$1 Billion HKD Liquidity Fund Introduced to Support Hong Kong's ETFs

Its main goal is to boost liquidity, stability, as well as investor confidence in Hong Kong's expanding ETF market.

Hong Kong is working hard towards achieving its goal of becoming a digital asset hub with a new $1 billion HKD ETF liquidity fund. The fund is aimed at improving liquidity and stability in its growing ETF market. This comes after the Securities and Futures Commission approved six new Bitcoin and Ethereum ETFs in April. However, these ETFs have seen very modest initial success compared to their U.S. counterparts.

Meanwhile, in South Korea, the Democratic Party is pushing to legalize spot Bitcoin ETFs, challenging current regulations. In the U.S., the Grayscale Bitcoin Trust finally reported positive inflows, breaking a four-month streak of outflows.

Hong Kong Launches ETF Liquidity Fund

Hong Kong is taking its goal of becoming a digital asset hub very seriously with the introduction of its first ETF liquidity fund. The fund, set at $1 billion HKD, or around $128 million USD, is a collaborative effort by LD Capital, Antalpha Ventures, and Highblock.

Its main goal is to boost liquidity and stability in Hong Kong's expanding ETF market. This initiative coincides with the Securities and Futures Commission's recent approval of six new Hong Kong-listed ETFs, including Bitcoin and Ethereum spot ETFs from firms like ChinaAMC, Harvest Global, and Bosera International. These ETFs were launched on Apr. 30, and saw a debut trading volume of around $100 million HKD.

The liquidity fund will offer market-making services for these ETFs, acting as both buyer and seller to make sure these are continuous trading activities and to reduce price volatility. This role is crucial when it comes to maintaining market efficiency and encouraging investment flow.

The entities behind this fund bring a lot of expertise and resources to the table. LD Capital provides a wealth of blockchain investment experience, Antalpha Ventures brings industry knowledge from its affiliation with Bitmain, a top digital asset mining hardware manufacturer, and Highblock offers insights from its quantitative trading and digital asset operations in Hong Kong.

This strategic development will hopefully boost investor confidence a bit in Hong Kong’s ETF market.

Hong Kong's Spot Crypto ETFs Start Slow

So far, Hong Kong's inaugural spot Bitcoin and Ethereum ETFs have seen lackluster performances in their first week compared to their United States counterparts.

The three Bitcoin ETFs launched in Hong Kong attracted a total of $262 million in assets under management (AUM), with the majority of these funds subscribed to before their official listing. However, they only saw an additional $14 million in asset inflows during the first week, a stark contrast to the billions that flowed into U.S. spot Bitcoin ETFs earlier in the year.

Farside Investors believes that the launch of these ETFs in Hong Kong were much less impactful than those in the U.S. Additionally, the world's first spot Ether ETFs in Hong Kong also underperformed, only attracting a cumulative $54.2 million in AUM and $9.3 million in inflows by May 6.

Despite the low numbers, Bloomberg ETF analyst Eric Balchunas pointed out that when considering the size of the local markets, Hong Kong’s $310 million in ETF assets is about as significant as $50 billion would be in the U.S. market.

It is also important to keep in mind that the limited appeal of these ETFs in Hong Kong could actually be due to stricter investor qualifications and higher management fees compared to the U.S. Hong Kong's crypto ETFs have annual fees ranging from 0.85% to 1.99%, which is much higher than the U.S. average of 0.25%.

These ETFs also feature restrictions that exclude mainland Chinese investors unless they also hold Hong Kong residency, which also ends up limiting potential investment inflows.

Despite these challenges, a study by crypto exchange OSL found that 80% of crypto-savvy investors in Hong Kong plan to invest in the new spot Bitcoin and Ether ETFs, which suggests that there is pretty solid local interest. However, the current regulations that prevent mainland funds from participating could keep transaction volumes low for some time.

