Two Bitcoin (BTC) exchange-traded funds (ETFs) launched in Australia in June, close on the heels of the six Bitcoin and Ethereum (ETH) ETFs that launched in Hong Kong at the end of April. The crypto ETF market is beginning to take shape, and as things stand, it looks to be a two-horse race between Australia and Hong Kong as the race to capture market share heats up.
With its June 4 launch on Cboe, Monochrome Asset Management became the first and only Australian ETF to hold Bitcoin directly. VanEck is the second, launching its product as a sub-fund of its United States version on the Australian Securities Exchange (ASX) on June 20. Several other firms have applications in the pipeline.
All of these ETFs are offered on international exchanges where there is reasonable accessibility, depending on the platform they use. But the real prize is the Asian market.
ETF providers in both jurisdictions have expansionist plans for the long term. At least one Australian provider, Monochrome, is eyeing the broader Asian market — countries where local institutions probably wouldn’t generate enough volume to justify the expense of launching and maintaining a standalone product. For Hong Kong, the eventual goal is to tap the massive mainland China market.
As the first to market, these providers have a head start, and will probably have the market to themselves in the immediate future. Singapore is ruling itself out of the picture for the time being. There’s a possibility that regulators in Japan and South Korea will also approve crypto ETFs, but strict capital controls in Korea mean their horizons stop at their own borders.
Act locally, think globally
So what will this probable two horse race look like? For players in both markets, the near term goal is to accumulate assets locally. That’s clearly going to take longer than it did for their U.S. counterparts, which saw $4.6 billion in trading on their first day on Jan. 11 and are now approaching $30 billion in assets under management (AUM).
The flow of funds in Hong Kong has not matched up to the pre-launch hype, but the hype may be more to blame for that than the products. While the overall ETF market in Asia has seen a CAGR of 20% over the past 10 years, investor preference for ETFs here is still not as strong as in the U.S. The combined AUM of all ETFs in the seven leading APAC markets accounts for just 4% of their total combined market cap. In the U.S., ETF AUM accounts for 16% of the total market.
ETF preference is strongest in Japan and Australia, where AUM accounts for about 9% and 7% of local market cap respectively. In Hong Kong, ETF AUM accounts for just 1% of market cap. Nonetheless, the CEO of London-based CF Benchmarks, which provides reference data for crypto ETFs, predicts that crypto ETFs in Hong Kong will reach $1 billion in AUM by the end of 2024.
Strategic differences
With the crypto ETFs specifically, the Hong Kong and Australia markets have different constructs. Hong Kong is a global financial hub, with activity oriented around institutional investors. There are fewer regulated exchanges and innovators. While in the U.S. we saw a reluctant regulator pushed by pent up demand for crypto ETFs, in Hong Kong it was actually the regulator pushing the ETFs forward.
It's not every day you see regulators chasing fund managers for applications. Hong Kong has decided to make Web3 and crypto a big focal point of how they position the economy for the future. There’s a lot going on in terms of events and consultation papers, which they’re publishing faster than people can digest them.
While the regulator won’t allow mainlanders to buy Hong Kong ETFs, the probable long game is for them to be able to buy them through the Hong Kong China Stock Connect. This is a bridge for mainland investors to seamlessly invest in Hong Kong listed investment products and vice versa. Today, that includes traditional securities and ETFs. If reports of initial discussions to include the crypto ETFs are true, then things could get very interesting. That could take a few months, or a few years. No one knows. But that’s the idea.
If it happens, or even if it seems likely, that could bring a lot more providers into the Hong Kong market. Right now, there are still a few applicants waiting on approval, and several more providers watching and waiting to see if demand grows. If the Stock Connect doesn’t happen, this is probably a three- or four-player market. If it does happen, we’ll start to see more applicants trickling in to compete for even a tiny slice of the world’s largest market.
ETF as a service?
In Australia, the local market is less than half the size of Hong Kong’s. But, there’s more appetite for ETFs in general and there’s a good mix of crypto exchanges, retail and institutional investors, and innovators such as gaming companies and fintech platforms.
Regulators in Australia didn’t take an active role in pushing ETFs forward. In fact, they've been taking certain crypto companies to court in some instances. But at the same time they have put a custody regime in place that safeguards consumers and helps provide clarity on how regulated businesses should be thinking about infrastructure. Their approach is more reactive--they’re responding to demand and industry trends.
For the Aussie ETFs, the immediate goal is to capture as much of Aussie professional and institutional flow as they can. But if Monochrome’s strategy as the only directly held spot Bitcoin ETF plays out, it will leverage its position amongst other local feeder Bitcoin ETFs as an Australian listed instrument in good standing under ASIC’s retail crypto asset licensing rules to use as a master fund for feeder funds in other countries across the region. Think ETF as a service.
That would probably require some additional approval in each jurisdiction where they plan to launch, but approval from the Australian regulator provides a high degree of comfort.
For Hong Kong, there’s a feeling that the Stock Connect deal is do or die. But even without that it’s a large enough standalone market to support crypto ETFs. The Australian market is less so, but probably still viable.
No matter what happens, this is a very exciting and positive development that will drive innovation and differentiation in the market, and deliver all sorts of lessons as the market continues to develop.