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
SPONSORED 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.) |
(Address of Principal Executive Offices) (Zip Code)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Securities registered pursuant to Section 12(g) of the Act:
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 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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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 ☐
Number of Shares of the registrant outstanding as of May 2, 2022:
Grayscale® BITCOIN CASH Trust (BCH)
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 Bitcoin Cash Trust (BCH) (the “Trust”). 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 Trust’s operations, the plans of Grayscale Investments, LLC (the “Sponsor”) and references to the Trust’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 Sponsor 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 Sponsor’s expectations and predictions, however, is subject to a number of risks and uncertainties, including, but not limited to, those described in Part II, Item 1A. Risk Factors. Forward-looking statements are made based on the Sponsor’s beliefs, estimates and opinions on the date the statements are made and neither the Trust nor the Sponsor 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 Sponsor acting on behalf of the Trust.
A glossary of industry and other defined terms is included in this Quarterly Report, beginning on page 24.
This Quarterly Report supplements and where applicable amends the Memorandum, as defined in the Trust’s Amended and Restated Declaration of Trust and Trust 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 Bitcoin Cash 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” and “Risk Factors” in Exhibit 99.1 to Amendment No. 4 to the Trust’s Registration Statement on the Form 10 filed with the Securities and Exchange Commission on February 4, 2022 (the “Information Statement”).
3
PART I – FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
GRAYSCALE BITCOIN CASH TRUST (BCH)
STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
(Amounts in thousands, except Share and per Share amounts)
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March 31, 2022 |
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June 30, 2021 |
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Assets: |
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Investment in Bitcoin Cash, 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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Sponsor'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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Accumulated net investment loss |
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Accumulated net realized gain on investment in Bitcoin Cash |
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Accumulated net change in unrealized appreciation on investment in Bitcoin Cash |
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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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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 BITCOIN CASH TRUST (BCH)
SCHEDULES OF INVESTMENT (UNAUDITED)
(Amounts in thousands, except quantity of Bitcoin Cash and percentages)
March 31, 2022 |
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Quantity of |
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Cost |
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Fair Value |
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% of Net |
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Investment in Bitcoin Cash |
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$ |
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$ |
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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, 2021 |
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Quantity of |
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Cost |
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Fair Value |
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% of Net |
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Investment in Bitcoin Cash |
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$ |
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$ |
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% |
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Net assets |
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$ |
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$ |
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% |
See accompanying notes to the unaudited financial statements.
5
GRAYSCALE BITCOIN CASH TRUST (BCH)
STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands)
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Three Months Ended March 31, |
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Nine Months Ended March 31, |
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2022 |
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2021 |
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2022 |
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2021 |
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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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Sponsor's Fee, related party |
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Net investment loss |
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( |
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( |
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Net realized and unrealized (loss) gain from: |
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Net realized (loss) gain on investment in Bitcoin Cash |
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Net change in unrealized (depreciation) appreciation on investment in Bitcoin Cash |
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Net realized and unrealized (loss) gain on investment |
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Net (decrease) increase 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 BITCOIN CASH TRUST (BCH)
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
(Amounts in thousands, except change in Shares outstanding)
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Three Months Ended March 31, |
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Nine Months Ended March 31, |
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2022 |
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2021 |
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2022 |
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2021 |
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(Decrease) increase 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 (loss) gain on investment in Bitcoin Cash |
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( |
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Net change in unrealized (depreciation) appreciation on investment in Bitcoin Cash |
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Net (decrease) increase in net assets resulting from operations |
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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 (decrease) increase in net assets from operations and capital share transactions |
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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 BITCOIN CASH TRUST (BCH)
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
1. Organization
Grayscale Bitcoin Cash Trust (BCH) (the “Trust”) is a Delaware Statutory Trust that was formed on January 26, 2018 and commenced operations on March 1, 2018. In general, the Trust holds Bitcoin Cash (“BCH”) and, from time to time, issues common units of fractional undivided beneficial interest (“Shares”) (in minimum baskets of
Incidental Rights are rights to claim, or otherwise establish dominion and control over, any virtual currency or other asset or right, which rights are incident to the Trust’s ownership of BCH and arise without any action of the Trust, or of the Sponsor or Trustee on behalf of the Trust; IR Virtual Currency is any virtual currency tokens, or other asset or right, received by the Trust through the exercise (subject to the applicable provisions of the Trust Agreement) of any Incidental Right.
