Bloomberg Analyst Casts Doubt on Hong Kong's New Crypto ETFs

Eric Balchunas criticized predictions that the ETFs could draw $25 billion in inflows, suggesting a more realistic figure would be around $500 million.

Hong Kong has approved its first spot Bitcoin and Ether ETFs, with launches planned by several local asset managers. Despite skepticism from some analysts about the market impact of these ETFs, others see a lot of potential for capital influx into Hong Kong's digital asset market. Additionally, there have been a few interesting developments in the Ethereum ecosystem, including the launch of Puffer Finance's liquid staking project, which secured $18 million for its mainnet launch. OKX also introduced X Layer, an Ethereum-based layer-2 network using zero-knowledge proof technology to offer faster, cheaper transactions and improved interoperability for decentralized applications.

Bitcoin and Ether ETFs Green-Lighted in Hong Kong

Hong Kong has joined the ranks of regions embracing cryptocurrency with the approval of its first spot exchange-traded funds (ETFs) for Bitcoin and Ether. The Hong Kong Securities and Futures Commission (SFC) conditionally approved these ETFs on Apr. 15, according to Reuters. This milestone will see local launches from at least three Chinese asset managers, specifically the Hong Kong units of Harvest Fund Management, Bosera Asset Management, and China Asset Management (ChinaAMC).

These ETFs, collaborating with well known local partners like HashKey Capital and OSL Digital Securities, are introducing an innovative in-kind subscription model. Unlike the cash-create model prevalent in the U.S., this method allows for the issuance of new ETF shares using actual Bitcoin and Ether. The system aims to enhance market liquidity and reduce the reliance on cash settlements, promoting more seamless trading flows.

Patrick Pan, the CEO of OSL, noted that the in-kind model aligns with practices in both digital and traditional asset markets, contributing to market stability. Although specific launch dates for these ETFs have not been confirmed just yet, the approval in principle by the SFC is a crucial step towards their introduction. The launch is anticipated to attract a lot more capital into Hong Kong's digital asset market.

Hong Kong Spot Bitcoin and Ether ETFs Stir Mixed Reactions

Not everyone is so optimistic about the prospects of Bitcoin and Ether ETFs in Hong Kong. Although this move has been welcomed by some, Bloomberg ETF analyst Eric Balchunas shared his skepticism about the potential impact of these new financial products. Balchunas criticized predictions that the ETFs could draw $25 billion in inflows, suggesting a more realistic figure would be around $500 million, mostly due to the comparatively small size of Hong Kong's ETF market and the inaccessibility of these products to Chinese retail investors.

Additionally, the asset managers authorized to issue these ETFs, namely Harvest Fund Management, Bosera Asset Management, and China Asset Management, are relatively small players in the global market, especially when compared to giants like BlackRock. According to Balchunas, the entire Hong Kong ETF market holds fewer assets than U.S. spot bitcoin ETFs alone, indicating a less robust financial ecosystem for these new ETFs. He also noted that high fees, ranging from 1-2%, and less liquidity could lead to wide spreads and discounts on these ETFs.

On a more optimistic note, Jamie Coutts, chief crypto analyst at Real Vision and former Bloomberg Intelligence crypto analyst, argued that these ETFs could unlock a big pool of capital for Chinese investors, who are adept at navigating government-imposed capital controls.

What are Spot Ether ETFs?

A spot Ether ETF is a type of exchange-traded fund that provides investors with exposure to ether (ETH), the cryptocurrency, without the necessity of directly buying or managing the digital currency itself. Unlike futures-based ETFs that are based on speculative contracts predicting future prices, a spot Ethereum ETF holds ether directly in its reserves to track its real-time price. This setup is similar to existing Bitcoin spot ETFs, which have already been introduced in the market.

The primary benefits of investing in a spot Ethereum ETF include the convenience of trading within a traditional financial framework, reducing the entry barrier for those accustomed to the conventional brokerage ecosystem. This makes it easier for institutional investors like pension funds and asset managers, who may face regulatory restrictions on direct cryptocurrency engagements, to participate in the crypto market. Additionally, these ETFs provide liquidity, allowing for quick buying and selling during market hours, and enable diverse trading strategies like short-selling and options.

