H
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from ______ to ______ |
Commission File Number
MANAGED BY GRAYSCALE INVESTMENTS, LLC
(Exact Name of Registrant as Specified in Its Charter)
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(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
c/o Grayscale Investments, LLC
(Address of Principal Executive Offices) (Zip Code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Number of Shares of the registrant outstanding as of February 2, 2024:
Grayscale® Digital large Cap Fund LLC
Table of Contents
2
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” with respect to the financial conditions, results of operations, plans, objectives, future performance and business of Grayscale Digital Large Cap Fund LLC (the “Fund”). Statements preceded by, followed by or that include words such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of these terms and other similar expressions are intended to identify some of the forward-looking statements. All statements (other than statements of historical fact) included in this Quarterly Report that address activities, events or developments that will or may occur in the future, including such matters as changes in market prices and conditions, the Fund’s operations, the plans of Grayscale Investments, LLC (the “Manager”) and references to the Fund’s future success and other similar matters are forward-looking statements. These statements are only predictions. Actual events or results may differ materially from such statements. These statements are based upon certain assumptions and analyses the Manager made based on its perception of historical trends, current conditions and expected future developments, as well as other factors appropriate in the circumstances. Whether or not actual results and developments will conform to the Manager’s expectations and predictions, however, is subject to a number of risks and uncertainties, including, but not limited to, those described in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K and in “Part II, Item 1A. Risk Factors” herein. Forward-looking statements are made based on the Manager’s beliefs, estimates and opinions on the date the statements are made and neither the Fund nor the Manager is under a duty or undertakes an obligation to update forward-looking statements if these beliefs, estimates and opinions or other circumstances should change, other than as required by applicable laws. Investors are therefore cautioned against relying on forward-looking statements.
Unless otherwise stated or the context otherwise requires, the terms “we,” “our” and “us” in this Quarterly Report refer to the Manager acting on behalf of the Fund.
A glossary of industry and other defined terms is included in this Quarterly Report, beginning on page 44.
This Quarterly Report supplements, and where applicable amends, the Memorandum, as defined in the Fund’s Second Amended and Restated Limited Liability Company Agreement, for general purposes.
Industry and Market Data
Although we are responsible for all disclosure contained in this Quarterly Report on Form 10-Q, in some cases we have relied on certain market and industry data obtained from third-party sources that we believe to be reliable. Market estimates are calculated by using independent industry publications in conjunction with our assumptions regarding the digital asset industry and market. While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the headings “Forward-Looking Statements,” “Part I, Item 1A. Risk Factors” in the Annual Report on Form 10-K for the year ended June 30, 2023, filed with the Securities and Exchange Commission (the “SEC”) on September 1, 2023 (the “Annual Report”), and “Part II, Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q.
3
PART I – FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
GRAYSCALE Digital Large Cap Fund LLC
STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
(Amounts in thousands, except Share and per Share amounts)
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December 31, 2023 |
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June 30, 2023 |
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Assets: |
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Investments in digital assets, at fair value (cost $ |
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$ |
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$ |
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Total assets |
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$ |
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$ |
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Liabilities: |
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Manager’s Fee payable, related party |
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$ |
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$ |
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Total liabilities |
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Net assets |
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$ |
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$ |
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Net Assets consists of: |
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Paid-in-capital |
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$ |
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$ |
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Accumulated net investment loss |
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Accumulated net realized gain on investments in digital assets |
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Accumulated net change in unrealized appreciation on investments in digital assets |
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$ |
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$ |
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Shares issued and outstanding, no par value (unlimited Shares authorized) |
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Principal market net asset value per Share |
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$ |
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$ |
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See accompanying notes to the unaudited financial statements.
4
GRAYSCALE Digital Large Cap Fund LLC
SCHEDULES OF INVESTMENTs (UNAUDITED)
(Amounts in thousands, except quantity of each Fund Component and percentages)
December 31, 2023 |
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Quantity |
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Cost |
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Fair Value |
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% of Net Assets |
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Investment in BTC |
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$ |
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$ |
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% |
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Investment in ETH |
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% |
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Investment in SOL |
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% |
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Investment in ADA |
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% |
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Investment in MATIC |
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% |
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Net assets |
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$ |
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$ |
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% |
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June 30, 2023 |
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Quantity |
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Cost |
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Fair Value |
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% of Net Assets |
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Investment in BTC |
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$ |
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$ |
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% |
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Investment in ETH |
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% |
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Investment in ADA |
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% |
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Investment in SOL |
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% |
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Investment in MATIC |
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% |
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Net assets |
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$ |
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$ |
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% |
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See accompanying notes to the unaudited financial statements.
5
GRAYSCALE Digital Large Cap Fund LLC
STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands)
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Three Months Ended December 31, |
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Six Months Ended December 31, |
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2023 |
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2022 |
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2023 |
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2022 |
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Investment income: |
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Investment income |
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$ |
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$ |
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$ |
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$ |
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Expenses: |
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Manager’s Fee, related party |
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Net investment loss |
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Net realized and unrealized gain (loss) from: |
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Net realized gain (loss) on investments in digital assets |
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Net change in unrealized appreciation (depreciation) on investments in digital assets |
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Net realized and unrealized gain (loss) on investments in digital assets |
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( |
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( |
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Net increase (decrease) in net assets resulting from operations |
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$ |
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$ |
( |
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$ |
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$ |
( |
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See accompanying notes to the unaudited financial statements.
6
grayscale digital Large cap fund llc
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
(Amounts in thousands, except change in Shares outstanding)
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Three Months Ended December 31, |
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Six Months Ended December 31, |
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2023 |
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2022 |
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2023 |
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2022 |
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Increase (decrease) in net assets from operations: |
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Net investment loss |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Net realized gain (loss) on investments in digital assets |
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( |
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Net change in unrealized appreciation (depreciation) on investments in digital assets |
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( |
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Net increase (decrease) in net assets resulting from operations |
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( |
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Increase in net assets from capital share transactions: |
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Shares issued |
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Net increase in net assets resulting from capital share transactions |
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Total increase (decrease) in net assets from operations and capital share transactions |
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( |
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( |
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Net assets: |
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Beginning of period |
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End of period |
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$ |
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$ |
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$ |
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$ |
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Change in Shares outstanding: |
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Shares outstanding at beginning of period |
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Shares issued |
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Net increase in Shares |
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Shares outstanding at end of period |
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See accompanying notes to the unaudited financial statements.
