Bloomberg's ETF analyst, Eric Balchunas, advises caution amidst the recent approval of spot Bitcoin and Ether exchange-traded funds (ETFs) in Hong Kong. While the news may spark excitement, Balchunas suggests that investors should curb their enthusiasm, anticipating that the ETFs may struggle to attract significant inflows.

The Hong Kong Securities and Futures Commission (SFC) recently granted conditional approvals to three offshore Chinese asset managers – Harvest Fund Management, Bosera Asset Management, and China Asset Management – to issue spot Bitcoin and Ether ETFs. However, Balchunas believes that predictions of massive inflows, reaching up to $25 billion, may be overly optimistic, suggesting that these ETFs may be fortunate to attract $500 million in inflows.

Balchunas highlights several reasons to temper expectations. Firstly, he notes that the Hong Kong ETF market is relatively small compared to major markets like the United States. Additionally, these ETFs do not grant Chinese retail investors official access, limiting their potential reach. Moreover, the approved asset managers are considerably smaller compared to industry giants like BlackRock, casting doubt on their ability to compete effectively.

Furthermore, Balchunas emphasizes that the capital environment in Hong Kong is less efficient, leading to wider spreads and premium discounts. He predicts that fees for these ETFs may be higher, ranging from 1-2%, compared to the lower fees seen in the U.S. market.

While Balchunas urges caution, Jamie Coutts, chief crypto analyst at Real Vision, believes that the Hong Kong ETFs could still unlock significant capital from Chinese investors adept at navigating government-imposed capital controls. Notably, the approved ETFs will utilize an in-kind creation model, allowing new shares to be issued directly using Bitcoin and Ether, in contrast to the cash-create redemption model used by U.S. spot Bitcoin ETFs.

Despite differing views, the imminent launch of these spot ETFs in approximately two weeks marks a significant development in the evolving landscape of cryptocurrency investment products.