Grayscale Investments LLC (“Grayscale” or the “Sponsor”) acts as the Sponsor of the Trust and is a wholly owned subsidiary of Digital Currency Group, Inc. (“DCG”). The Sponsor is responsible for the day-to-day administration of the Trust pursuant to the provisions of the Trust Agreement. Grayscale is responsible for preparing and providing annual and quarterly reports on behalf of the Trust to investors and is also responsible for selecting and monitoring the Trust’s service providers. As partial consideration for the Sponsor’s services, the Trust pays Grayscale a Sponsor’s Fee as discussed in Note 6. The Sponsor also acts as the sponsor and manager of other investment products including Grayscale Basic Attention Token Trust (BAT), Grayscale Bitcoin Trust (BTC) (OTCQX: GBTC), Grayscale Chainlink Trust (LINK), Grayscale Decentraland Trust (MANA), Grayscale Ethereum Trust (ETH) (OTCQX: ETHE), Grayscale Ethereum Classic Trust (ETC) (OTCQX: ETCG), Grayscale Filecoin Trust (FIL), Grayscale Horizen Trust (ZEN) (OTCQX: HZEN), Grayscale Litecoin Trust (LTC) (OTCQX: LTCN), Grayscale Livepeer Trust (LPT), Grayscale Solana Trust (SOL), Grayscale Stellar Lumens Trust (XLM) (OTCQX: GXLM), Grayscale Zcash Trust (ZEC) (OTCQX: ZCSH), Grayscale Decentralized Finance (DeFi) Fund LLC, Grayscale Digital Large Cap Fund LLC (OTCQX: GDLC), and Grayscale Smart Contract Platform Ex Ethereum (ETH) Fund LLC, each of which is an affiliate of the Trust. The following investment products sponsored or managed by the Sponsor 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 Trust (BTC), Grayscale Ethereum Trust (ETH), Grayscale Ethereum Classic Trust (ETC), Grayscale Litecoin Trust (LTC), and Grayscale Digital Large Cap Fund LLC. Grayscale Advisors, LLC, a Registered Investment Advisor and an affiliate of the Sponsor, is the advisor to the Grayscale Future of Finance (NYSE: GFOF) product.
Authorized Participants of the Trust are the only entities who may place orders to create or, if permitted, redeem Baskets. Genesis Global Trading, Inc. (“Genesis” or the “Authorized Participant”), a registered broker-dealer and wholly owned subsidiary of DCG, is the only Authorized Participant and is party to a participant agreement with the Sponsor and the Trust. Additional Authorized Participants may be added at any time, subject to the discretion of the Sponsor.
The custodian of the Trust is Coinbase Custody Trust Company, LLC (the “Custodian”), a third-party service provider. The Custodian is responsible for safeguarding the BCH, Incidental Rights, and IR Virtual Currency held by the Trust, and holding the private key(s) that provide access to the Trust’s digital wallets and vaults.
The transfer agent for the Trust (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 Trust’s Shares which are primarily held in book-entry form.
2. Summary of Significant Accounting Policies
In the opinion of management of the Sponsor of the Trust, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position as of March 31, 2022 and June 30, 2021 and results of operations for the three and nine months ended March 31, 2022 and 2021 have been made. The results of operations for the periods presented are not necessarily indicative of
8
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, 2021 included in the Trust’s Information Statement.
The following is a summary of significant accounting policies followed by the Trust:
The financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The Trust 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 Trust uses fair value as its method of accounting for BCH in accordance with its classification as an investment company for accounting purposes. The Trust 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 Trust conducts its transactions in BCH, including receiving BCH for the creation of Shares and delivering BCH for the redemption of Shares and for the payment of the Sponsor’s Fee. At this time, the Trust is not accepting redemption requests from shareholders. Since its inception, the Trust has not held cash or cash equivalents.
Principal Market and Fair Value Determination
To determine which market is the Trust’s principal market (or in the absence of a principal market, the most advantageous market) for purposes of calculating the Trust’s net asset value (“NAV”), the Trust 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 BCH in a current sale, which assumes an orderly transaction between market participants on the measurement date. ASC 820-10 requires the Trust to assume that BCH 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 Trust only receives BCH from the Authorized Participant and does not itself transact on any Digital Asset Markets. Therefore, the Trust looks to the Authorized Participant when assessing entity-specific and market-based volume and level of activity for Digital Asset Markets. The Authorized Participant transacts in a Brokered Market, a Dealer Market, Principal-to-Principal Markets and Exchange Markets, each as defined in the FASB ASC Master Glossary (collectively, “Digital Asset Markets”). The Authorized Participant, as a related party of the Sponsor, provides information about the Digital Asset Markets on which it transacts to the Trust.