7
GRAYSCALE digital large cap fund llc
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
1. Organization
The Grayscale Digital Large Cap Fund LLC (the “Fund”) was constituted as a Cayman Islands limited liability company on January 25, 2018 (the inception of the Fund) and commenced operations on February 1, 2018. In general, the Fund will hold digital assets. Historically, and through the period ending June 30, 2022, a digital asset had been eligible for inclusion in the Fund’s portfolio if it satisfied market capitalization, liquidity and coverage criteria as determined by the Manager (as defined below). Effective July 1, 2022, the Fund’s digital assets consist of digital assets that comprise the CoinDesk Large Cap Select Index (the “DLCS”), as rebalanced from time to time, subject to the Manager’s discretion to exclude individual digital assets in certain cases. The DLCS is designed and managed by CoinDesk Indices, Inc. (in this capacity, the “Index Provider”) as discussed in Note 5. As of December 31, 2023, the digital assets included in the Fund’s portfolio were: Bitcoin (“BTC”), Ethereum (“ETH”), Solana (“SOL”), Cardano (“ADA”), and Polygon (“MATIC”) (collectively, the “Fund Components”). On a quarterly basis beginning on the second business day of January, April, July and October of each year, the Manager performs an analysis and may rebalance the Fund’s portfolio based on these results in accordance with policies and procedures as set forth in the Fund’s Limited Liability Company Agreement (the “LLC Agreement”). The Fund is authorized under the LLC Agreement to create and issue an unlimited number of equal, fractional, undivided interests in the profits, losses, distributions, capital and assets of, and ownership of, the Fund (“Shares”) (in minimum baskets of
From time to time, the Fund may hold cash in U.S. dollars and positions in digital assets as a result of a fork, airdrop or similar event through which the Fund becomes entitled to another digital asset or other property by virtue of its ownership of one or more of the digital assets it then holds (each such new asset, a “Forked Asset”).
Grayscale Investments, LLC (“Grayscale” or the “Manager”) acts as the Manager of the Fund and is a wholly owned subsidiary of Digital Currency Group, Inc. (“DCG”). The Manager is responsible for the day-to-day administration of the Fund pursuant to the provisions of the LLC Agreement. Grayscale is responsible for preparing and providing annual and quarterly reports on behalf of the Fund to investors and is also responsible for selecting and monitoring the Fund’s service providers. As partial consideration for the Manager’s services, the Fund pays Grayscale a Manager’s Fee as discussed in Note 8. The Manager also acts as the sponsor and manager of other investment products including Grayscale Basic Attention Token Trust (BAT) (OTCQB: GBAT), Grayscale Bitcoin Trust (BTC) (NYSE Arca: GBTC), Grayscale Bitcoin Cash Trust (BCH) (OTCQX: BCHG), Grayscale Chainlink Trust (LINK) (OTCQB: GLNK), Grayscale Decentraland Trust (MANA) (OTCQX: MANA), Grayscale Ethereum Trust (ETH) (OTCQX: ETHE), Grayscale Ethereum Classic Trust (ETC) (OTCQX: ETCG), Grayscale Filecoin Trust (FIL) (OTCQB: FILG), Grayscale Horizen Trust (ZEN) (OTCQX: HZEN), Grayscale Litecoin Trust (LTC) (OTCQX: LTCN), Grayscale Livepeer Trust (LPT) (OTCQB: GLIV), Grayscale Solana Trust (SOL) (OTCQB: GSOL), Grayscale Stellar Lumens Trust (XLM) (OTCQX: GXLM), Grayscale Zcash Trust (ZEC) (OTCQX: ZCSH), Grayscale Decentralized Finance (DeFi) Fund LLC (OTCQB: DEFG), and Grayscale Smart Contract Platform Ex Ethereum (ETH) Fund LLC, each of which is an affiliate of the Fund. The following investment products sponsored or managed by the Manager are also SEC reporting companies with their shares registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”): Grayscale Bitcoin Cash Trust (BCH), Grayscale Ethereum Trust (ETH), Grayscale Ethereum Classic Trust (ETC), Grayscale Horizen Trust (ZEN), Grayscale Litecoin Trust (LTC), Grayscale Stellar Lumens Trust (XLM), and Grayscale Zcash Trust (ZEC). On January 10, 2024, the Securities and Exchange Commission (the “SEC”) approved an application under Rule 19b-4 of the Exchange Act by NYSE Arca, Inc. (“NYSE Arca”) to list the shares of the Grayscale Bitcoin Trust (BTC), which began trading on NYSE Arca on January 11, 2024. Grayscale Bitcoin Trust (BTC) is an SEC reporting company with its shares registered pursuant to Section 12(b) of the Exchange Act. Grayscale Advisors, LLC, a Registered Investment Advisor and an affiliate of the Manager, is the advisor to the Grayscale Future of Finance (NYSE: GFOF) product.
Authorized Participants of the Fund are the only entities who may place orders to create or, if permitted, redeem Baskets. Grayscale Securities, LLC (“Grayscale Securities” or, in such capacity, an “Authorized Participant”), a registered broker-dealer and wholly owned subsidiary of the Manager, is the only Authorized Participant, and is party to a participant agreement with the Manager and the Fund. Additional Authorized Participants may be added at any time, subject to the discretion of the Manager. Liquidity Providers may be engaged from time to time and at any time. Genesis Global Trading, Inc. (“Genesis”), a wholly owned subsidiary of DCG, served as a Liquidity Provider from October 3, 2022 to September 12, 2023. Unaffiliated Liquidity Providers have since been engaged, and additional Liquidity Providers who are unaffiliated with the Fund may be engaged in the future.
8
The custodian of the Fund is Coinbase Custody Trust Company, LLC (the “Custodian”), a third-party service provider. The Custodian is responsible for safeguarding the Fund Components and Forked Assets held by the Fund, and holding the private key(s) that provide access to the Fund’s digital wallets and vaults.
The transfer agent for the Fund (the “Transfer Agent”) is Continental Stock Transfer & Trust Company. The responsibilities of the Transfer Agent are to maintain creations, redemptions, transfers, and distributions of the Fund’s Shares which are primarily held in book-entry form.
On October 14, 2019, the Fund received notice that its Shares were qualified for public trading on the OTCQX U.S. Marketplace of the OTC Markets Group, Inc. (“OTCQX”). The Fund’s trading symbol on OTCQX is “GDLC” and the CUSIP number for its Shares is G40705108. The Fund’s previous trading symbol was “GDLCF” on OTCQX and was changed to “GDLC” on April 14, 2020.
