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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2022

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______

Commission File Number 000-56308

 

Grayscale® Bitcoin Cash Trust (BCH)

SPONSORED BY GRAYSCALE INVESTMENTS, LLC

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

 

Delaware

82-6867376

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

c/o Grayscale Investments, LLC

290 Harbor Drive, 4th Floor

Stamford, Connecticut 06902

(Address of Principal Executive Offices) (Zip Code)

(212) 668-1427

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(g) of the Act:

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Grayscale Bitcoin Cash Trust (BCH) Shares

BCHG

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. Yes ☒ No ☐

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). Yes ☒ No ☐

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

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

 

 

 

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, 2023: 34,812,900

 

 


 

 

Grayscale® BITCOIN CASH Trust (BCH)

Table of Contents

 

 

 

Page

 

Forward-Looking Statements

3

 

 

 

 

Industry and Market Data

3

 

 

PART I – FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements (Unaudited)

4

 

 

 

 

Statements of Assets and Liabilities at December 31, 2022 and June 30, 2022

4

 

 

 

 

Schedules of Investment at December 31, 2022 and June 30, 2022

5

 

 

 

 

Statements of Operations for the Three and Six Months Ended December 31, 2022 and 2021

6

 

 

 

 

Statements of Changes in Net Assets for the Three and Six Months Ended December 31, 2022 and 2021

7

 

 

 

 

Notes to the Unaudited Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

22

 

 

 

Item 4.

Controls and Procedures

22

 

 

PART II – OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

23

 

 

 

Item 1A.

Risk Factors

23

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

 

 

 

Item 3.

Defaults Upon Senior Securities

25

 

 

 

Item 4.

Mine Safety Disclosures

25

 

 

 

Item 5.

Other Information

25

 

 

 

Item 6.

Exhibits

26

 

 

 

GLOSSARY OF DEFINED TERMS

27

 

 

SIGNATURES

31

 

 

 

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 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 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 27.

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 “Part I, Item 1A. Risk Factors” in the Annual Report on Form 10-K for the year ended June 30, 2022, filed with the Securities and Exchange Commission (the “SEC”) on September 1, 2022 (the “Annual Report”).

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)

 

 

 

December 31, 2022

 

 

June 30, 2022

 

Assets:

 

 

 

 

 

 

Investment in BCH, at fair value (cost $115,163 and $116,624 as of December 31, 2022 and June 30, 2022, respectively)

 

$

30,106

 

 

$

31,213

 

Total assets

 

$

30,106

 

 

$

31,213

 

Liabilities:

 

 

 

 

 

 

Sponsor's Fee payable, related party

 

$

-

 

 

$

-

 

Total liabilities

 

 

-

 

 

 

-

 

Net assets

 

$

30,106

 

 

$

31,213

 

Net Assets consists of:

 

 

 

 

 

 

Paid-in-capital

 

 

122,301

 

 

 

122,301

 

Accumulated net investment loss

 

 

(6,906

)

 

 

(6,452

)

Accumulated net realized (loss) gain on investment in BCH

 

 

(232

)

 

 

775

 

Accumulated net change in unrealized depreciation on investment in BCH

 

 

(85,057

)

 

 

(85,411

)

 

 

$

30,106

 

 

$

31,213

 

Shares issued and outstanding, no par value (unlimited Shares authorized)

 

 

34,812,900

 

 

 

34,812,900

 

Net asset value per Share

 

$

0.86

 

 

$

0.90

 

 

See accompanying notes to the unaudited financial statements.

4


 

GRAYSCALE BITCOIN CASH TRUST (BCH)

SCHEDULES OF INVESTMENT (UNAUDITED)

(Amounts in thousands, except quantity of BCH and percentages)

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quantity of
BCH

 

 

Cost

 

 

Fair Value

 

 

% of Net
Assets

 

Investment in BCH

 

 

308,465.51466494

 

 

$

115,163

 

 

$

30,106

 

 

 

100

%

Net assets

 

 

 

 

$

115,163

 

 

$

30,106

 

 

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quantity of
BCH

 

 

Cost

 

 

Fair Value

 

 

% of Net
Assets

 

Investment in BCH

 

 

312,377.75996478

 

 

$

116,624

 

 

$

31,213

 

 

 

100

%

Net assets

 

 

 

 

$

116,624

 

 

$

31,213

 

 

 

100

%

 

See accompanying notes to the unaudited financial statements.