However, spot Ethereum ETFs come with their limitations, like additional fees, and their trading hours do not cover the cryptocurrency market's 24/7 nature. Currently, these types of ETFs are not yet approved in the United States, with the Securities and Exchange Commission (SEC) delaying decisions on applications from major financial institutions.

The regulatory outlook is cautious, especially since the SEC views many cryptocurrencies, especially those leveraging a proof-of-stake system like Ethereum post-Merge, as securities. This classification influences the regulatory approach and the potential approval timeline for spot Ethereum ETFs in the U.S. Despite these challenges, the anticipation for their approval is still high, driven by the earlier acceptance of spot Bitcoin ETFs

Puffer Finance Raises $18 Million

In addition to spot Ether ETFs being approved in Hong Kong, other Ethereum products are also attracting some attention. Puffer Finance, an Ethereum-based liquid staking project developed on the restaking protocol Eigenlayer, recently secured $18 million in a Series A funding round. This funding is aimed at launching its mainnet. The investment round was led by Brevan Howard Digital and Electric Capital, with big contributions from Coinbase Ventures, Kraken Ventures, Lemniscap, Franklin Templeton, Fidelity, Mechanism, Lightspeed Faction, Consensys, Animoca, GSR, and several angel investors.

After its successful test phase in February, Puffer Finance very quickly achieved a total value locked (TVL) of $1.2 billion, according to DefiLlama. To date, the project has amassed $23.5 million in venture capital funding. The recent funding round also saw a strategic investment from Binance Labs, which is expected to boost Puffer Finance's standing in the liquid restaking sector as it introduces technological enhancements alongside its mainnet launch.

Puffer Finance's innovative approach allows Ethereum validators to reduce the required capital for staking from 32 Ether to just 1 Ether, making the entry much more accessible for individual stakers. Stakeholders receive Puffer liquid restaking tokens (nLRTs) which can be used to farm yields on other decentralized finance protocols while collecting Ethereum staking rewards. This method, known as liquid staking, was popularized by other blockchains like Cosmos and has been adopted by Ethereum after its transition to a proof-of-stake network through the Merge.

The adoption of liquid staking on Ethereum is part of a much broader trend in the DeFi sector, which now sees liquid staking protocols as the largest category, holding almost $55 billion across approximately 160 protocols. This growth is led by Lido, which currently has the largest locked value at $35 billion. Liquid staking's rise in popularity is mostly due to its potential to lower barriers for individual participation and its promise of enhanced protocol performance, according to Amir Forouzani, a core contributor at Puffer Labs.

OKX Launches X Layer

Meanwhile, crypto exchange OKX has launched X Layer, its Ethereum-based layer-2 network designed to provide lower fees and enhanced interoperability for users of decentralized applications (DApps). The network, which went live on its public mainnet on Apr. 15, leverages zero-knowledge proof technology for security and scalability and is built using Polygon’s chain development kit (CDK).

X Layer will facilitate faster and cheaper transactions in on-chain applications, using ZK-proofs, a technology common among Ethereum layer-2 solutions. It is fully compatible with the Ethereum Virtual Machine (EVM), which allows developers to deploy or transition existing Ethereum-based DApps seamlessly.

According to Haider Rafique, the chief marketing officer at OKX, X Layer is part of the company’s broader plan to create a seamless and interoperable Web3 ecosystem. He speaks very highly of the potential of X Layer, bolstered by a strong community and its ability to connect with other Ethereum-based networks.

The beta version of X Layer was launched in November of 2023 and attracted more than 50 Web3 DApps during its test phase. Currently, DApps like The Graph, Curve, LayerZero, QuickSwap, Galaxy, and Timeswap are preparing to launch on this network.

For OKX users, X Layer provides the ability to transfer assets, as well as deposit and withdraw cryptocurrencies. It supports almost 200 DApps offering services like token swaps, staking, and smart contract functionalities. The network’s native token, OKB, is used to pay gas fees.

Polygon’s CDK not only supports the development of X Layer but also connects it with other chains through the Aggregation Layer (AggLayer), facilitating the flow of liquidity between networks. Marc Boiron, CEO of Polygon, clarified that this connectivity resolves liquidity fragmentation and promotes growth across interconnected blockchain protocols. Investment management firm VanEck projects that Ethereum layer-2 networks like X Layer could surpass $1 trillion in market capitalization by 2030.