On July 21, 2020, the Fund registered with the Cayman Islands Monetary Authority (reference number: 1688783). The Fund is registered and regulated as a private fund under the Private Funds Act (As Revised) of the Cayman Islands (the “Private Funds Act”).
2. Summary of Significant Accounting Policies
In the opinion of management of the Manager of the Fund, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position as of December 31, 2023 and June 30, 2023 and results of operations for the three and six months ended December 31, 2023 and 2022 have been made. The results of operations for the periods presented are not necessarily indicative of the results of operations expected for the full year. These unaudited financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2023 included in the Fund’s Annual Report on Form 10-K.
The following is a summary of significant accounting policies followed by the Fund:
The financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The Fund qualifies as an investment company for accounting purposes pursuant to the accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services—Investment Companies. The Fund uses fair value as its method of accounting for digital assets in accordance with its classification as an investment company for accounting purposes. The Fund is not a registered investment company under the Investment Company Act of 1940. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates and these differences could be material.
The Fund conducts its transactions in Fund Components, including receiving Fund Components for the creation of Shares and delivering Fund Components for the redemption of Shares and for the payment of the Manager’s Fee. At this time, the Fund is not accepting redemption requests from shareholders. Since its inception, the Fund has not held cash or cash equivalents.
Principal Market and Fair Value Determination
To determine which market is the Fund’s principal market (or in the absence of a principal market, the most advantageous market) for purposes of calculating the Fund’s net asset value in accordance with U.S. GAAP (“Principal Market NAV”), the Fund follows ASC 820-10, which outlines the application of fair value accounting. ASC 820-10 determines fair value to be the price that would be received for each Fund Component in a current sale, which assumes an orderly transaction between market participants on the measurement date. ASC 820-10 requires the Fund to assume that each Fund Component is sold in its principal market to market participants or, in the absence of a principal market, the most advantageous market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact.
The Fund only receives Fund Components in connection with a creation order from the Authorized Participant (or a Liquidity Provider) and does not itself transact on any Digital Asset Markets. Therefore, the Fund looks to market-based volume and level of activity for Digital Asset Markets. The Authorized Participant(s), or a Liquidity Provider, may transact in a Brokered Market, a Dealer Market, Principal-to-Principal Markets and Exchange Markets (referred to as “Trading Platform Markets” in this Quarterly Report), each as defined in the FASB ASC Master Glossary (collectively, “Digital Asset Markets”).
In determining which of the eligible Digital Asset Markets is the Fund’s principal market, the Fund reviews these criteria in the following order:
First, the Fund reviews a list of Digital Asset Markets that maintain practices and policies designed to comply with anti-money laundering (“AML”) and know-your-customer (“KYC”) regulations, and non-Digital Asset Trading Platform Markets that the Fund reasonably believes are operating in compliance with applicable law, including federal and state licensing requirements, based upon information and assurances provided to it by each market.
9
Second, the Fund sorts these Digital Asset Markets from high to low by market-based volume and level of activity of each Fund Component traded on each Digital Asset Market in the trailing twelve months.
Third, the Fund then reviews pricing fluctuations and the degree of variances in price on Digital Asset Markets to identify any material notable variances that may impact the volume or price information of a particular Digital Asset Market.
Fourth, the Fund then selects a Digital Asset Market as its principal market based on the highest market-based volume, level of activity and price stability in comparison to the other Digital Asset Markets on the list. Based on information reasonably available to the Fund, Trading Platform Markets have the greatest volume and level of activity for the Fund Components. The Fund therefore looks to accessible Trading Platform Markets as opposed to the Brokered Market, Dealer Market and Principal-to-Principal Markets to determine its principal market for each Fund Component. As a result of the aforementioned analysis, a Trading Platform Market has been selected as the Fund’s principal market for each Fund Component.
The Fund determines its principal market (or in the absence of a principal market the most advantageous market) annually and conducts a quarterly analysis to determine (i) if there have been recent changes to each Digital Asset Market’s trading volume and level of activity in the trailing twelve months, (ii) if any Digital Asset Markets have developed that the Fund has access to, or (iii) if recent changes to each Digital Asset Market’s price stability have occurred that would materially impact the selection of the principal market and necessitate a change in the Fund’s determination of its principal market.
The cost basis of each Fund Component received in connection with a creation order is recorded by the Fund at the fair value of such Fund Component at 4:00 p.m., New York time, on the creation date for financial reporting purposes. The cost basis recorded by the Fund may differ from proceeds collected by an Authorized Participant from the sale of the corresponding Shares to investors.
Investment Transactions and Revenue Recognition
The Fund considers investment transactions to be the receipt of Fund Components for Share creations and the delivery of Fund Components for Share redemptions, the payment of expenses in Fund Components or the sale of Fund Components when the Manager rebalances the Fund’s portfolio. At this time, the Fund is not accepting redemption requests from shareholders. The Fund records its investment transactions on a trade date basis and changes in fair value are reflected as net change in unrealized appreciation or depreciation on investments. Realized gains and losses are calculated using the specific identification method. Realized gains and losses are recognized in connection with transactions including settling obligations for the Manager’s Fee and selling Fund Component(s) when the Manager rebalances the Fund’s portfolio.
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the ‘exit price’) in an orderly transaction between market participants at the measurement date.
GAAP utilizes a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
The fair value hierarchy is categorized into three levels based on the inputs as follows:
The availability of valuation techniques and observable inputs can vary by investment. To the extent that valuations are based on sources that are less observable or unobservable in the market, the determination of fair value requires more judgment. Fair value estimates do not necessarily represent the amounts that may be ultimately realized by the Fund.