5


 

GRAYSCALE BITCOIN CASH TRUST (BCH)

STATEMENTS OF OPERATIONS (UNAUDITED)

(Amounts in thousands)

 

 

 

Three Months Ended December 31,

 

 

Six Months Ended December 31,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Investment income:

 

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Sponsor's Fee, related party

 

 

214

 

 

 

1,109

 

 

 

454

 

 

 

2,235

 

Net investment loss

 

 

(214

)

 

 

(1,109

)

 

 

(454

)

 

 

(2,235

)

Net realized and unrealized loss from:

 

 

 

 

 

 

 

 

 

 

 

 

Net realized (loss) gain on investment in BCH

 

 

(515

)

 

 

363

 

 

 

(1,007

)

 

 

758

 

Net change in unrealized (depreciation) appreciation on investment in BCH

 

 

(7,213

)

 

 

(24,547

)

 

 

354

 

 

 

(32,078

)

Net realized and unrealized loss on investment

 

 

(7,728

)

 

 

(24,184

)

 

 

(653

)

 

 

(31,320

)

Net decrease in net assets resulting from operations

 

$

(7,942

)

 

$

(25,293

)

 

$

(1,107

)

 

$

(33,555

)

 

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)

 

 

 

Three Months Ended December 31,

 

 

Six Months Ended December 31,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Decrease in net assets from operations:

 

 

 

 

 

 

 

 

 

 

 

 

Net investment loss

 

$

(214

)

 

$

(1,109

)

 

$

(454

)

 

$

(2,235

)

Net realized (loss) gain on investment in BCH

 

 

(515

)

 

 

363

 

 

 

(1,007

)

 

 

758

 

Net change in unrealized (depreciation) appreciation on investment in BCH

 

 

(7,213

)

 

 

(24,547

)

 

 

354

 

 

 

(32,078

)

Net decrease in net assets resulting from operations

 

 

(7,942

)

 

 

(25,293

)

 

 

(1,107

)

 

 

(33,555

)

Increase in net assets from capital share transactions:

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,124

 

Net increase in net assets resulting from capital share transactions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,124

 

Total decrease in net assets from operations and capital share transactions

 

 

(7,942

)

 

 

(25,293

)

 

 

(1,107

)

 

 

(22,431

)

Net assets:

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

 

38,048

 

 

 

158,328

 

 

 

31,213

 

 

 

155,466

 

End of period

 

$

30,106

 

 

$

133,035

 

 

$

30,106

 

 

$

133,035

 

Change in Shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Shares outstanding at beginning of period

 

 

34,812,900

 

 

 

34,812,900

 

 

 

34,812,900

 

 

 

32,434,700

 

Shares issued

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,378,200

 

Net increase in Shares

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,378,200

 

Shares outstanding at end of period

 

 

34,812,900

 

 

 

34,812,900

 

 

 

34,812,900

 

 

 

34,812,900

 

 

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 100 Shares, referred to as “Baskets”) in exchange for BCH. The redemption of Shares is not currently contemplated and the Trust does not currently operate a redemption program. 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. 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, less the Trust’s expenses and other liabilities. The Trust may also receive Incidental Rights and/or IR Virtual Currency as a result of the Trust’s investment in BCH, in accordance with the terms of the Trust Agreement.

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) (OTCQB: GBAT), Grayscale Bitcoin Trust (BTC) (OTCQX: GBTC), 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), Grayscale Stellar Lumens Trust (XLM) (OTCQX: GXLM), Grayscale Zcash Trust (ZEC) (OTCQX: ZCSH), Grayscale Decentralized Finance (DeFi) Fund LLC (OTCQB: DEFG), 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 Horizen Trust (ZEN), Grayscale Litecoin Trust (LTC), Grayscale Stellar Lumens Trust (XLM), Grayscale Zcash Trust (ZEC), 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, in such capacity, an “Authorized Participant”), a registered broker-dealer and wholly owned subsidiary of DCG, was the only Authorized Participant prior to October 3, 2022 and was party to a participant agreement with the Sponsor and the Trust. Effective October 3, 2022, Grayscale Securities, LLC (“Grayscale Securities” or, in such capacity, an “Authorized Participant”), a registered broker-dealer and wholly owned subsidiary of the Sponsor, is the only Authorized Participant, and is party to a participant agreement with the Sponsor and the Trust. As a result, since October 3, 2022, Genesis has no longer acted as an Authorized Participant of the Trust, but serves as a Liquidity Provider to Grayscale Securities. Additional Authorized Participants may be added at any time, subject to the discretion of the Sponsor. The Authorized Participant(s) may engage additional Liquidity Providers at any time.