New Moves to Legalize Spot BTC ETFs in South Korea

The Democratic Party of Korea is ready to challenge the Financial Services Commission’s (FSC) current regulatory stance on spot Bitcoin ETFs. After their recent electoral victory, where they secured 175 of 300 seats in the National Assembly, the party now plans to fulfill one of its campaign promises by advocating for the legalization of spot ETFs with underlying virtual assets.

This move comes after the FSC's Jan. 12 statement warning that domestic securities firms could breach the Capital Markets Act by listing foreign spot BTC ETFs. Naturally, this was not very well-received considering the global trend toward embracing these ETFs..

The party's dissatisfaction mainly stems from the FSC's very narrow interpretation of the Capital Markets Act, which currently does not recognize virtual assets as a legitimate underlying asset. In response to this, an official from the Democratic Party's policy committee now revealed plans to request a reevaluation of this interpretation once the National Assembly session begins in June. Should the FSC decide not to change its mind, the party will then consider pushing for legislative amendments to the Capital Markets Act.

The efforts to adjust the legal framework around virtual assets are part of a broader regulatory evolution in South Korea. Since the enactment of the 2020 Virtual Asset Business Rights Act, the country has seen tighter regulations on the crypto market. This includes much stricter penalties for crypto-related crimes and new guidelines for crypto exchanges.

Discussions to refine this act are expected to start in the second half of the year.

GBTC Ends Four-Month Outflow Streak

Meanwhile, things are looking up for U.S. spot Bitcoin ETFs. Grayscale recently ended a four-month streak of outflows from its Grayscale Bitcoin Trust (GBTC).

Since its launch in January, GBTC saw huge daily outflows, averaging about $218 million, and culminating in a staggering total of over $17.5 billion. However, this trend shifted for the better on May 3, when GBTC reported an inflow of $63 million, its first positive entry in months. This was followed by another $3.9 million in inflows on May 6.

The broader U.S. spot Bitcoin ETF market is still very robust with a healthy balance sheet. BlackRock's iShares Bitcoin Trust leads with net inflows amounting to $15.4 billion. Other large contributions have come from Fidelity Investments’ Fidelity Wise Origin Bitcoin Fund, which garnered $8.1 billion, Cathie Wood’s ARK 21Shares Bitcoin ETF with $2.2 billion, and the Bitwise Bitcoin ETF Trust adding $1.7 billion.

Bitcoin ETF Flow Table (Source: Farside Investors)

This means that the cumulative investment inflows into the spot Bitcoin ETF market stands at around $11.7 billion.

Susquehanna Invests Over $1 Billion in Bitcoin ETFs

Susquehanna International Group, a quantitative trading firm, invested $1 billion in Bitcoin ETFs during the first quarter of 2024. The firm reported to the Securities and Exchange Commission that it owns 17,271,326 shares of the Grayscale Bitcoin Trust (GBTC), which was valued at $1.09 billion on Mar. 31, 2024. Additionally, it holds 1,349,414 shares of the Fidelity Wise Origin Bitcoin Fund (FBTC), with a market value of about $83.74 million.

Susquehanna also increased its holdings in the ProShares Bitcoin Strategy ETF (BITO), which is tied to Bitcoin futures contracts, owning 7,907,827 shares worth around $255.42 million. The firm did, however, reduce its stake in MicroStrategy by 15%.

Despite the massive size of these investments, they represent only a small fraction of Susquehanna’s overall portfolio, which was valued at more than $575.8 billion at the end of the first quarter. The firm's portfolio also includes major investments in companies like NVIDIA Corporation and the SPDR S&P 500 ETF Trust, as well as new acquisitions like Convertible Zero, NRG Energy Inc., and Albemarle Corporation.

Other traditional financial firms also seem intrigued by the possibilities of Bitcoin ETFs. Legacy Wealth Management and United Capital Management of Kansas recently contributed $40 million to Fidelity’s Bitcoin ETF in April.