10
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Fair Value Measurement Using |
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(Amounts in thousands) |
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Amount at |
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Level 1 |
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Level 2 |
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Level 3 |
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December 31, 2023 |
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Assets |
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Investment in BTC |
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$ |
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$ |
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|
$ |
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|
$ |
|
||||
Investment in ETH |
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||||
Investment in SOL |
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Investment in ADA |
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|
||||
Investment in MATIC |
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|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
June 30, 2023 |
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Assets |
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||||
Investment in BTC |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Investment in ETH |
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||||
Investment in ADA |
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||||
Investment in SOL |
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|
||||
Investment in MATIC |
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|
|
|
|
|
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|
|
|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Recently Issued Accounting Pronouncements
In December 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-08, Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets (“ASU 2023-08”). ASU 2023-08 is intended to improve the accounting for certain crypto assets by requiring an entity to measure those crypto assets at fair value each reporting period with changes in fair value recognized in net income. The amendments also improve the information provided to investors about an entity’s crypto asset holdings by requiring disclosure about significant holdings, contractual sale restrictions, and changes during the reporting period. ASU 2023-08 is effective for annual and interim reporting periods beginning after December 15, 2024. Early adoption is permitted for both interim and annual financial statements that have not yet been issued. The Manager of the Fund is evaluating this new guidance as of December 31, 2023. If the Manager elects to adopt in a subsequent interim period prior to the effective date, such adoption would be reflected retroactive to the beginning of the fiscal year. The Manager does not anticipate any material impact on its financial statements and disclosures as the Fund historically used fair value as its method of accounting for digital assets in accordance with its classification as an investment company for accounting purposes.
3. Fair Value of Investments in Digital Assets
The Fund Components are held by the Custodian on behalf of the Fund and are carried at fair value.
Fund Component |
|
Principal Market |
|
December 31, 2023 |
|
|
June 30, 2023 |
|
||
BTC |
|
Coinbase |
|
$ |
|
|
$ |
|
||
ETH |
|
Coinbase |
|
$ |
|
|
$ |
|
||
SOL(1) |
|
Coinbase |
|
$ |
|
|
$ |
|
||
ADA(2) |
|
Coinbase |
|
$ |
|
|
$ |
|
||
MATIC(3) |
|
Coinbase |
|
$ |
|
|
$ |
|
||
11
The following represents the changes in quantity of each Fund Component and their respective fair values:
(Amounts in thousands, except BTC amounts) |
|
Quantity |
|
|
Fair Value |
|
||
BTC balance at June 30, 2022 |
|
|
|
|
$ |
|
||
BTC contributed |
|
|
|
|
|
|
||
BTC contributed from portfolio rebalancing |
|
|
|
|
|
|
||
BTC distributed for Manager’s Fee, related party |
|
|
( |
) |
|
|
( |
) |
Net change in unrealized appreciation on investment in BTC |
|
|
|
|
|
|
||
Net realized gain on investment in BTC |
|
|
|
|
|
|
||
BTC balance at June 30, 2023 |
|
|
|
|
$ |
|
||
BTC contributed |
|
|
|
|
|
|
||
BTC contributed from portfolio rebalancing |
|
|
|
|
|
|
||
BTC distributed for Manager’s Fee, related party |
|
|
( |
) |
|
|
( |
) |
Net change in unrealized appreciation on investment in BTC |
|
|
|
|
|
|
||
Net realized gain on investment in BTC |
|
|
|
|
|
|
||
BTC balance at December 31, 2023 |
|
|
|
|
$ |
|
||
(Amounts in thousands, except ETH amounts) |
|
Quantity |
|
|
Fair Value |
|
||
ETH balance at June 30, 2022 |
|
|
|
|
$ |
|
||
ETH contributed |
|
|
|
|
|
|
||
ETH contributed from portfolio rebalancing |
|
|
|
|
|
|
||
ETH distributed for Manager’s Fee, related party |
|
|
( |
) |
|
|
( |
) |
Net change in unrealized appreciation on investment in ETH |
|
|
|
|
|
|
||
Net realized gain on investment in ETH |
|
|
|
|
|
|
||
ETH balance at June 30, 2023 |
|
|
|
|
$ |
|
||
ETH contributed |
|
|
|
|
|
|
||
ETH distributed from portfolio rebalancing |
|
|
( |
) |
|
|
( |
) |
ETH distributed for Manager’s Fee, related party |
|
|
( |
) |
|
|
( |
) |
Net change in unrealized appreciation on investment in ETH |
|
|
|
|
|
|
||
Net realized gain on investment in ETH |
|
|
|
|
|
|
||
ETH balance at December 31, 2023 |
|
|
|
|
$ |
|
||
(Amounts in thousands, except SOL amounts) |
|
Quantity |
|
|
Fair Value |
|
||
SOL balance at June 30, 2022 |
|
|
|
|
$ |
|
||
SOL contributed |
|
|
|
|
|
|
||
SOL contributed from portfolio rebalancing |
|
|
|
|
|
|
||
SOL distributed for Manager’s Fee, related party |
|
|
( |
) |
|
|
( |
) |
Net change in unrealized depreciation on investment in SOL |
|
|
|
|
|
( |
) |
|
Net realized loss on investment in SOL |
|
|
|
|
|
( |
) |
|
SOL balance at June 30, 2023 |
|
|
|
|
$ |
|
||
SOL contributed |
|
|
|
|
|
|
||
SOL contributed from portfolio rebalancing |
|
|
|
|
|
|
||
SOL distributed for Manager’s Fee, related party |
|
|
( |
) |
|
|
( |
) |
Net change in unrealized appreciation on investment in SOL |
|
|
|
|
|
|
||
Net realized loss on investment in SOL |
|
|
|
|
|
( |
) |
|
SOL balance at December 31, 2023 |
|
|
|
|
$ |
|
||
12