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.

On July 20, 2020, the Trust received notice that its Shares were qualified for public trading on the OTCQX U.S. Marketplace of the OTC Markets Group, Inc. (“OTCQX”). The Trust’s trading symbol on OTCQX is “BCHG” and the CUSIP number for its Shares is 38963P109.

8


 

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 December 31, 2022 and June 30, 2022 and results of operations for the three and six months ended December 31, 2022 and 2021 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, 2022 included in the Trust’s Annual Report on Form 10-K.

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 in connection with a creation order from the Authorized Participant (or its Liquidity Provider) and does not itself transact on any Digital Asset Markets. Therefore, the Trust looks to market-based volume and level of activity for Digital Asset Markets. The Trust, through its Authorized Participant(s), or a Liquidity Provider on behalf of the Authorized Participant(s), may transact 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”).

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 that follow anti-money laundering (“AML”) and know-your-customer (“KYC”) procedures, and non-Digital Asset Exchange Markets that the Trust 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 these Digital Asset Markets from high to low by 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 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 aforementioned 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

9


 

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 BCH received in connection with a creation order is recorded by the Trust at the fair value of BCH at 4:00 p.m., New York time, on the creation date for financial reporting purposes. 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:

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Trust has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, these valuations do not entail a significant degree of judgment.
Level 2 – Valuations based on quoted prices in markets that are not active or for which significant inputs are observable, either directly or indirectly.
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

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.

 

 

 

 

 

 

Fair Value Measurement Using

 

(Amounts in thousands)

 

Amount at
Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Investment in BCH

 

$

30,106

 

 

$

30,106

 

 

$

-

 

 

$

-

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Investment in BCH

 

$

31,213

 

 

$

31,213

 

 

$

-

 

 

$

-

 

 

3. Fair Value of BCH

BCH is held by the Custodian on behalf of the Trust and is carried at fair value. As of December 31, 2022 and June 30, 2022, the Trust held 308,465.51466494 and 312,377.75996478 BCH, respectively.

The Trust determined the fair value per BCH to be $97.60 and $99.92 on December 31, 2022 and June 30, 2022, respectively, using the price provided at 4:00 p.m., New York time, by the Digital Asset Exchange Market considered to be the Trust’s principal market (Coinbase Pro).

10


 

The following represents the changes in quantity of BCH and the respective fair value:

(Amounts in thousands, except BCH amounts)

 

Quantity

 

 

Fair Value

 

Balance at June 30, 2021

 

 

298,405.98055893

 

 

$

155,466

 

BCH contributed

 

 

21,839.80475225

 

 

 

11,124

 

BCH distributed for Sponsor's Fee, related party

 

 

(7,868.02534640

)

 

 

(3,330

)

Net change in unrealized depreciation on investment in BCH

 

 

-

 

 

 

(132,445

)

Net realized gain on investment in BCH

 

 

-

 

 

 

398

 

Balance at June 30, 2022

 

 

312,377.75996478

 

 

$

31,213

 

BCH contributed

 

 

-

 

 

 

-

 

BCH distributed for Sponsor's Fee, related party

 

 

(3,912.24529984

)

 

 

(454

)

Net change in unrealized appreciation on investment in BCH

 

 

-

 

 

 

354

 

Net realized loss on investment in BCH

 

 

-

 

 

 

(1,007

)

Balance at December 31, 2022

 

 

308,465.51466494

 

 

$

30,106

 

 

4. Creations and Redemptions of Shares

At December 31, 2022 and June 30, 2022, 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 0.0089 and 0.0090 of one BCH at December 31, 2022 and June 30, 2022, respectively. The decrease in the number of BCH represented by each Share is primarily a result of the periodic withdrawal of BCH to pay the Sponsor’s Fee.

