In a bid to establish itself as a major player in the cryptocurrency market, Hong Kong has debuted a batch of exchange-traded funds (ETFs) investing directly in crypto assets. This move signals potential competition for the popular Bitcoin products in the US, which played a significant role in the digital asset's record-breaking rally.

Harvest Global Investments Ltd., the local unit of China Asset Management, along with a partnership between HashKey Capital Ltd. and Bosera Asset Management (International) Co., have listed Bitcoin and Ether ETFs in Hong Kong. These listings are expected to provide valuable insights into the demand for such funds and whether Hong Kong's push towards becoming a regulated digital asset hub is gaining momentum. The authorities are hopeful that embracing the crypto industry will help restore the city's reputation as a modern financial center, which has been marred by a crackdown on dissent.

The US has already witnessed the launch of spot-Bitcoin ETFs in January, with companies like BlackRock Inc. and Fidelity Investments amassing a staggering $52 billion in assets under management during the historic rollout. Meanwhile, Bloomberg Intelligence's Rebecca Sin estimates that Hong Kong's Bitcoin and Ether funds could accumulate around $1 billion over a span of two years. However, Harvest Global's CEO, Han Tongli, believes this estimate to be too conservative, citing the city's acceptance among investors in both the West and the East, as opposed to the US, which mainly caters to Western markets.

On the first day of their release, the six new Hong Kong spot-crypto ETFs are anticipated to generate approximately $300 million in combined inflows, with Bitcoin funds taking the lead. Potential sources of investment include Chinese wealth invested in Hong Kong, as well as active participation from crypto exchanges and market makers in the Asia Pacific region. It's worth noting that crypto trading is prohibited on mainland China, driving crypto-related activities underground. The introduction of these new funds in Hong Kong offers an alternative investment avenue for Chinese investors, although questions remain as to whether Chinese access to Hong Kong ETFs could be expanded in the future.

Hong Kong is adopting an in-kind ETF subscription and redemption mechanism, which allows for the swapping of underlying assets for fund units and vice versa. In contrast, US-based Bitcoin funds utilize a cash redemption model. Harvest Global's Han believes that this in-kind approach enhances the appeal of Hong Kong's products and anticipates that the uptake of Hong Kong ETFs could be three times greater than that of their US counterparts.

While some have cautioned that Hong Kong's financial sector is relatively smaller compared to the US, others argue that the local products will still be attractive due to their ease of access, especially for Asian trading hours. Bosera Asset Management (International)'s Head of Products, Ethan Li, highlighted Hong Kong's potential significance in the global virtual-asset sphere and revealed plans to expand the team and digital-asset product pipeline.

Despite a recent stall in the crypto market's revival, digital assets have rebounded sharply from a significant dip in 2022. Bitcoin, currently valued at $63,540, sits approximately $10,000 below its March record high of $73,798, while Ether remains relatively stable in comparison. The industry, however, continues to grapple with the aftermath of a market collapse two years ago, which exposed risky practices and fraud, leading to bankruptcies and widespread criticism. Hong Kong itself was affected by an alleged fraud incident involving the JPEX crypto exchange last year.

At the launch event for the ETFs, Christina Choi, executive director for the investment products division at the Securities and Futures Commission, clarified that the products going live does not serve as an endorsement or encouragement of crypto investments by the regulator. Choi humorously referenced a Chinese meme about the volatile nature of digital assets, cautioning investors to interpret market movements with caution.

As investors eagerly examine incoming data from issuers, the net inflows into these Hong Kong vehicles are expected to be closely monitored. In the US, similar figures have been known to cause significant swings in crypto prices as demand fluctuates. Hong Kong's ETF listings mark an important step in the city's aspirations to carve out a prominent role in the ever-evolving cryptocurrency landscape.