(Amounts in thousands, except ADA amounts) |
|
Quantity |
|
|
Fair Value |
|
||
ADA balance at June 30, 2022 |
|
|
|
|
$ |
|
||
ADA contributed |
|
|
|
|
|
|
||
ADA contributed from portfolio rebalancing |
|
|
|
|
|
|
||
ADA distributed for Manager’s Fee, related party |
|
|
( |
) |
|
|
( |
) |
Net change in unrealized depreciation on investment in ADA |
|
|
|
|
|
( |
) |
|
Net realized loss on investment in ADA |
|
|
|
|
|
( |
) |
|
ADA balance at June 30, 2023 |
|
|
|
|
$ |
|
||
ADA contributed |
|
|
|
|
|
|
||
ADA contributed from portfolio rebalancing |
|
|
|
|
|
|
||
ADA distributed for Manager’s Fee, related party |
|
|
( |
) |
|
|
( |
) |
Net change in unrealized appreciation on investment in ADA |
|
|
|
|
|
|
||
Net realized loss on investment in ADA |
|
|
|
|
|
( |
) |
|
ADA balance at December 31, 2023 |
|
|
|
|
$ |
|
||
(Amounts in thousands, except MATIC amounts) |
|
Quantity |
|
|
Fair Value |
|
||
MATIC balance at June 30, 2022 |
|
|
|
|
$ |
|
||
MATIC contributed |
|
|
|
|
|
|
||
MATIC contributed from portfolio rebalancing |
|
|
|
|
|
|
||
MATIC distributed for Manager’s Fee, related party |
|
|
( |
) |
|
|
( |
) |
Net change in unrealized depreciation on investment in MATIC |
|
|
|
|
|
( |
) |
|
Net realized gain on investment in MATIC |
|
|
|
|
|
|
||
MATIC balance at June 30, 2023 |
|
|
|
|
$ |
|
||
MATIC contributed |
|
|
|
|
|
|
||
MATIC contributed from portfolio rebalancing |
|
|
|
|
|
|
||
MATIC distributed for Manager’s Fee, related party |
|
|
( |
) |
|
|
( |
) |
Net change in unrealized appreciation on investment in MATIC |
|
|
|
|
|
|
||
Net realized loss on investment in MATIC |
|
|
|
|
|
( |
) |
|
MATIC balance at December 31, 2023 |
|
|
|
|
$ |
|
||
(Amounts in thousands, except AVAX amounts) |
|
Quantity |
|
|
Fair Value |
|
||
AVAX balance at June 30, 2022 |
|
|
|
|
$ |
|
||
AVAX contributed |
|
|
|
|
|
|
||
AVAX distributed from portfolio rebalancing |
|
|
( |
) |
|
|
( |
) |
AVAX distributed for Manager’s Fee, related party |
|
|
( |
) |
|
|
( |
) |
Net change in unrealized appreciation on investment in AVAX |
|
|
|
|
|
|
||
Net realized loss on investment in AVAX |
|
|
|
|
|
( |
) |
|
AVAX balance at June 30, 2023 |
|
|
|
|
$ |
|
||
(Amounts in thousands, except DOT amounts) |
|
Quantity |
|
|
Fair Value |
|
||
DOT balance at June 30, 2022 |
|
|
|
|
$ |
|
||
DOT contributed |
|
|
|
|
|
|
||
DOT distributed from portfolio rebalancing |
|
|
( |
) |
|
|
( |
) |
DOT distributed for Manager’s Fee, related party |
|
|
( |
) |
|
|
( |
) |
Net change in unrealized appreciation on investment in DOT |
|
|
|
|
|
|
||
Net realized loss on investment in DOT |
|
|
|
|
|
( |
) |
|
DOT balance at June 30, 2023 |
|
|
|
|
$ |
|
||
(Amounts in thousands, except LTC amounts) |
|
Quantity |
|
|
Fair Value |
|
||
LTC balance at June 30, 2022 |
|
|
|
|
$ |
|
||
LTC contributed |
|
|
|
|
|
|
||
LTC distributed from portfolio rebalancing |
|
|
( |
) |
|
|
( |
) |
LTC distributed for Manager’s Fee, related party |
|
|
( |
) |
|
|
( |
) |
Net change in unrealized appreciation on investment in LTC |
|
|
|
|
|
|
||
Net realized loss on investment in LTC |
|
|
|
|
|
( |
) |
|
LTC balance at June 30, 2023 |
|
|
|
|
$ |
|
||
13
(Amounts in thousands, except UNI amounts) |
|
Quantity |
|
|
Fair Value |
|
||
UNI balance at June 30, 2022 |
|
|
|
|
$ |
|
||
UNI contributed |
|
|
|
|
|
|
||
UNI distributed from portfolio rebalancing |
|
|
( |
) |
|
|
( |
) |
UNI distributed for Manager’s Fee, related party |
|
|
( |
) |
|
|
|
|
Net change in unrealized appreciation on investment in UNI |
|
|
|
|
|
|
||
Net realized loss on investment in UNI |
|
|
|
|
|
( |
) |
|
UNI balance at June 30, 2023 |
|
|
|
|
$ |
|
||
(Amounts in thousands, except LINK amounts) |
|
Quantity |
|
|
Fair Value |
|
||
LINK balance at June 30, 2022 |
|
|
|
|
$ |
|
||
LINK contributed |
|
|
|
|
|
|
||
LINK distributed from portfolio rebalancing |
|
|
( |
) |
|
|
( |
) |
LINK distributed for Manager’s Fee, related party |
|
|
( |
) |
|
|
( |
) |
Net change in unrealized appreciation on investment in LINK |
|
|
|
|
|
|
||
Net realized loss on investment in LINK |
|
|
|
|
|
( |
) |
|
LINK balance at June 30, 2023 |
|
|
|
|
$ |
|
||
(Amounts in thousands, except BCH amounts) |
|
Quantity |
|
|
Fair Value |
|
||
BCH balance at June 30, 2022 |
|
|
|
|
$ |
|
||
BCH contributed |
|
|
|
|
|
|
||
BCH distributed from portfolio rebalancing |
|
|
( |
) |
|
|
( |
) |
BCH distributed for Manager’s Fee, related party |
|
|
( |
) |
|
|
|
|
Net change in unrealized appreciation on investment in BCH |
|
|
|
|
|
|
||
Net realized loss on investment in BCH |
|
|
|
|
|
( |
) |
|
BCH balance at June 30, 2023 |
|
|
|
|
$ |
|
||
4. Distributions
When a proposed modification to the Ethereum Network is accepted by the vast majority of validators, miners and users but is nonetheless not accepted by an other than insignificant population of participants in the network, a “fork” in the blockchain occurs, resulting in two separate Ethereum Networks. Holders of ETH on the original Ethereum Network, at the time the block is mined and the fork occurs, may also receive an identical amount of new tokens on the new network.
Ethereum Fork on September 15, 2022 (ETHPoW)
Background and Measurement
The Ethereum Network completed the final stages of an upgrade referred to as the “Merge,” which is a stage of what was previously referred to as Ethereum 2.0, on September 15, 2022, and the Ethereum Network transitioned to a proof-of-stake model. Following the Merge, a hard fork of the Ethereum Network occurred, as certain ETH miners and network participants planned to maintain the proof-of-work consensus mechanism that was removed as part of the Merge. This version of the Ethereum Network was rebranded as Ethereum Proof-of-Work.
Immediately following the hard fork on September 15, 2022, holders of ETH passively received rights to an equal number of Ethereum Proof-of-Work tokens (“ETHPoW”) (referred to as a “right to the Forked Asset”). At that time, the Fund held approximately
Furthermore, on September 16, 2022, the Manager of the Fund announced that it had declared a distribution and established a record date for the distribution of the rights to the Forked Asset to the shareholders of record as of the close of business on September 26, 2022 (“Record Date Shareholders”).