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 21%) on its net taxable income and certain distributions made by the Trust to shareholders would be treated as taxable dividends to the extent of the Trust’s current and accumulated earnings and profits.

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 December 31, 2022 and June 30, 2022, 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 December 31, 2022 or June 30, 2022.

6. Related Parties

The Trust considers the following entities, their directors, and certain employees to be related parties of the Trust: DCG, Genesis, Grayscale, Grayscale Securities and CoinDesk Indices, Inc. As of both December 31, 2022 and June 30, 2022, 1,786,273 Shares of the Trust were held by related parties of the Trust.

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 1.0% of Coinbase, Inc.’s ownership.

In accordance with the Trust Agreement governing the Trust, the Trust pays a fee to the Sponsor, calculated as 2.5% of the aggregate value of the Trust’s assets, less its liabilities (which include any accrued but unpaid expenses up to, but excluding, the date of calculation), as calculated and published by the Sponsor or its delegates in the manner set forth in the Trust Agreement (the “Sponsor’s Fee”). The Sponsor’s Fee accrues daily in U.S. dollars and is payable in BCH, monthly in arrears. The amount of BCH payable in respect of each daily U.S. dollar accrual will be determined by reference to the same U.S. dollar value of BCH used to determine such accrual. For purposes of these financial statements, the U.S. dollar value of BCH is determined by reference to the Digital Asset Exchange Market that the Trust considers its principal market as of 4:00 p.m., New York time, on each valuation date. The Trust held no Incidental Rights or IR Virtual Currency as of December 31, 2022 and June 30, 2022. No Incidental Rights or IR Virtual Currencies have been distributed in payment of the Sponsor’s Fee during the three and six months ended December 31, 2022 and 2021.

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 $600,000 in any given fiscal year; ordinary course legal fees and expenses; audit fees; regulatory fees, including, if applicable, any fees relating to the registration of the Shares under the Securities Act or the Exchange Act; printing and mailing costs; the costs of maintaining the Trust’s website and applicable license fees (the “Sponsor-paid Expenses”).

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 $600,000 in any given fiscal year and extraordinary legal fees and expenses, including any legal fees and expenses incurred in connection with litigation, regulatory enforcement or investigation matters (collectively “Additional Trust Expenses”). In such circumstances, the Sponsor or its delegate (i) will instruct the Custodian to withdraw from the Digital Asset Account BCH, Incidental Rights and/or IR Virtual Currency in such quantity as may be necessary to permit payment of such Additional Trust Expenses and (ii) may either (x) cause the Trust (or its delegate) to convert such BCH, Incidental Rights and/or IR Virtual Currency into U.S. dollars or other fiat currencies at the Actual Exchange Rate or (y) when the Sponsor incurs such expenses on behalf of the Trust, cause the Trust (or its delegate) to deliver such BCH, Incidental Rights and/or IR Virtual Currency in kind to the Sponsor in satisfaction of such Additional Trust Expenses.

For the three months ended December 31, 2022 and 2021, the Trust incurred Sponsor’s Fees of $213,026 and $1,109,385, respectively. For the six months ended December 31, 2022 and 2021, the Trust incurred Sponsor’s Fees of $453,240 and $2,234,895, respectively. As of December 31, 2022 and June 30, 2022, there were no accrued and unpaid Sponsor’s Fees. In addition, the Sponsor may pay Additional Trust Expenses on behalf of the Trust, which are reimbursable by the Trust to the Sponsor. For the three and six months ended December 31, 2022 and 2021, the Sponsor did not pay any Additional Trust Expenses on behalf of the Trust.

On March 2, 2022, the Board of the Sponsor (the “Board”) approved the purchase by DCG, the parent company of the Sponsor, of up to an aggregate total of $200 million worth of Shares of the Trust and shares of any of the following five investment products the Sponsor also acts as the sponsor and manager of, including Grayscale Bitcoin Trust (BTC) (OTCQX: GBTC), Grayscale Digital Large Cap Fund LLC (OTCQX: GDLC), Grayscale Ethereum Trust (ETH) (OTCQX: ETHE), Grayscale Ethereum Classic Trust (ETC) (OTCQX:

12


 

ETCG), and Grayscale Stellar Lumens Trust (XLM) (OTCQX: GXLM). Subsequently, DCG authorized such purchase. The Share purchase 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. From March 2, 2022 through December 31, 2022, DCG did not purchase any Shares of the Trust under this authorization.

