China‘s Crypto Ban Prevents Exposure to Hong Kong’s Bitcoin, Ethereum ETFs

Investors in mainland China might miss out on the opportunity to engage with Hong Kongs newly approved Bitcoin and Ethereum Exchange-Traded Funds (ETFs).

According to experts, due to stringent domestic regulations, Chinese nationals will likely be barred from participating.

Is the Impact of Hong Kong Bitcoin and Ethereum ETFs Overstated？

The prohibition is not surprising, given Chinas restrictive stance on cryptocurrencies. Since the 2021 ban on trading and mining cryptocurrencies, Chinese traders have faced significant hurdles in accessing global crypto markets.

Conversely, Hong Kong has shown a more open stance towards cryptocurrencies. The citys regulators approved the Bitcoin and Ethereum ETFs this past Monday, allowing issuers such as ChinaAMC, Harvest Global, and Bosera International to introduce these investment vehicles.

Although Hong Kongs Securities and Futures Commission (SFC) has not announced the development, the issuers have confirmed the approval. Many view the ETFs as a potential catalyst for increased Bitcoin prices. However, restrictions on mainland investment might dampen these hopes.

Eric Balchunas, a senior ETF analyst at Bloomberg, expressed skepticism about the potential impact of these ETFs due to the size differences between the US and Hong Kong markets.

“[We] don‘t expect a lot of flows (I saw one estimate of $25 billion that’s insane). We think theyll be lucky to get $500 million,” Balchunas said.

He noted that while the introduction of these ETFs in Hong Kong is positive, the actual market movements may be modest compared to the US. The US Bitcoin ETFs attracted over $12 billion in net flows within their initial months. It starkly contrasts with the limited scope in Hong Kong.

Bitcoin Spot ETFs Total Cumulative Flow. Source: Farside Investors

Balchunas further highlighted several factors limiting the potential success of Hong Kongs ETFs. These include the small size of the local ETF market, valued at only $50 billion, and the relative inexperience of the issuers.

Additionally, he pointed out likely issues with liquidity and higher fee structures compared to the US, which could deter significant inflows.

Despite these constraints, there may still be a silver lining for institutional investors. The Hong Kong ETFs offer additional trading hours, which could benefit global trading strategies.

“The fact that this development has occurred in Asia for the first time, underscores the global nature of this evolving narrative. The trajectory of the crypto industry is moving in a direction that fosters adoption, albeit gradually, signaling promising prospects for its future growth and mainstream acceptance,” Sumit Gupta, co-founder of crypto exchange CoinDCX told BeInCrypto.

Nevertheless, data from SEC filings indicates that institutional holdings in Bitcoin ETFs remain modest, suggesting that this advantage might not lead to significant shifts in the market.