Subsequent Measurement and Distribution of Rights to ETHPoW
On September 26, 2022 (the “Record Date”), the Fund distributed the rights to the Forked Asset to obtain approximately
14
blockchain is referred to as a “right to the Forked Asset” and any such ETHPoW acquired through such a right to the Forked Asset is referred to as the “Forked Asset.”
On the Record Date, the Fund, acting on behalf of the Record Date Shareholders and pursuant to the terms of the LLC Agreement governing the Fund, appointed Grayscale Investments, LLC as agent (in this capacity, the “Agent”) on behalf of the Record Date Shareholders and transferred the rights to the Forked Assets held by the Fund to the Agent on behalf of the Record Date Shareholders. The Fund has no ownership interest in the distributed rights to the Forked Assets, no ability to control the actions of the Agent and no right to receive any information about the rights to the Forked Assets or the disposition thereof or of the underlying Forked Assets from the Record Date Shareholders, their Agent or any other person. As of the Record Date, the Fund determined such rights to the Forked Assets to have a fair value of $
On September 18, 2023, the Agent announced that it irrevocably abandoned all of the rights to the Forked Assets. The Agent determined that the Custodian does not support the Forked Assets, nor have trading venues with meaningful liquidity developed for the Forked Assets. As such, it is not possible to exercise the rights to acquire and sell the Forked Assets, and on behalf of the Record Date Shareholders, the Agent abandoned the rights to the Forked Assets.
5. Portfolio Rebalancing
From inception through June 30, 2022, the Fund sought to hold digital assets with market capitalizations that collectively constituted at least
Effective July 1, 2022, the Manager replaced the Target Coverage Ratio Methodology as the fund construction criteria and no longer seeks to hold Fund Components meeting the Target Coverage Ratio. Instead, the Fund Components consist of the digital assets that make up the DLCS, as rebalanced from time to time, subject to the Manager’s discretion to exclude individual digital assets in certain cases. The DLCS is designed and managed by the Index Provider. The process followed by the Index Provider to determine the digital assets included in the DLCS and their respective weightings in the DLCS is referred to as the “DLCS Methodology.”
Effective July 1, 2022, the Index Provider reviews the DLCS for rebalancing according to the DLCS Methodology quarterly during a period beginning 14 days before the end of each March, June, September and December (each such period, an “Index Rebalancing Period”). At the start of each Index Rebalancing Period, the Index Provider applies the DLCS Methodology to determine any changes to the Index Components and the respective weightings of the Index Components within DLCS, as determined by the Index Provider based on market capitalization criteria (the “Index Weightings”), after which the Manager rebalances the Fund’s portfolio accordingly, subject to application of the Exclusion Criteria. In order to rebalance the Fund’s portfolio, the Manager will (i) determine whether any Fund Components have been removed from the DLCS and should therefore be removed as Fund Components, (ii) determine whether any new digital assets have been added to the DLCS and should therefore be included as Fund Components, and (iii) determine how much cash and Forked Assets the Fund holds. If a Fund Component is no longer included in the DLCS, the Manager will adjust the Fund’s portfolio by selling such Fund Component in the Digital Asset Markets in proportion to their respective weightings in the Fund (“Weightings”) and using the cash proceeds to purchase additional tokens of the remaining Fund Components and, if applicable, any new Fund Component in proportion to their respective Weightings. The Weightings of each Fund Component are generally expected to be the same as the weighting of each digital asset in the DLCS except when the Manager determines to exclude one or more digital assets included in the DLCS from the Fund Components. If a digital asset not then included in the Fund’s portfolio is newly eligible for inclusion in the Fund’s portfolio because it was added to the DLCS and not excluded through the Exclusion Criteria, the Manager will adjust the Fund’s portfolio by selling tokens of the then-current Fund Components in the Digital Asset Markets in proportion to their respective Weightings and using the cash proceeds to purchase tokens of the newly eligible digital assets.
The Manager will rebalance the Fund’s portfolio quarterly during a period beginning on the second business day of each January, April, July and October (each such period, a “Fund Rebalancing Period”). The Manager expects each Fund Rebalancing Period to last between and business days. The DLCS, and therefore the Fund, may also be rebalanced mid-quarter, prior to the Index Rebalancing Period under extraordinary circumstances, if, for example, a digital asset is removed from the Index.
On April 6, 2021, the Manager of the Fund announced the updated Fund Component weightings for the Fund in connection with its quarterly review. Effective April 2, 2021, the Manager adjusted the Fund’s portfolio by selling the existing Fund Components in proportion to their respective weightings and using the cash proceeds to purchase LINK in accordance with the Fund’s construction
15
criteria. On April 2, 2021, the Fund recognized a realized gain of $
On July 2, 2021, the Manager of the Fund announced the updated Fund Component weightings for the Fund in connection with its quarterly review. Effective July 1, 2021, the Manager adjusted the Fund’s portfolio by selling the existing Fund Components in proportion to their respective weightings and using the cash proceeds to purchase ADA in accordance with the Fund’s construction criteria. On July 1, 2021, the Fund recognized a realized gain of $
On October 1, 2021, the Manager of the Fund announced the updated Fund Component weightings for the Fund in connection with its quarterly review. The Manager adjusted the Fund’s portfolio by selling the existing Fund Components in proportion to their respective weightings and using the cash proceeds to purchase SOL and UNI in accordance with the Fund’s construction criteria. On October 1, 2021, the Fund recognized a realized gain of $
On April 5, 2022, the Manager of the Fund announced the updated Fund Component weightings for the Fund in connection with its quarterly review. The Manager adjusted the Fund’s portfolio by selling the existing Fund Components in proportion to their respective weightings and using the cash proceeds to purchase DOT and AVAX in accordance with the Fund’s construction criteria. On April 5, 2022, the Fund recognized a realized gain of $
Effective July 1, 2022, the Fund replaced the Target Coverage Ratio Methodology with the DLCS Methodology. The change in methodology resulted in the removal of BCH, LINK, LTC, DOT, and UNI in proportion to their respective weighing on July 7, 2022 following the quarterly Fund Rebalancing Period. On July 7, 2022, the Fund recognized a realized loss of $
On October 4, 2022, the Index Provider completed the quarterly rebalancing of the DLCS and determined that BTC, ETH, ADA, SOL, MATIC and AVAX met the inclusion criteria of the DLCS Index. On October 4, 2022, following the rebalancing of the Index, the Manager completed its quarterly review of the Fund’s portfolio and initiated the process of rebalancing the Fund. The Manager adjusted the Fund’s portfolio by selling the existing Fund Components in proportion to their respective Weightings and using the cash proceeds to purchase SOL, AVAX and MATIC. As a result, MATIC was added to the Fund. No tokens were removed from the Fund. On October 5, 2022, following the rebalancing, the Fund recognized a realized gain of $
On January 4, 2023, the Index Provider completed the quarterly rebalancing of the DLCS and determined that BTC, ETH, ADA, SOL and MATIC met the inclusion criteria of the DLCS Index, but AVAX did not. On January 4, 2023, following the rebalancing of the Index, the Manager completed its quarterly review of the Fund’s portfolio and initiated the process of rebalancing the Fund. The Manager adjusted the Fund’s portfolio by selling AVAX and using the cash proceeds to purchase certain amounts of the other existing Fund Components in proportion to their respective Weightings following the rebalancing. As a result of the rebalancing, AVAX was removed from the Fund. On January 5, 2023, following the rebalancing, the Fund recognized a realized loss of $
On April 4, 2023, the Index Provider completed the quarterly rebalancing of the DLCS and determined that BTC, ETH, ADA, SOL and MATIC met the inclusion criteria of the DLCS Index. On April 4, 2023, following the rebalancing of the Index, the Manager completed its quarterly review of the Fund’s portfolio and initiated the process of rebalancing the Fund. The Manager adjusted the Fund’s portfolio by purchasing and selling the existing Fund Components in proportion to their respective Weightings. No new tokens were added to or removed from the Fund. On April 5, 2023, following the rebalancing, the Fund recognized a realized gain of $
On July 5, 2023, the Index Provider completed the quarterly rebalancing of the DLCS and determined that BTC, ETH, ADA, SOL and MATIC met the inclusion criteria of the DLCS Index. On July 5, 2023, following the rebalancing of the Index, the Manager completed its quarterly review of the Fund’s portfolio and initiated the process of rebalancing the Fund. The Manager adjusted the Fund’s portfolio
16
by purchasing and selling the existing Fund Components in proportion to their respective Weightings. No new tokens were added to or removed from the Fund. On July 6, 2023, following the rebalancing, the Fund recognized a realized gain of $
On October 3, 2023, the Index Provider completed the quarterly rebalancing of the DLCS and determined that BTC, ETH, ADA, SOL and MATIC met the inclusion criteria of the DLCS Index. On October 3, 2023, following the rebalancing of the Index, the Manager completed its quarterly review of the Fund’s portfolio and initiated the process of rebalancing the Fund. The Manager adjusted the Fund’s portfolio by purchasing and selling the existing Fund Components in proportion to their respective Weightings. No new tokens were added to or removed from the Fund. On October 4, 2023, following the rebalancing, the Fund recognized a realized gain of $
6. Creations and Redemptions of Shares
At December 31, 2023 and June 30, 2023, there were an unlimited number of Shares authorized by the Fund. The Fund creates (and, should the Fund commence a redemption program, redeems) Shares from time to time, but only in one or more Baskets. The creation and redemption of Baskets on behalf of investors are made by the Authorized Participant in exchange for the delivery of tokens of each Fund Component to the Fund, or the distribution of tokens of each Fund Component by the Fund, plus cash representing the Forked Asset portion, if any, and the U.S. Dollar portion, if any. The number of tokens of each Fund Component required for each creation Basket or redemption Basket is determined by dividing (x) the total number of tokens of such Fund Component held by the Fund at 4:00 p.m., New York time, on such trade date of a creation or redemption order, after deducting the number of tokens of each Fund Component payable as the Manager’s Fee and the number of tokens of such Fund Component payable as a portion of Additional Fund Expenses (as defined in Note 7), by (y) the number of Shares outstanding at such time and multiplying the quotient obtained by 100. Each Share represented approximately
The cost basis of investments in each Fund Component recorded by the Fund is the fair value of each Fund Component, as determined by the Fund, at 4:00 p.m., New York time, on the date of transfer to the Fund by the Authorized Participant based on the creation Baskets. The cost basis recorded by the Fund may differ from proceeds collected by the Authorized Participant from the sale of each Share to investors. The Authorized Participant may realize significant profits buying, selling, creating, and, if permitted, redeeming Shares as a result of changes in the value of Shares or each Fund Component. In addition, the Authorized Participant may realize significant profits through the sale of digital assets during a Fund Rebalancing Period.
At this time, the Fund is not operating a redemption program and is not accepting redemption requests. Subject to receipt of regulatory approval and approval by the Manager in its sole discretion, the Fund may in the future operate a redemption program. The Fund currently has no intention of seeking regulatory approval to operate an ongoing redemption program. Further, the Fund is registered and regulated as a private fund under the Private Funds Act. The Cayman Islands Monetary Authority has supervisory and enforcement powers to ensure the Fund’s compliance with the Private Funds Act. Before the Fund is able to effect open redemptions as an open-ended Fund, it will be required to meet the requirements of, and register with, the Cayman Islands Monetary Authority and be regulated as a mutual fund under the Mutual Funds Law (As Revised) of the Cayman Islands.
7. Income Taxes
The Government of the Cayman Islands does not, and will not, under existing Cayman law, impose any income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding tax upon the Fund or the shareholders. Interest, dividends and gains payable to the Fund and all distributions by the Fund to shareholders will be received free of any Cayman Islands income or withholding taxes.
The Fund has elected to be treated as a corporation for U.S. federal income tax purposes. The Manager believes that the Fund will not be treated as engaged in a trade or business in the United States and thus will not derive income that is treated as “effectively connected” with the conduct of a trade or business in the United States (“effectively connected income”) under the U.S. Internal Revenue Code of 1986, as amended (the “Code”) and corresponding tax regulations (e.g., including under Sections 861 through 865). There can, however, be no complete assurance in this regard. If the Fund were treated as engaged in a trade or business in the United States, it would be subject to U.S. federal income tax, at the rates applicable to U.S. corporations (currently, at the rate of
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If the Fund were treated as engaged in a trade or business in the United States during any taxable year, it would be required to file a U.S. federal income tax return for that year, regardless of whether it recognized any effectively connected income. If the Fund did not file U.S. federal income tax returns and were later determined to have engaged in a U.S. trade or business, it would generally not be entitled to offset its effectively connected income and gains against its effectively connected losses and deductions (and, therefore, would be taxable on its gross, rather than net, effectively connected income). If the Fund recognizes any effectively connected income, the imposition of U.S. taxes on such income may have a substantial adverse effect on the return to shareholders.
