10-Q 1 gdlc-20220331.htm 10-Q 10-Q
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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 March 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 000-56284

 

Grayscale® Digital Large Cap Fund LLC

MANAGED BY GRAYSCALE INVESTMENTS, LLC

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

Cayman Islands

98-1406784

(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(b) of the Act: None

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

N/A

N/A

N/A

Securities registered pursuant to Section 12(g) of the Act: Grayscale Digital Large Cap Fund LLC Shares

 

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 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 May 2, 2022: 15,867,400

 

 


 

 

Grayscale® Digital large Cap Fund LLC

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 March 31, 2022 and June 30, 2021

4

 

 

 

 

Schedules of Investments at March 31, 2022 and June 30, 2021

5

 

 

 

 

Statements of Operations for the Three and Nine Months Ended March 31, 2022 and 2021

6

 

 

 

 

Statements of Changes in Net Assets for the Three and Nine Months Ended March 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

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

 

 

 

Item 4.

Controls and Procedures

31

 

 

PART II – OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

32

 

 

 

Item 1A.

Risk Factors

32

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

Item 3.

Defaults Upon Senior Securities

32

 

 

 

Item 4.

Mine Safety Disclosures

32

 

 

 

Item 5.

Other Information

32

 

 

 

Item 6.

Exhibits

33

 

 

 

GLOSSARY OF DEFINED TERMS

34

 

 

SIGNATURES

39

 

 

 

2


 

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” with respect to the financial conditions, results of operations, plans, objectives, future performance and business of Grayscale Digital Large Cap Fund LLC (the “Fund”). Statements preceded by, followed by or that include words such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of these terms and other similar expressions are intended to identify some of the forward-looking statements. All statements (other than statements of historical fact) included in this Quarterly Report that address activities, events or developments that will or may occur in the future, including such matters as changes in market prices and conditions, the Fund’s operations, the plans of Grayscale Investments, LLC (the “Manager”) and references to the Fund’s future success and other similar matters are forward-looking statements. These statements are only predictions. Actual events or results may differ materially from such statements. These statements are based upon certain assumptions and analyses the Manager made based on its perception of historical trends, current conditions and expected future developments, as well as other factors appropriate in the circumstances. Whether or not actual results and developments will conform to the Manager’s expectations and predictions, however, is subject to a number of risks and uncertainties, including, but not limited to, those described in Part II, Item 1A. Risk Factors. Forward-looking statements are made based on the Manager’s beliefs, estimates and opinions on the date the statements are made and neither the Fund nor the Manager is under a duty or undertakes an obligation to update forward-looking statements if these beliefs, estimates and opinions or other circumstances should change, other than as required by applicable laws. Investors are therefore cautioned against relying on forward-looking statements.

Unless otherwise stated or the context otherwise requires, the terms “we,” “our” and “us” in this Quarterly Report refer to the Manager acting on behalf of the Fund.

A glossary of industry and other defined terms is included in this Quarterly Report, beginning on page 34.

This Quarterly Report supplements, and where applicable amends, the Memorandum, as defined in the Fund’s Second Amended and Restated Limited Liability Company Agreement, for general purposes.

Industry and Market Data

Although we are responsible for all disclosure contained in this Quarterly Report on Form 10-Q, in some cases we have relied on certain market and industry data obtained from third-party sources that we believe to be reliable. Market estimates are calculated by using independent industry publications in conjunction with our assumptions regarding the digital asset industry and market. While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the headings “Forward-Looking Statements” and "Risk Factors" in Exhibit 99.1 to Amendment No. 5 to the Fund's Registration 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 Digital Large Cap Fund LLC

STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)

(Amounts in thousands, except Share and per Share amounts)

 

 

 

March 31, 2022

 

 

June 30, 2021

 

Assets:

 

 

 

 

 

 

Investments in digital assets, at fair value (cost $137,466 and $112,405 as of March 31, 2022 and June 30, 2021, respectively)

 

$

468,890

 

 

$

367,308

 

Total assets

 

$

468,890

 

 

$

367,308

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Manager's Fee payable, related party

 

$

-

 

 

$

-

 

Total liabilities

 

 

-

 

 

 

-

 

Net assets

 

$

468,890

 

 

$

367,308

 

 

 

 

 

 

 

 

Net Assets consists of:

 

 

 

 

 

 

Paid-in-capital

 

$

114,568

 

 

$

113,633

 

Accumulated net investment loss

 

 

(17,389

)

 

 

(8,173

)

Accumulated net realized gain on investments in digital assets

 

 

40,287

 

 

 

6,945

 

Accumulated net change in unrealized appreciation on investments in digital assets

 

 

331,424

 

 

 

254,903

 

 

 

$

468,890

 

 

$

367,308

 

 

 

 

 

 

 

 

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

 

 

15,867,400

 

 

 

15,837,800

 

 

 

 

 

 

 

 

Net asset value per Share

 

$

29.55

 

 

$

23.19

 

 

See accompanying notes to the unaudited financial statements.