In determining which of the eligible Digital Asset Markets is the Trust’s principal market, the Trust reviews these criteria in the following order:
First, the Trust reviews a list of Digital Asset Markets and excludes any Digital Asset Markets that are non-accessible to the Trust and the Authorized Participant. The Trust or the Authorized Participant does not have access to Digital Asset Exchange Markets that do not have a BitLicense and has access only to non-Digital Asset Exchange Markets that the Authorized Participant 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.
Second, the Trust sorts the remaining Digital Asset Markets from high to low by entity-specific and market-based volume and level of activity of BCH traded on each Digital Asset Market in the trailing twelve months.
Third, the Trust then reviews intra-day 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 Trust 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 Trust, Exchange Markets have the greatest volume and level of activity for the asset. The Trust therefore looks to accessible Exchange Markets as opposed to the Brokered Market, Dealer Market and Principal-to-Principal Markets to determine its principal market. As a result of the analysis, an Exchange Market has been selected as the Trust’s principal market.
The Trust 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 Trust 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 Trust’s determination of its principal market.
9
The cost basis of the investment in BCH recorded by the Trust for financial reporting purposes is the fair value of BCH at the time of transfer. The cost basis recorded by the Trust may differ from proceeds collected by the Authorized Participant from the sale of the corresponding Shares to investors.
Investment Transactions and Revenue Recognition
The Trust considers investment transactions to be the receipt of BCH for Share creations and the delivery of BCH for Share redemptions or for payment of expenses in BCH. At this time, the Trust is not accepting redemption requests from shareholders. The Trust 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 Sponsor’s Fee in BCH.
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 Trust. Unobservable inputs reflect the Trust’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 Trust.
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Amount at |
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Fair Value Measurement Using |
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(Amounts in thousands) |
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Fair Value |
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Level 1 |
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Level 2 |
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Level 3 |
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March 31, 2022 |
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Assets |
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Investment in BCH |
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$ |
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$ |
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$ |
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$ |
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June 30, 2021 |
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Assets |
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Investment in BCH |
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$ |
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$ |
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$ |
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$ |
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3. Fair Value of Bitcoin Cash
BCH is held by the Custodian on behalf of the Trust and is carried at fair value. As of March 31, 2022 and June 30, 2021, the Trust held
The Trust determined the fair value per BCH to be $
10
The following represents the changes in quantity of BCH and the respective fair value:
(Amounts in thousands, except Bitcoin Cash amounts) |
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Bitcoin Cash |
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Fair Value |
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Balance at June 30, 2020 |
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$ |
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BCH contributed |
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BCH distributed for Sponsor's Fee, related party |
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Net change in unrealized appreciation on investment in BCH |
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Net realized gain on investment in BCH |
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Balance at June 30, 2021 |
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$ |
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BCH contributed |
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BCH distributed for Sponsor's Fee, related party |
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Net change in unrealized depreciation on investment in BCH |
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Net realized gain on investment in BCH |
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Balance at March 31, 2022 |
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$ |
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4. Creations and Redemptions of Shares
At March 31, 2022 and June 30, 2021, there were an unlimited number of Shares authorized by the Trust. The Trust creates (and, should the Trust 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 BCH to the Trust or the distribution of BCH by the Trust. The number of BCH required for each creation Basket or redemption Basket is determined by dividing (x) the number of BCH owned by the Trust at 4:00 p.m., New York time, on such trade date of a creation or redemption order, after deducting the number of BCH representing the U.S. dollar value of accrued but unpaid fees and expenses of the Trust, 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 BCH recorded by the Trust is the fair value of BCH, as determined by the Trust, at 4:00 p.m., New York time, on the date of transfer to the Trust by the Authorized Participant based on the creation Baskets. The cost basis recorded by the Trust 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 BCH.
At this time, the Trust is not operating a redemption program and is not accepting redemption requests. Subject to receipt of regulatory approval and approval by the Sponsor in its sole discretion, the Trust may in the future operate a redemption program. The Trust currently has no intention of seeking regulatory approval to operate an ongoing redemption program.
5. Income Taxes
The Sponsor takes the position that the Trust is properly treated as a grantor trust for U.S. federal income tax purposes. Assuming that the Trust is a grantor trust, the Trust will not be subject to U.S. federal income tax. Rather, if the Trust is a grantor trust, each beneficial owner of Shares will be treated as directly owning its pro rata Share of the Trust’s assets and a pro rata portion of the Trust’s income, gain, losses and deductions will “flow through” to each beneficial owner of Shares.
If the Trust were not properly classified as a grantor trust, the Trust might be classified as a partnership for U.S. federal income tax purposes. However, due to the uncertain treatment of digital assets, including forks, airdrops and similar occurrences for U.S. federal income tax purposes, there can be no assurance in this regard. If the Trust were classified as a partnership for U.S. federal income tax purposes, the tax consequences of owning Shares generally would not be materially different from the tax consequences described herein, although there might be certain differences, including with respect to timing. In addition, tax information reports provided to beneficial owners of Shares would be made in a different form. If the Trust were not classified as either a grantor trust or a partnership for U.S. federal income tax purposes, it would be classified as a corporation for such purposes. In that event, the Trust would be subject to entity-level U.S. federal income tax (currently at the rate of
In accordance with GAAP, the Trust 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 March 31, 2022 and June 30, 2021, the Trust did not have a liability for any unrecognized tax amounts. However, the
11
Sponsor’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 on-going analyses of and changes to tax laws, regulations and interpretations thereof.
The Sponsor of the Trust 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 March 31, 2022 or June 30, 2021.
6. Related Parties
The Trust considers the following entities, their directors, and employees to be related parties of the Trust: DCG, Genesis, Grayscale and CoinDesk Indices, Inc. As of March 31, 2022 and June 30, 2021,
The Sponsor’s parent, an affiliate of the Trust, holds a minority interest in Coinbase, Inc., the parent company of the Custodian, that represents less than
In accordance with the Trust Agreement governing the Trust, the Trust pays a fee to the Sponsor, calculated as
As partial consideration for receipt of the Sponsor’s Fee, the Sponsor is obligated under the Trust Agreement to assume and pay all fees and other expenses incurred by the Trust 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 $
The Trust may incur certain extraordinary, non-recurring expenses that are not Sponsor-paid Expenses, including, but not limited to, taxes and governmental charges, expenses and costs of any extraordinary services performed by the Sponsor (or any other service provider) on behalf of the Trust to protect the Trust or the interests of shareholders (including in connection with any Incidental Rights and any IR Virtual Currency), any indemnification of the Custodian or other agents, service providers or counterparties of the Trust, 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 March 31, 2022 and 2021, the Trust incurred Sponsor's Fees of $
On March 2, 2022, the Board of the Sponsor approved the purchase by DCG, the parent company of the Sponsor, of up to an aggregate total of $
12
authorization does not obligate DCG to acquire any specific number of Shares in any period, and may be expanded, extended, modified, or discontinued at any time.
7. Risks and Uncertainties
The Trust is subject to various risks including market risk, liquidity risk, and other risks related to its concentration in a single asset, BCH. Investing in BCH is currently highly speculative and volatile.
The net asset value of the Trust relates primarily to the value of BCH held by the Trust, and fluctuations in the price of BCH could materially and adversely affect an investment in the Shares of the Trust. The price of BCH has a limited history. During such history, BCH prices have been volatile and subject to influence by many factors, including the levels of liquidity. If Digital Asset Markets continue to experience significant price fluctuations, the Trust may experience losses. Several factors may affect the price of BCH, including, but not limited to, global BCH supply and demand, theft of BCH from global exchanges or vaults, competition from other forms of digital currency or payment services, global or regional political, economic or financial conditions, and other unforeseen events and situations.
The BCH held by the Trust are commingled and the Trust’s shareholders have no specific rights to any specific BCH. In the event of the insolvency of the Trust, its assets may be inadequate to satisfy a claim by its shareholders.
There is currently no clearing house for BCH, nor is there a central or major depository for the custody of BCH. There is a risk that some or all of the Trust’s BCH 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 Trust’s BCH. Further, transactions in BCH are irrevocable. Stolen or incorrectly transferred BCH may be irretrievable. As a result, any incorrectly executed BCH transactions could adversely affect an investment in the Shares.
The Securities and Exchange Commission (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, 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 promoters of several other digital assets on the basis that the digital assets in question are securities.
If BCH is determined to be a “security” under federal or state securities laws by the SEC or any other agency, or in a proceeding in a court of law or otherwise, it may have material adverse consequences for BCH. For example, it may become more difficult for BCH to be traded, cleared and custodied as compared to other digital assets that are not considered to be securities, which could, in turn, negatively affect the liquidity and general acceptance of BCH and cause users to migrate to other digital assets. As such, any determination that BCH is a security under federal or state securities laws may adversely affect the value of BCH and, as a result, an investment in the Shares.