Due to the new and evolving nature of digital assets and a general absence of clearly controlling authority with respect to digital assets, many significant aspects of the U.S. federal income tax treatment of digital assets (including with respect to the amount, timing, and character of income recognition) are uncertain. The Manager believes that, in general, gains and losses recognized by the Fund from the sale or other disposition of digital assets will be treated as capital gains or losses. However, it is possible that the IRS will not agree with the Fund’s U.S. federal tax treatment of digital assets.
In accordance with GAAP, the Fund has defined the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the applicable taxing authority and requires measurement of a tax position meeting the “more-likely-than-not” threshold, based on the largest benefit that is more than 50% likely to be realized. Tax positions not deemed to meet the “more-likely-than-not” threshold are recorded as a tax benefit or expense in the current period. As of and during the periods ended December 31, 2023 and June 30, 2023, the Fund did not have a liability for any unrecognized tax amounts. However, the Manager’s conclusions concerning its determination of “more likely than not” tax positions may be subject to review and adjustment at a later date based on factors including, but not limited to, further implementation guidance, and ongoing analyses of and changes to tax laws, regulations and interpretations thereof.
The Manager of the Fund has evaluated whether or not there are uncertain tax positions that require financial statement recognition and has determined that no reserves for uncertain tax positions related to federal, state and local income taxes existed as of December 31, 2023 or June 30, 2023.
8. Related Parties
The Fund considered the following entities, their directors and certain employees to be related parties of the Fund as of December 31, 2023: DCG, Genesis, Grayscale, and Grayscale Securities. As of both December 31, 2023 and June 30, 2023,
On November 20, 2023, it was announced that CoinDesk Indices, Inc., the Index Provider, previously an affiliate of the Manager and the Fund at the time of this event, was acquired by an unaffiliated third party. This transaction did not have any impact on the Fund, or disrupt the operations of the Fund.
The Manager’s parent, an affiliate of the Fund, holds a minority interest in Coinbase, Inc., the parent company of the Custodian, that represents less than
In accordance with the LLC Agreement governing the Fund, the Fund pays a fee to the Manager, calculated as
As partial consideration for receipt of the Manager’s Fee, the Manager shall assume and pay all fees and other expenses incurred by the Fund in the ordinary course of its affairs, excluding taxes, but including marketing fees; administrator fees, if any; custodian fees; transfer agent fees; trustee fees; the fees and expenses related to the listing, quotation or trading of the Shares on any secondary market (including customary legal, marketing and audit fees and expenses) in an amount up to $
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The Fund may incur certain extraordinary, non-recurring expenses that are not Manager-paid Expenses, including, but not limited to, taxes and governmental charges, expenses and costs of any extraordinary services performed by the Manager (or any other service provider) on behalf of the Fund to protect the Fund or the interests of shareholders (including in connection with any Forked Assets), any indemnification of the Custodian or other agents, service providers or counterparties of the Fund, the fees and expenses related to the listing, quotation or trading of the Shares on any secondary market (including legal, marketing and audit fees and expenses) to the extent exceeding $
For the three months ended December 31, 2023 and 2022, the Fund incurred Manager’s Fees of $
On March 2, 2022, the Board of the Manager (the “Board”) approved the purchase by DCG, the parent company of the Manager, of up to an aggregate total of $
9. Risks and Uncertainties
The Fund is subject to various risks including market risk, liquidity risk, and other risks related to its concentration in digital assets. Investing in digital assets is currently highly speculative and volatile.
The net asset value of the Fund, calculated by reference to the principal market prices, relates primarily to the value of the Fund Components, and fluctuations in the prices of such Fund Components could materially and adversely affect an investment in the Shares of the Fund. The prices of the Fund Components have a very limited history. During such history, the market prices of such Fund Components have been volatile and subject to influence by many factors, including the levels of liquidity. If the Digital Asset Markets continue to experience significant price fluctuations, the Fund may experience losses. Several factors may affect the market price of the Fund Components, including, but not limited to, global supply and demand of such Fund Components, theft of such Fund Components from global trading platforms or vaults, competition from other forms of digital assets or payment services, global or regional political, economic or financial conditions, and other unforeseen events and situations.
The digital asset networks relevant to the Fund Components are decentralized to an extent, meaning no single entity owns or operates them. Some digital asset networks, such as the BTC, ETH, SOL, ADA, and MATIC networks, are collectively maintained by a decentralized user base.
The Fund Components are commingled, and the Fund’s shareholders have no specific rights to any specific Fund Component. In the event of the insolvency of the Fund, its assets may be inadequate to satisfy a claim by its shareholders.
There is currently no clearing house for the Fund Components, nor is there a central or major depository for the custody of such Fund Components. There is a risk that some or all of the Fund Components could be lost or stolen. There can be no assurance that the Custodian will maintain adequate insurance or that such coverage will cover losses with respect to the Fund Components. Further, transactions in the Fund Components are irrevocable. Stolen or incorrectly transferred Fund Components may be irretrievable. As a result, any incorrectly executed Fund Component transactions could adversely affect an investment in the Shares.
The SEC has stated that certain digital assets may be considered “securities” under the federal securities laws. The test for determining whether a particular digital asset is a “security” is complex and difficult to apply, and the outcome is difficult to predict. Public, though non-binding, statements by senior officials at the SEC have indicated that the SEC did not consider Bitcoin or Ethereum to be securities,
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and does not currently consider Bitcoin to be a security. The SEC staff also provided informal assurances to a handful of promoters that their digital assets are not securities. On the other hand, the SEC has brought enforcement actions against the issuers and promoters of several other digital assets on the basis that the digital assets in question are securities.
Further, Ripple Labs, Inc. (“Ripple”), the company that retains a key role in stewarding the development of XRP, is currently a defendant in a federal class-action lawsuit filed by certain XRP holders that alleges that XRP is a security issued by Ripple. In addition, in 2020 the SEC filed a complaint against the issuer of XRP, Ripple Labs, Inc., and two of its executives, alleging that they raised more than $