4


 

GRAYSCALE Digital Large Cap Fund LLC

SCHEDULES OF INVESTMENTs (UNAUDITED)

(Amounts in thousands, except quantity of each Fund Component and percentages)

 

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quantity

 

 

Cost

 

 

Fair Value

 

 

% of Net Assets

 

Investment in Bitcoin

 

 

6,569.60448350

 

 

$

74,357

 

 

$

299,545

 

 

 

63.88

%

Investment in Ethereum

 

 

40,405.53834439

 

 

 

18,499

 

 

 

132,699

 

 

 

28.30

%

Investment in Solana

 

 

104,701.94598531

 

 

 

14,580

 

 

 

12,875

 

 

 

2.76

%

Investment in Cardano

 

 

11,456,777.36729540

 

 

 

16,218

 

 

 

13,175

 

 

 

2.81

%

Investment in Uniswap

 

 

210,689.29296703

 

 

 

4,823

 

 

 

2,366

 

 

 

0.50

%

Investment in Litecoin

 

 

23,719.37019487

 

 

 

1,786

 

 

 

2,947

 

 

 

0.63

%

Investment in Chainlink

 

 

159,381.12210823

 

 

 

4,705

 

 

 

2,687

 

 

 

0.57

%

Investment in Bitcoin Cash

 

 

6,879.79457409

 

 

 

2,498

 

 

 

2,596

 

 

 

0.55

%

Net assets

 

 

 

 

$

137,466

 

 

$

468,890

 

 

 

100.00

%

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quantity

 

 

Cost

 

 

Fair Value

 

 

% of Net Assets

 

Investment in Bitcoin

 

 

7,340.02142854

 

 

$

82,598

 

 

$

255,175

 

 

 

69.47

%

Investment in Ethereum

 

 

45,287.78133655

 

 

 

20,499

 

 

 

101,625

 

 

 

27.67

%

Investment in Bitcoin Cash

 

 

7,379.46217362

 

 

 

2,676

 

 

 

3,845

 

 

 

1.05

%

Investment in Litecoin

 

 

26,184.80079374

 

 

 

1,967

 

 

 

3,707

 

 

 

1.01

%

Investment in Chainlink

 

 

153,327.61595468

 

 

 

4,665

 

 

 

2,956

 

 

 

0.80

%

Net assets

 

 

 

 

$

112,405

 

 

$

367,308

 

 

 

100.00

%

 

See accompanying notes to the unaudited financial statements.

5


 

GRAYSCALE Digital Large Cap Fund LLC

STATEMENTS OF OPERATIONS (UNAUDITED)

(Amounts in thousands)

 

 

 

Three Months Ended March 31,

 

 

Nine Months Ended March 31,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Investment income:

 

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Manager's Fee, related party

 

 

2,622

 

 

 

2,549

 

 

 

9,216

 

 

 

4,018

 

Net investment loss

 

 

(2,622

)

 

 

(2,549

)

 

 

(9,216

)

 

 

(4,018

)

Net realized and unrealized (loss) gain on investments in digital assets:

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gain on investments in digital assets

 

 

1,772

 

 

 

152

 

 

 

33,342

 

 

 

625

 

Net change in unrealized (depreciation) appreciation on investments in digital assets

 

 

(27,207

)

 

 

271,256

 

 

 

76,521

 

 

 

425,402

 

Net realized and unrealized (loss) gain on investments in digital assets

 

 

(25,435

)

 

 

271,408

 

 

 

109,863

 

 

 

426,027

 

Net (decrease) increase in net assets resulting from operations

 

$

(28,057

)

 

$

268,859

 

 

$

100,647

 

 

$

422,009

 

 

See accompanying notes to the unaudited financial statements.