To the extent that BCH is determined to be a security, the Trust and the Sponsor may also be subject to additional regulatory requirements, including those under the Investment Company Act of 1940, and the Sponsor may be required to register as an investment adviser under the Investment Advisers Act of 1940. If the Sponsor determines not to comply with such additional regulatory and registration requirements, the Sponsor will terminate the Trust. Any such termination could result in the liquidation of the Trust’s BCH at a time that is disadvantageous to shareholders.
To the extent a private key required to access a BCH address is lost, destroyed or otherwise compromised and no backup of the private keys are accessible, the Trust may be unable to access the BCH controlled by the private key and the private key will not be capable of being restored by the Bitcoin Cash Network. The processes by which BCH transactions are settled are dependent on the peer-to-peer network, and as such, the Trust is subject to operational risk. A risk also exists with respect to previously unknown technical vulnerabilities, which may adversely affect the value of BCH.
The Trust relies on third party service providers to perform certain functions essential to its operations. Any disruptions to the Trust’s or the Trust’s service providers’ business operations resulting from business restrictions, quarantines or restrictions on the ability of personnel to perform their jobs as a result of the COVID-19 pandemic could have an adverse impact on the Trust’s ability to access critical services and would be disruptive to the operation of the Trust.
13
8. Financial Highlights Per Share Performance
|
|
Three Months Ended March 31, |
|
|
Nine Months Ended March 31, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net asset value, beginning of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Net (decrease) increase in net assets from investment operations: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net investment loss |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net realized and unrealized (loss) gain |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Net (decrease) increase in net assets resulting from operations |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Net asset value, end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total return |
|
|
- |
% |
|
|
% |
|
|
- |
% |
|
|
% |
||
Ratios to average net assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net investment loss |
|
|
- |
% |
|
|
- |
% |
|
|
- |
% |
|
|
- |
% |
Expenses |
|
|
- |
% |
|
|
- |
% |
|
|
- |
% |
|
|
- |
% |
Ratios of net investment loss and expenses to average net assets have been annualized.
An individual shareholder’s return, ratios, and per Share performance may vary from those presented above based on the timing of Share transactions. The amount shown for a Share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the number of Shares issued in Creations occurring at an operational value derived from an operating metric as defined in the Trust Agreement.
Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period and assuming redemption on the last day of the period and has been annualized.
9. Indemnifications
In the normal course of business, the Trust enters into certain contracts that provide a variety of indemnities, including contracts with the Sponsor and affiliates of the Sponsor, DCG and its officers, directors, employees, subsidiaries and affiliates, and the Custodian as well as others relating to services provided to the Trust. The Trust’s maximum exposure under these and its other indemnities is unknown. However, no liabilities have arisen under these indemnities in the past and, while there can be no assurances in this regard, there is no expectation that any will occur in the future. Therefore, the Sponsor does not consider it necessary to record a liability in this regard.
10. Subsequent Events
As of the close of business on May 2, 2022 the fair value of BCH determined in accordance with the Trust’s accounting policy was $
There are no known events that have occurred that require disclosure other than that which has already been disclosed in these notes to the financial statements.
14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with, and is qualified in its entirety by reference to, our unaudited financial statements and related notes included elsewhere in this Quarterly Report, which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The following discussion may contain forward-looking statements based on assumptions we believe to be reasonable. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those set forth under Part II, Item 1A. Risk Factors in this Quarterly Report and under “Risk Factors” or the other sections of the Information Statement.
Trust Overview
The Trust is a passive entity that is managed and administered by the Sponsor and does not have any officers, directors or employees. The Trust holds BCH and, from time to time on a periodic basis, issues Creation Baskets in exchange for deposits of BCH. As a passive investment vehicle, the Trust’s investment objective is for the value of the Shares (based on BCH per Share) to reflect the value of BCH held by the Trust, determined by reference to the index price (the “Index Price”), of a BCH in U.S. dollars calculated by applying a weighting algorithm to the price and trading volume data for the immediately preceding 24-hour period as of 4:00 p.m. New York time derived from the selected digital asset exchanges that are reflected in the Index on such trade date, less the Trust’s expenses and other liabilities. To date, the Trust has not met its investment objective and the Shares quoted on OTCQX have not reflected the value of BCH held by the Trust, less the Trust’s expenses and other liabilities, but instead have traded at both premiums and discounts to such value, which at times have been substantial. The Trust is not managed like a business corporation or an active investment vehicle.
