So, as history shows us, 20%+ bull market drawdowns are not uncommon.
Bitcoin’s recent fall from fresh all-time highs has been accompanied by the same in stocks as the US 10 year yield has surged 72 bps year-to-date to 4.67%. Meanwhile, despite the rise in bond yields, gold and other commodities continue to hover around all-time highs as inflation expectations have increased.
This suggests that, in the short-term, bitcoin remains more correlated with financial liquidity conditions and long-duration risk assets, rather than traditional inflation hedges.
Spot Bitcoin ETFs Coming to Hong Kong
On Monday, Bloomberg Senior ETF analyst Eric Balchunas posted on X that Hong Kong listed spot bitcoin ETFs “have been approved to exist but not launch (yet). Rumor has it launching next wk so to not compete w the Dubai conf.”
Balchunas, however, cautions investors to not expect anywhere near the flows of the US ETFs, citing Hong Kong’s relatively small equity ETF market (only $50 billion, compared to $7.19 trillion in the US), and the fact that mainland Chinese locals are not expected to be allowed to purchase the funds initially. China and Hong Kong have a program called Stock Connect whereby mainland Chinese investors can access HK-listed securities and Hong Kong domiciled investors can access mainland China securities, subject to approvals and quotas.
In addition, the three ETF providers that have received approval (Bosera, China AMC, Harvest) are relatively small players; there are no large, global players such as BlackRock or StateStreet involved.
However, one can look at the gold ETF market in Hong Kong and China and possibly arrive at a different prediction for the success of HK-listed bitcoin ETFs.
The World Gold Council reports that Chinese gold ETFs ended 2023 with $4 billion in AUM, their highest ever. Additionally, the world largest gold ETF with $63 billion in assets, State Street’s GLD, is cross-listed in Hong Kong (2840 HK), is allowed to be purchased and held by mainland Chinese investors through Stock Connect, and it is indeterminable what percentage of the fund’s assets are accounted for by US investors vs. Hong Kong or China investors.
BlackRock’s IAU, the second largest gold ETF, has $29 billion in assets and is only traded in the US.
So, while the overall equity ETF market in Hong Kong and China is only a fraction of the size it is in the US, the gap in the size of the gold ETF market is much smaller, signaling a relative investor appetite for monetary store-of-value alternatives outside of the local currency. Indeed, there have been reports out of China recently of huge crowds of consumers lining up to buy gold jewelry every chance they get as Chinese stock and real estate markets suffer.
Is it possible that a country with strict capital controls and a failing stock and property market has given rise to a citizenry that understands the value of gold and bitcoin on a more visceral level than their western counterparts? We will get a peak into latent demand for bitcoin exposure in a country where bitcoin trading and mining is still illegal if and when the HK-listed bitcoin ETFs are approved for mainland Chinese investment.
Ethereum Debates More Changes to Monetary Policy
The Ethereum community is once again debating changes to ETH monetary policy amid concern over a growing issuance rate. ETH is the second largest cryptocurrency by market cap, behind bitcoin.
Various staking innovations enabled by Ethereum’s transition to proof-of-stake have led to increased demand to stake ETH. As new ETH is issued to stakers, this increase in the staking rate has led to an increase in new issuance. As a result, researchers from the Ethereum Foundation have proposed putting a limit on annual new ETH issuance.
ETH’s monetary policy has been altered several times in its history, most recently with the merge from a proof-of-work to proof-of-stake consensus model in 2022. The below chart illustrates the change in ETH’s annual issuance rate over time:
