Analysts foresee a significant surge in Bitcoin exchange-traded funds (ETFs) following their launch in Hong Kong, attributed to the adoption of in-kind creation models. Bloomberg’s senior ETF analyst, Eric Balchunas, highlighted Hong Kong’s move towards in-kind creation for spot Bitcoin ETFs, suggesting potential increases in assets under management (AUM) and trading volume in the burgeoning region.
Balchunas’s perspective was influenced by a research note from Bloomberg ETF analyst Rebecca Sin, indicating that the in-kind model presents an “opportunity for the market.”
According to Sin:
“Hong Kong is pursuing in-kind creation of the ETF, unlike the US, where transactions are cash-only. In the US, it’s cash in, Bitcoin ETF out, while Hong Kong aims for Bitcoin in, ETF out. This could present an opportunity for the market.”
Earlier this year, Hong Kong authorities signaled their readiness to accept applications for spot crypto ETFs, with plans for rollout by mid-year. Since then, several entities, including Harvest Hong Kong, have submitted applications to launch spot Bitcoin ETFs.
In-kind vs. Cash Creations Hong Kong’s potential adoption of the in-kind model stands in stark contrast to the cash-creation model favored by US authorities for spot Bitcoin ETFs.
Through in-kind redemptions, ETF issuers can exchange the fund’s underlying assets, such as Bitcoin, with market makers, avoiding immediate sale of securities for cash during share creation and redemption. This mechanism facilitates ETF issuance of creation units without immediate sale of securities for cash.
In contrast, the cash redemptions favored by the US SEC necessitate fund managers to sell Bitcoin to provide cash for redeeming shareholders.
Notably, BlackRock, one of the Bitcoin ETF issuers, cautioned that this method presents challenges in maintaining share prices aligned with Bitcoin’s actual value.