Critical Accounting Policies and Estimates
Investment Transactions and Revenue Recognition
The Trust considers investment transactions to be the receipt of BCH for Share creations and the delivery of BCH for Share redemptions or for payment of expenses in BCH. At this time, the Trust is not accepting redemption requests from shareholders. The Trust 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 Sponsor’s Fee in BCH.
Principal Market and Fair Value Determination
To determine which market is the Trust’s principal market (or in the absence of a principal market, the most advantageous market) for purposes of calculating the Trust’s NAV, the Trust follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 BCH in a current sale, which assumes an orderly transaction between market participants on the measurement date. ASC 820-10 requires the Trust to assume that BCH 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 Trust only receives BCH from the Authorized Participant and does not itself transact on any Digital Asset Markets. Therefore, the Trust looks to the Authorized Participant when assessing entity-specific and market-based volume and level of activity for Digital Asset Markets. The Authorized Participant transacts in a Brokered Market, a Dealer Market, Principal-to-Principal Markets and Exchange Markets, each as defined in the FASB ASC Master Glossary. The Authorized Participant, as a related party of the Sponsor, provides information about the Digital Asset Markets on which it transacts to the Trust. In determining which of the eligible Digital Asset Markets is the Trust’s principal market, the Trust reviews these criteria in the following order:
15
The Trust 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 Trust 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 Trust’s determination of its principal market.
The cost basis of the investment in BCH recorded by the Trust for financial reporting purposes is the fair value of BCH at the time of transfer. The cost basis recorded by the Trust may differ from proceeds collected by the Authorized Participant from the sale of the corresponding Shares to investors.
Investment Company Considerations
The Trust is an investment company for GAAP purposes and follows accounting and reporting guidance in accordance with the FASB ASC Topic 946, Financial Services – Investment Companies. The Trust uses fair value as its method of accounting for BCH in accordance with its classification as an investment company for accounting purposes. The Trust 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.
Review of Financial Results (unaudited)
Financial Highlights for the Three and Nine Months Ended March 31, 2022 and 2021
(All amounts in the following table and the subsequent paragraphs, except Share and per Share, BCH and price of BCH amounts, are in thousands)
|
|
Three Months Ended March 31, |
|
|
Nine Months Ended March 31, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Net realized and unrealized (loss) gain on investment in Bitcoin Cash |
|
$ |
(13,779 |
) |
|
$ |
44,210 |
|
|
$ |
(45,099 |
) |
|
$ |
61,344 |
|
Net (decrease) increase in net assets resulting from operations |
|
$ |
(14,425 |
) |
|
$ |
43,350 |
|
|
$ |
(47,980 |
) |
|
$ |
60,004 |
|
Net assets |
|
$ |
118,610 |
|
|
$ |
154,736 |
|
|
$ |
118,610 |
|
|
$ |
154,736 |
|
Net realized and unrealized loss on investment in BCH for the three months ended March 31, 2022 was ($13,779), which includes a realized loss of ($80) on the transfer of BCH to pay the Sponsor’s Fee and net change in unrealized depreciation on investment in BCH of ($13,699). Net realized and unrealized loss on investment in BCH for the period was driven by BCH price depreciation from $420.63 per BCH as of December 31, 2021 to $377.34 per BCH as of March 31, 2022. Net decrease in net assets resulting from operations was ($14,425) for the three months ended March 31, 2022, which consisted of the net realized and unrealized loss on investment in BCH, plus the Sponsor’s Fee of $646. Net assets decreased to $118,610 at March 31, 2022, a 11% decrease for the three-month period. The decrease in net assets resulted from the aforementioned BCH price depreciation and the withdrawal of approximately 1,944 BCH to pay the foregoing Sponsor’s Fee.
Net realized and unrealized gain on investment in BCH for the three months ended March 31, 2021 was $44,210, which includes a realized gain of $279 on the transfer of BCH to pay the Sponsor’s Fee and net change in unrealized appreciation on investment in BCH of $43,931. Net realized and unrealized gain on investment in BCH for the period was driven by BCH price appreciation from $341.98 per BCH as of December 31, 2020 to $526.01 per BCH as of March 31, 2021. Net increase in net assets resulting from operations was $43,350 for the three months ended March 31, 2021, which consisted of the net realized and unrealized gain on investment in BCH, less the Sponsor’s Fee of $860. Net assets increased to $154,736 at March 31, 2021, an 89% increase for the three-month period. The increase in net assets resulted from the aforementioned BCH price appreciation and the contribution of approximately 56,486 BCH with a value of $29,527 to the Trust in connection with Share creations during the period, partially offset by the withdrawal of approximately 1,684 BCH to pay the foregoing Sponsor’s Fee.