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 has 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.

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 service providers’ business operations, resulting from business failures, financial instability, security failures, government mandated regulation or operational problems could have an adverse impact on the Trust’s ability to access critical services and be disruptive to the operations of the Trust.

13


 

8. Financial Highlights Per Share Performance

 

 

 

Three Months Ended December 31,

 

 

Six Months Ended December 31,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

Net asset value, beginning of period

 

$

1.09

 

 

$

4.55

 

 

$

0.90

 

 

$

4.79

 

Net decrease in net assets from investment operations:

 

 

 

 

 

 

 

 

 

 

 

 

Net investment loss

 

 

(0.01

)

 

 

(0.03

)

 

 

(0.01

)

 

 

(0.06

)

Net realized and unrealized loss

 

 

(0.22

)

 

 

(0.70

)

 

 

(0.03

)

 

 

(0.91

)

Net decrease in net assets resulting from operations

 

 

(0.23

)

 

 

(0.73

)

 

 

(0.04

)

 

 

(0.97

)

Net asset value, end of period

 

$

0.86

 

 

$

3.82

 

 

$

0.86

 

 

$

3.82

 

Total return

 

 

-21.10

%

 

 

-16.04

%

 

 

-4.44

%

 

 

-20.25

%

Ratios to average net assets:

 

 

 

 

 

 

 

 

 

 

 

 

Net investment loss

 

 

-2.50

%

 

 

-2.50

%

 

 

-2.50

%

 

 

-2.50

%

Expenses

 

 

-2.50

%

 

 

-2.50

%

 

 

-2.50

%

 

 

-2.50

%

 

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.

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 February 2, 2023, the fair value of BCH determined in accordance with the Trust’s accounting policy was $139.72 per BCH.

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 or in “Part I, Item 1A. Risk Factors” and “Forward-Looking Statements” or other sections of our Annual Report on Form 10-K for the year ended June 30, 2022.

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, 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 net asset value (“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.

Effective October 3, 2022, the Sponsor entered into a Participant Agreement with Grayscale Securities, a wholly owned subsidiary of the Sponsor and an affiliate and related party of the Trust, pursuant to which Grayscale Securities has agreed to act as an Authorized Participant of the Trust. The Participant Agreement provides the procedures for the creation of Shares of the Trust through the Authorized Participant, which are substantially similar to the procedures for the creation of Shares set forth in the Trust’s prior participant agreement with Genesis, except that the Authorized Participant may engage a Liquidity Provider to source BCH on behalf of the Authorized Participant in connection with the creation of Shares. Since October 3, 2022, Grayscale Securities is the only acting Authorized Participant of the Trust. Grayscale Securities has engaged Genesis as a Liquidity Provider. Additional Authorized Participants may be added at any time, subject to the discretion of the Sponsor.

The Trust only receives BCH in connection with a creation order from the Authorized Participant (or its Liquidity Provider) and does not itself transact on any Digital Asset Markets. Therefore, the Trust looks to market-based volume and level of activity for Digital Asset Markets. The Trust, through its Authorized Participant(s), or a Liquidity Provider on behalf of the Authorized Participant(s), may transact in a Brokered Market, a Dealer Market, Principal-to-Principal Markets and Exchange Markets, each as defined in the FASB ASC Master Glossary. 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 that follow anti-money laundering (“AML”) and know-your-customer (“KYC”) procedures, and non-Digital Asset Exchange Markets that the Trust 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.

15


 

Second, the Trust sorts these Digital Asset Markets from high to low by market-based volume and activity of BCH traded on each Digital Asset Market in the trailing twelve months.
Third, the Trust 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 Trust then selects a Digital Asset Market as its principal market based on the highest market volume, 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 aforementioned 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.

