Hong Kong-Listed Bitcoin ETFs Could Unlock Up to $25B in Demand, Crypto Firm Says

• Mainland Chinese investors could pour $25 billion in potential Hong Kong-listed spot bitcoin exchange-traded funds (ETFs) through the Southbound Stock Connect program, according to Matrixport.
• One Hong Kong-based observer said mainland Chinese funds have been applying to issue spot ETFs through their Hong Kong subsidiaries.

Hong Kong, one of the world’s leading financial centers and a gateway for outbound Chinese investments, is set to approve a spot bitcoin exchange-traded fund tied to bitcoin (BTC).

The investment vehicle could unlock up to $25 billion in demand from Chinese investors via the Southbound Stock Connect program, according to Singapore-based crypto services provider Matrixport. The Southbound Stock Connect allows qualified mainland Chinese investors to access eligible shares listed in Hong Kong.

“A likely approval of Hong Kong-listed Bitcoin Spot ETFs could attract several billion dollars of capital as mainland investors take advantage of the Southbound Connect program, which facilitates up to 500 billion RMB (HK$540 billion and $70 billion] per year in transactions," Matrixport said in a report Friday.

“Based on the (potential) available capacity, this might result in up to 200 billion Hong Kong dollars of available capacity for those HK Bitcoin ETFs—or US$25 billion," Matrixport added.

The estimate is based on a blue sky assumption that the average amount of the unused annual Southbound connect quota over the past three years would be channeled into the spot ETFs.

The Stock Connect program allows mainland Chinese investors to snap up HK$540 billion worth of Chinese stocks annually. However, flows in the past three years have been HK$450 billion, HK$400 billion and HK$320 billion, falling short of the limit by HK$100 to HK$200 billion ($15 billion to $25 billion), according to data source 360MarketIQ.

"Hence there is potentially HK$100 billion to HK$200 billion in quota left for bitcoin ETF investment flows – if the approval occurs without any restrictions. HK$200 is the equivalent of $25 billion," Matrixport explained.

As of this writing, it's unclear whether the impending spot ETFs will be open for mainland Chinese investors. That said, mainland China seems interested in diversifying into alternative assets, as evidenced by the recent surge in gold prices in Shanghai.

The tightly controlled Chinese renminbi (or yuan) has declined nearly 2% against the U.S. dollar, extending the two-year losing streak on the back of an economic slowdown and shrinking trade surplus.

"China’s RMB is at a 17-year low vs. the USD. Indeed, there is a demand for diversification," Matrixport said, noting the Chinese central bank's continued gold purchases.

Nick Ruck, COO of ContentFi Labs, said mainland funds are interested in issuing ETFs in Hong Kong.

"Mainland-based funds have been applying to issue spot bitcoin ETFs through their Hong Kong subsidiaries. If approved, this could allow qualified mainland investors greater access to bitcoin," Ruck, who is based on Hong Kong, told CoinDesk.

According to Nikkei Asia, top Chinese fund manager Bosera Asset Management's Hong Kong arm, Harvest Global Investments, and Chinese brokerage GF Holdings-owned Value Partners have applied for ETFs in Hong Kong.

In December, a report by Hong Kong Exchanges and Clearing Limited (HKEX) said the Stock Connect program was expanded to include Hong Kong-listed ETFs in July 2022. As of mid-2023, the program included six Hong Kong-listed ETFs, and their average daily turnover grew to HK$2.9 billion by September.

The U.S. greenlighted nearly a dozen spot ETFs four months ago. Since then, these funds have amassed $12 billion in investor funds, pushing bitcoin to new record highs above $73,000.