Net realized and unrealized loss on investment in BCH for the nine months ended March 31, 2022 was ($45,099), which includes a realized gain of $678 on the transfer of BCH to pay the Sponsor’s Fee and net change in unrealized depreciation on investment in
16
BCH of ($45,777). Net realized and unrealized loss on investment in BCH for the period was driven by BCH price depreciation from $520.99 per BCH as of June 30, 2021 to $377.34 per BCH as of March 31, 2022. Net decrease in net assets resulting from operations was ($47,980) for the nine months ended March 31, 2022, which consisted of the net realized and unrealized loss on investment in BCH, plus the Sponsor’s Fee of $2,881. Net assets decreased to $118,610 at March 31, 2022, a 24% decrease for the nine-month period. The decrease in net assets resulted from the aforementioned BCH price depreciation and the withdrawal of approximately 5,915 BCH to pay the foregoing Sponsor's Fee, partially offset by the contribution of approximately 21,840 BCH with a value of $11,124 to the Trust in connection with Share creations during the period.
Net realized and unrealized gain on investment in BCH for the nine months ended March 31, 2021 was $61,344, which includes a realized loss of ($161) on the transfer of BCH to pay the Sponsor’s Fee and net change in unrealized appreciation on investment in BCH of $61,505. Net realized and unrealized gain on investment in BCH for the period was driven by BCH price appreciation from $221.14 per BCH as of June 30, 2020 to $526.01 per BCH as of March 31, 2021. Net increase in net assets resulting from operations was $60,004 for the nine months ended March 31, 2021, which consisted of the net realized and unrealized gain on investment in BCH, less the Sponsor’s Fee of $1,340. Net assets increased to $154,736 at March 31, 2021, a 2,622% increase for the nine-month period. The increase in net assets resulted from the aforementioned BCH price appreciation and the contribution of approximately 271,941 BCH with a value of $89,047 to the Trust in connection with Share creations during the period, partially offset by the withdrawal of approximately 3,479 BCH to pay the foregoing Sponsor’s Fee.
Cash Resources and Liquidity
The Trust has not had a cash balance at any time since inception. When selling BCH, Incidental Rights and/or IR Virtual Currency in the Digital Asset Market to pay Additional Trust Expenses, the Sponsor endeavors to sell the exact number of BCH, Incidental Rights and/or IR Virtual Currency needed to pay expenses in order to minimize the Trust’s holdings of assets other than BCH. As a consequence, the Sponsor expects that the Trust will not record any cash flow from its operations and that its cash balance will be zero at the end of each reporting period. Furthermore, the Trust is not a party to any off-balance sheet arrangements.
In exchange for the Sponsor’s Fee, the Sponsor has agreed to assume most of the expenses incurred by the Trust. As a result, the only ordinary expense of the Trust during the periods covered by this Quarterly Report was the Sponsor’s Fee. The Trust is not aware of any trends, demands, conditions or events that are reasonably likely to result in material changes to its liquidity needs.