The cost basis of BCH received in connection with a creation order is recorded by the Trust at the fair value of BCH at 4:00 p.m., New York time, on the creation date for financial reporting purposes. 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 Six Months Ended December 31, 2022 and 2021

(All amounts in the following table and the subsequent paragraphs, except Share, per Share, BCH and price of BCH amounts, are in thousands)

 

 

Three Months Ended December 31,

 

 

Six Months Ended December 31,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net realized and unrealized loss on investment in BCH

 

$

(7,728

)

 

$

(24,184

)

 

$

(653

)

 

$

(31,320

)

Net decrease in net assets resulting from operations

 

$

(7,942

)

 

$

(25,293

)

 

$

(1,107

)

 

$

(33,555

)

Net assets

 

$

30,106

 

 

$

133,035

 

 

$

30,106

 

 

$

133,035

 

Net realized and unrealized loss on investment in BCH for the three months ended December 31, 2022 was ($7,728), which includes a realized loss of ($515) on the transfer of BCH to pay the Sponsor’s Fee and net change in unrealized depreciation on investment in BCH of ($7,213). Net realized and unrealized loss on investment in BCH for the period was driven by BCH price depreciation from $122.57 per BCH as of September 30, 2022 to $97.60 per BCH as of December 31, 2022. Net decrease in net assets resulting from operations was ($7,942) for the three months ended December 31, 2022, which consisted of the net realized and unrealized loss on investment in BCH, plus the Sponsor’s Fee of $214. Net assets decreased to $30,106 at December 31, 2022, a 21% decrease for the three-month period. The decrease in net assets resulted from the aforementioned BCH price depreciation and the withdrawal of approximately 1,949 BCH to pay the foregoing Sponsor’s Fee.

Net realized and unrealized loss on investment in BCH for the three months ended December 31, 2021 was ($24,184), which includes a realized gain of $363 on the transfer of BCH to pay the Sponsor’s Fee and net change in unrealized depreciation on investment in BCH of ($24,547). Net realized and unrealized loss on investment in BCH for the period was driven by BCH price depreciation from $497.46 per BCH as of September 30, 2021 to $420.63 per BCH as of December 31, 2021. Net decrease in net assets resulting from operations was ($25,293) for the three months ended December 31, 2021, which consisted of the net realized and unrealized loss on investment in BCH, plus the Sponsor’s Fee of $1,109. Net assets decreased to $133,035 at December 31, 2021, a 16% decrease for the

16


 

three-month period. The decrease in net assets resulted from the aforementioned BCH price depreciation and the withdrawal of approximately 1,999 BCH to pay the foregoing Sponsor’s Fee.

Net realized and unrealized loss on investment in BCH for the six months ended December 31, 2022 was ($653), which includes a realized loss of ($1,007) on the transfer of BCH to pay the Sponsor’s Fee and net change in unrealized appreciation on investment in BCH of $354. Net realized and unrealized loss on investment in BCH for the period was driven by BCH price depreciation from $99.92 per BCH as of June 30, 2022 to $97.60 per BCH as of December 31, 2022. Net decrease in net assets resulting from operations was ($1,107) for the six months ended December 31, 2022, which consisted of the net realized and unrealized loss on investment in BCH, plus the Sponsor’s Fee of $454. Net assets decreased to $30,106 at December 31, 2022, a 4% decrease for the period. The decrease in net assets resulted from the aforementioned BCH price depreciation and the withdrawal of approximately 3,912 BCH to pay the foregoing Sponsor’s Fee.

Net realized and unrealized loss on investment in BCH for the six months ended December 31, 2021 was ($31,320), which includes a realized gain of $758 on the transfer of BCH to pay the Sponsor’s Fee and net change in unrealized depreciation on investment in BCH of ($32,078). 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 $420.63 per BCH as of December 31, 2021. Net decrease in net assets resulting from operations was ($33,555) for the six months ended December 31, 2021, which consisted of the net realized and unrealized loss on investment in BCH, plus the Sponsor’s Fee of $2,235. Net assets decreased to $133,035 at December 31, 2021, a 14% decrease for the period. The decrease in net assets resulted from aforementioned BCH price depreciation and the withdrawal of approximately 3,971 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.

