television interview.

She added that she hoped there could be a “new opportunity” for mainland Chinese investors in the future to “participate in this process.”

In-kind subscription

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 U.S. 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 U.S. funds.

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 $164 million are a fraction of the $2.3 billion ProShares Bitcoin Strategy ETF, a derivatives-based product in the U.S.

Hong Kong may lag behind the U.S. 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 in an interview.

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.

Fizzling rebound

Digital assets have rebounded sharply from a deep rout in 2022, though the revival has stalled of late. Bitcoin reversed earlier gains to fall two per cent to $61,700 at 11:40 a.m. in London on Tuesday. Ether dropped four per cent. 

The market collapse two years ago exposed risky practices and fraud, triggering a spate of bankruptcies and searing criticism that still hangs over the industry. An alleged fraud at the JPEX crypto exchange roiled Hong Kong last year.

Speaking at the ETFs’ launch event, Christina Choi, executive director for the investment products division at the Securities and Futures Commission, said the fact the products are going live doesn’t mean the regulator is endorsing cryptoassets or encouraging crypto investment.

“One day in the crypto circle is a year in the human world,” she said, referring to a Chinese meme about the sharp volatility that can buffet digital assets.

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