Selected Operating Data
|
|
Three Months Ended March 31, |
|
|
Nine Months Ended March 31, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Bitcoin Cash: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Opening balance |
|
|
316,275 |
|
|
|
239,368 |
|
|
|
298,406 |
|
|
|
25,708 |
|
Creations |
|
|
- |
|
|
|
56,486 |
|
|
|
21,840 |
|
|
|
271,941 |
|
Sponsor's Fee, related party |
|
|
(1,944 |
) |
|
|
(1,684 |
) |
|
|
(5,915 |
) |
|
|
(3,479 |
) |
Closing balance |
|
|
314,331 |
|
|
|
294,170 |
|
|
|
314,331 |
|
|
|
294,170 |
|
Accrued but unpaid Sponsor's Fee, related party |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net closing balance |
|
|
314,331 |
|
|
|
294,170 |
|
|
|
314,331 |
|
|
|
294,170 |
|
Number of Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Opening balance |
|
|
34,812,900 |
|
|
|
25,697,000 |
|
|
|
32,434,700 |
|
|
|
2,725,300 |
|
Creations |
|
|
- |
|
|
|
6,078,600 |
|
|
|
2,378,200 |
|
|
|
29,050,300 |
|
Closing balance |
|
|
34,812,900 |
|
|
|
31,775,600 |
|
|
|
34,812,900 |
|
|
|
31,775,600 |
|
|
|
As of March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Price of BCH on principal market (1) |
|
$ |
377.34 |
|
|
$ |
526.01 |
|
NAV per Share (2) |
|
$ |
3.41 |
|
|
$ |
4.87 |
|
Index Price (3) |
|
$ |
377.34 |
|
|
$ |
527.50 |
|
Digital Asset Holdings per Share using Index Price (3) |
|
$ |
3.41 |
|
|
$ |
4.88 |
|
17
For accounting purposes, the Trust reflects creations and the BCH receivable with respect to such creations on the date of receipt of a notification of a creation but does not issue Shares until the requisite number of BCH is received. At this time, the Trust is not accepting redemption requests from shareholders. Subject to receipt of regulatory approval from the SEC and approval by the Sponsor in its sole discretion, the Trust may in the future operate a redemption program. The Trust currently has no intention of seeking regulatory approval to operate an ongoing redemption program.
As of March 31, 2022, the Trust had a net closing balance with a value of $118,609,629, based on the Index Price (non-GAAP methodology). As of March 31, 2022, the Trust had a total market value of $118,609,629, based on the principal market (Coinbase Pro).
As of March 31, 2021, the Trust had a net closing balance with a total value of $155,174,680, based on the Index Price (non-GAAP methodology). As of March 31, 2021, the Trust had a total market value of $154,736,366, based on the principal market (Coinbase Pro).
Historical Digital Asset Holdings and BCH Prices
As movements in the price of BCH will directly affect the price of the Shares, investors should understand recent movements in the price of BCH. Investors, however, should also be aware that past movements in the BCH price are not indicators of future movements. Movements may be influenced by various factors, including, but not limited to, government regulation, security breaches experienced by service providers, as well as political and economic uncertainties around the world.
The following chart illustrates the movement in the Index Price, the Trust’s Digital Asset Holdings per Share based on the Index Price and the Trust’s NAV per Share as calculated in accordance with GAAP from March 1, 2018 (date of the first Creation Basket of the Trust) to March 31, 2022.
The following table illustrates the movements in the Index Price from the beginning of the Trust’s operations on March 1, 2018 to March 31, 2022. Since the beginning of the Trust’s operations, the Index Price has ranged from $76.92 to $1,714.45, with the straight average being $440.71. The Sponsor has not observed a material difference between the Index Price and average prices from the constituent Digital Asset Exchanges individually or as a group.
18
|
|
|
|
|
High |
|
Low |
|
|
|
|
|
|
|||||||||||
Period |
|
Average |
|
|
Index Price |
|
|
Date |
|
Index Price |
|
|
Date |
|
End of period |
|
|
Last business day |
|
|||||
March 1, 2018 (the first Creation Basket of the Trust) to March 31, 2018 |
|
$ |
1,013.93 |
|
|
$ |
1,295.40 |
|
|
3/1/2018 |
|
$ |
687.85 |
|
|
3/30/2018 |
|
$ |
699.12 |
|
|
$ |
738.55 |
|
Twelve months ended March 31, 2019 |
|
$ |
532.26 |
|
|
$ |
1,714.45 |
|
|
5/6/2018 |
|
$ |
76.92 |
|
|
12/15/2018 |
|
$ |
167.58 |
|
|
$ |
169.60 |
|
Twelve months ended March 31, 2020 |
|
$ |
303.33 |
|
|
$ |
504.57 |
|
|
6/26/2019 |
|
$ |
166.85 |
|
|
4/1/2019 |
|
$ |
220.30 |
|
|
$ |
220.30 |
|
Twelve months ended March 31, 2021 |
|
$ |
317.44 |
|
|
$ |
746.70 |
|
|
2/15/2021 |
|
$ |
208.33 |
|
|
9/23/2020 |
|
$ |
527.50 |
|
|
$ |
527.50 |
|
Twelve months ended March 31, 2022 |
|
$ |
561.48 |
|
|
$ |
1,465.90 |
|
|
5/6/2021 |
|
$ |
271.42 |
|
|
3/7/2022 |
|
$ |
377.34 |
|
|
$ |
377.34 |
|
March 1, 2018 (the first Creation Basket of the Trust) to March 31, 2022 |