Hong Kong Prepares for Game-Changing Bitcoin and Ether ETFs, Structure Details Unveiled

One of the issuers, ChinaAMC, reported that the performance of the crypto indices traded on the Chicago Mercantile Exchange will be tracked by the spot prices of Bitcoin and Ether.

There will be two ways to redeem: fiat money and cryptocurrency funds. Furthermore, the Hong Kong dollar, Chinese yuan, and US dollar will be the three currencies that ChinaAMC's cryptocurrency ETFs are denominated in. The ETF custodians will be the cryptocurrency exchange OSL and investment asset management BOCI-Prudential.

Launch of Bitcoin and Ether ETFs in Hong Kong

For issuer Harvest Global, the aforementioned two companies will also custody spot assets in Bitcoin and Ether ETFs. According to Harvest Global personnel, BOCI and OSL "effectively solves problems such as excessive margin requirements, price premiums caused by missing short positions, and roll losses, thereby more accurately reflecting the real-time value of Bitcoin and Ethereum."

In the meanwhile, Bosera Asset Management and Hong Kong-based HashKey Capital will jointly introduce their spot Bitcoin and Ether ETFs.

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Eric Balchunas, a senior ETF analyst at Bloomberg, stated on April 24 that the management costs for Hong Kong Bitcoin ETFs will vary from 0.3% to 0.99%. Compared to U.S. spot Bitcoin ETFs, where some issuers charge less than 0.25% annually, this is significantly more. James Seyffart, a Bloomberg analyst, said that "a potential fee war could break out in Hong Kong over these Bitcoin & Ethereum ETFs."

On OSL and HashKey, two legal cryptocurrency exchanges in Hong Kong, the three ETF issuers will establish and redeem ETF shares. Investors will have until 11:00 am local time every day to pay in their shares or withdraw cryptocurrency till 4:00 pm. All issuers will have BOCI Prudential act as their custodian, while market makers will include Virtu Financial, Vivienne Court, and other companies.

A Better-Performing ETF?

The goal of Hong Kong ETF issuers is to implement a "in-kind" subscription and redemption scheme. This makes it possible to trade ETF units for the fund's underlying assets and vice versa. The cash redemption approach used by American issuers differs greatly from this.

This is important because the in-kind method provides arbitrage opportunities, reduces transaction costs, and is more tax-efficient. On the other hand, there are greater tax ramifications and trading expenses associated with the US strategy of cash redemption ETFs.

To put it briefly, the conversion of assets into cash results in a taxable event, whereas the exchanging of assets (in-kind) does not. For investors, this is a significant distinction.