Cryptocurrencies have already achieved a significant investment milestone in 2024. In early January, the US Securities and Exchange Commission (SEC) approved tradable ETFs to track Bitcoin, a decision coming just months after the court of appeals in Washington ruled against the SEC’s decision for rejecting Grayscale Investment’s proposed Bitcoin ETF application.
Previous Bitcoin ETFs were only linked to futures contracts rather than spot pricing. And in another move this week, the UK's Financial Conduct Authority (FCA) said it wouldn't object to a UK listed market for cryptoasset-backed Exchange Traded Notes (ETNs).
In 2023, the globally renowned digital currency surged more than 150%, outperforming other major investments. But the SEC’s approval serves as a reputational win for the asset class, according to market experts, as digital currencies have overcome credibility worries stemming from major governance incidents surrounding crypto exchanges FTX and Binance in recent years.
“Spot ETFs serve to enhance the accessibility of Bitcoin for a broader range of investors and institutions,” explains Robert Zhan, director of financial risk management at KPMG China, speaking to FinanceAsia.
"We see a gap between the two capabilities, as asset managers in Hong Kong are either acting as retail fund managers lacking in virtual asset management experience or virtual asset managers lacking fund management experience." Eva Chan, Simmons & Simmons
That credibility boost through ETFs enables investors to gain Bitcoin exposure through reputable asset managers, rather than relying on unregistered exchanges, he added.
The initial test is whether Bitcoin ETFs translate into a sustained demand for cryptocurrency. Zhan points out that since the SEC announcement, 11 spot ETFs have been approved, translating into over a $1 billion in net inflows, reflecting market interests.
However, even with the trading approval, universal acceptance of digital money remains distant. SEC chair Gary Gensler, who had once referred to cryptocurrencies as the “wild west,” quantified his comments, stating that while the SEC approves the listing of Bitcoin ETFs, the regulator does not approve or endorse them.
What will happen in Hong Kong?
The Hong Kong Stock Exchange (HKEX) first welcomed ETFs for Bitcoin futures in December 2022, with the latest SEC announcement sparking a ripple effect of interest in the Special Administrative Region (SAR), noted Eva Chan, a partner at law firm Simmons & Simmons, speaking to FA.
Hong Kong-based Chan explained that while it is currently impossible to cross list SEC approved Bitcoin ETFs in Hong Kong under the rules of Hong Kong’s Securities and Futures Commission (SFC), establishing a local spot Bitcoin ETF appears more plausible, but tempers any initial enthusiasm.
“So far, we see a gap between the two capabilities, as asset managers in Hong Kong are either acting as retail fund managers lacking in virtual asset management experience or virtual asset managers lacking fund management experience. We therefore expect there to be some sort of partnership between these two types of asset managers through delegation or co-management arrangements,” said Chan.
That gap will eventually be met, insists KPMG’s Zhan, arguing that Hong Kong and its deep capital markets are well-positioned to build a first mover advantage against regional peers.
Zhan said: “Given the SEC’s reluctance to consider non-Bitcoin spot ETFs, while also classifying [Bitcoin] as a commodity, Hong Kong could approve ETFs that track other cryptocurrencies.”
The end of tulip comparisons?
Sceptics have long pointed to the limited use of digital tokens as a medium of exchange, often referring to El Salvador’s cryptocurrency experiment when the Central American nation became the first country in the world to accept Bitcoin as legal tender back in 2021.
Without paying dividends, Bitcoin lacks an intrinsic value, underscoring criticism that cryptocurrencies offer little beyond being a speculative asset.
Jefferies equity strategist Christopher Wood disagrees, drawing parallels with gold, also a non-yielding investment. While gold offers itself as a tangible item, Wood highlights the generational gap among investors, as younger investors are more familiar with blockchain technology and likely to have greater confidence in the digital ledger, recommending holding both the traditional metal and the intangible asset for the time being.
Given the divided opinion around cryptocurrencies, any market rally would likely reignite comparisons with the tulip bubble, a historical reference to the late 17th century rise and collapse of flower prices often described as the first recorded speculative bubble. Ironically, rapid price fluctuations occurred among tulip forwards contracts rather than on its spot price. If anything, the tulip comparison becomes less applicable with spot Bitcoin ETFs now available.
Bitcoin ETFs will only add to the divided opinion about cryptocurrencies, with the digital token returning 50% thus far in 2024 to outperform other major assets. As new digital offerings occur ever faster, few will likely have time to stop and smell the flowers.
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