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 on behalf of the Trust, 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 December 31,

 

 

Six Months Ended December 31,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(All BCH balances are rounded to the nearest whole BCH)

 

Bitcoin Cash:

 

 

 

 

 

 

 

 

 

 

 

 

Opening balance

 

 

310,415

 

 

 

318,274

 

 

 

312,378

 

 

 

298,406

 

Creations

 

 

-

 

 

 

-

 

 

 

-

 

 

 

21,840

 

Sponsor's Fee, related party

 

 

(1,949

)

 

 

(1,999

)

 

 

(3,912

)

 

 

(3,971

)

Closing balance

 

 

308,466

 

 

 

316,275

 

 

 

308,466

 

 

 

316,275

 

Accrued but unpaid Sponsor's Fee, related party

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net closing balance

 

 

308,466

 

 

 

316,275

 

 

 

308,466

 

 

 

316,275

 

Number of Shares:

 

 

 

 

 

 

 

 

 

 

 

 

Opening balance

 

 

34,812,900

 

 

 

34,812,900

 

 

 

34,812,900

 

 

 

32,434,700

 

Creations

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,378,200

 

Closing balance

 

 

34,812,900

 

 

 

34,812,900

 

 

 

34,812,900

 

 

 

34,812,900

 

 

 

 

As of December 31,

 

 

 

2022

 

 

2021

 

Price of BCH on principal market(1)

 

$

97.60

 

 

$

420.63

 

NAV per Share(2)

 

$

0.86

 

 

$

3.82

 

Index Price

 

$

97.57

 

 

$

420.55

 

Digital Asset Holdings per Share(3)

 

$

0.86

 

 

$

3.82

 

 

17


 

 

(1)
The Trust performed an assessment of the principal market at December 31, 2022 and 2021, and identified the principal market as Coinbase Pro.
(2)
As of December 31, 2022 and 2021 the NAV per Share was calculated using the fair value of BCH based on the price provided by Coinbase Pro, the Digital Asset Exchange that the Trust currently considers its principal market, as of 4:00 p.m., New York time, on the valuation date.
(3)
The Trust’s Digital Asset Holdings per Share is derived from the Index Price as represented by the Index as of 4:00 p.m., New York time, on the valuation date. The Trust’s Digital Asset Holdings per Share is calculated using a non-GAAP methodology where the price is derived from multiple Digital Asset Exchanges. See “Item 1. Business—Overview of the BCH Industry and Market—BCH Value—The Index and the Index Price” in the Trust’s Annual Report on Form 10-K for a description of the Index and the Index Price. Effective November 10, 2022, the Index Provider removed FTX.US from the Index due to FTX’s announcement that trading on the exchange may be halted, which would impact FTX’s ability to reliably publish trade prices and volumes on a real-time basis through APIs, and did not add any Constituent Exchanges as part of its review. The Digital Asset Exchanges used to calculate the Index Price as of December 31, 2022 and 2021 were Coinbase Pro, Bitstamp, Kraken, and LMAX Digital. Effective January 28, 2023, the Index Provider removed LMAX Digital from the Index due to the exchange failing the minimum liquidity requirement, and added Cboe Digital as a Constituent Exchange due to the exchange meeting the minimum liquidity requirement as part of its scheduled quarterly review. See “Item 1. Business—Valuation of BCH and Determination of the Trust’s Digital Asset Holdings” in the Trust’s Annual Report on Form 10-K for a description of the Trust’s Digital Asset Holdings per Share.

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 December 31, 2022, the Trust had a net closing balance with a value of $30,096,980, based on the Index Price (non-GAAP methodology). As of December 31, 2022, the Trust had a total market value of $30,106,234, based on the principal market (Coinbase Pro).

As of December 31, 2021, the Trust had a net closing balance with a total value of $133,009,294, based on the Index Price (non-GAAP methodology). As of December 31, 2021, the Trust had a total market value of $133,034,596, 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.

18


 

The following chart illustrates the movement in the Trust’s Digital Asset Holdings per Share versus the Index Price and the Trust’s NAV per Share from March 1, 2018 to December 31, 2022.

img195552362_0.jpg 

The following table illustrates the movements in the Index Price from the beginning of the Trust’s operations on March 1, 2018 to December 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 $396.00 through December 31, 2022. 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.

 

 

 

 

 

High

 

Low

 

 

 

 

 

 

Period

 

Average

 

 

Index Price

 

 

Date

 

Index Price

 

 

Date

 

End of period

 

 

Last business day

 

March 1, 2018 (the inception of the Trust's operations) to December 31, 2018

 

$

697.55

 

 

$

1,714.45

 

 

5/6/2018

 

$

76.92