6


 

grayscale digital Large cap fund llc

STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)

(Amounts in thousands, except change in Shares outstanding)

 

 

 

Three Months Ended March 31,

 

 

Nine Months Ended March 31,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

(Decrease) increase in net assets from operations:

 

 

 

 

 

 

 

 

 

 

 

 

Net investment loss

 

$

(2,622

)

 

$

(2,549

)

 

$

(9,216

)

 

$

(4,018

)

Net realized gain on investments in digital assets

 

 

1,772

 

 

 

152

 

 

 

33,342

 

 

 

625

 

Net change in unrealized (depreciation) appreciation on investments in digital assets

 

 

(27,207

)

 

 

271,256

 

 

 

76,521

 

 

 

425,402

 

Net (decrease) increase in net assets resulting from operations

 

 

(28,057

)

 

 

268,859

 

 

 

100,647

 

 

 

422,009

 

Increase in net assets from capital share transactions:

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued

 

 

-

 

 

 

10,655

 

 

 

935

 

 

 

77,788

 

Net increase in net assets resulting from capital share transactions

 

 

-

 

 

 

10,655

 

 

 

935

 

 

 

77,788

 

Total (decrease) increase in net assets from operations and capital share transactions

 

 

(28,057

)

 

 

279,514

 

 

 

101,582

 

 

 

499,797

 

Net assets:

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

 

496,947

 

 

 

252,657

 

 

 

367,308

 

 

 

32,374

 

End of period

 

$

468,890

 

 

$

532,171

 

 

$

468,890

 

 

$

532,171

 

Change in Shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Shares outstanding at beginning of period

 

 

15,867,400

 

 

 

15,392,800

 

 

 

15,837,800

 

 

 

6,029,000

 

Shares issued

 

 

-

 

 

 

418,900

 

 

 

29,600

 

 

 

9,782,700

 

Net increase in Shares

 

 

-

 

 

 

418,900

 

 

 

29,600

 

 

 

9,782,700

 

Shares outstanding at end of period

 

 

15,867,400

 

 

 

15,811,700

 

 

 

15,867,400

 

 

 

15,811,700

 

 

See accompanying notes to the unaudited financial statements.

7


 

GRAYSCALE digital large cap fund llc

NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

1. Organization

The Grayscale Digital Large Cap Fund LLC (the “Fund”) was constituted as a Cayman Islands limited liability company on January 25, 2018 (the inception of the Fund) and commenced operations on February 1, 2018. In general, the Fund will hold digital assets. A digital asset will be eligible for inclusion in the Fund’s portfolio if it satisfies market capitalization, liquidity and coverage criteria as determined by the Manager (as defined below). Digital assets will be held in the Fund’s portfolio on a market capitalization-weighted basis. At the inception of the Fund, the digital assets included in the Fund’s portfolio were: Bitcoin (“BTC”), Ethereum (“ETH”), XRP, Bitcoin Cash (“BCH”) and Litecoin (“LTC”). As of March 31, 2022, the digital assets included in the Fund’s portfolio were: Bitcoin (“BTC”), Ethereum (“ETH”), Solana ("SOL"), Cardano (“ADA”), Uniswap ("UNI"), Litecoin (“LTC”) Chainlink (“LINK”), and Bitcoin Cash (“BCH”) (collectively, the “Fund Components”). On a quarterly basis beginning on the first business day of January, April, July and October of each year, the Manager performs an analysis and may rebalance the Fund’s portfolio based on these results in accordance with policies and procedures as set forth in the Fund’s Limited Liability Company Agreement (the “LLC Agreement”). The Fund is authorized under the LLC Agreement to create and issue an unlimited number of equal, fractional, undivided interests in the profits, losses, distributions, capital and assets of, and ownership of, the Fund (“Shares”) (in minimum baskets of 100 Shares, referred to as “Baskets”) in connection with creations. The redemption of Shares is not currently contemplated and the Fund does not currently operate a redemption program. Subject to receipt of regulatory approval and approval by the Manager in its sole discretion, the Fund may in the future operate a redemption program. The Fund currently has no intention of seeking regulatory approval to operate an ongoing redemption program. The Fund’s investment objective is to hold the top digital assets by market capitalization and for the value of the Shares to reflect the value of such Fund Components at any given time, less the Fund’s expenses and other liabilities.

From time to time, the Fund may hold cash in U.S. dollars and positions in digital assets as a result of a fork, airdrop or similar event through which the Fund becomes entitled to another digital asset or other property by virtue of its ownership of one or more of the digital assets it then holds (each such new asset, a “Forked Asset”).

Grayscale Investments, LLC (“Grayscale” or the “Manager”) acts as the Manager of the Fund and is a wholly owned subsidiary of Digital Currency Group, Inc. (“DCG”). The Manager is responsible for the day-to-day administration of the Fund pursuant to the provisions of the LLC Agreement. Grayscale is responsible for preparing and providing annual and quarterly reports on behalf of the Fund to investors and is also responsible for selecting and monitoring the Fund’s service providers. As partial consideration for the Manager’s services, the Fund pays Grayscale a Manager’s Fee as discussed in Note 7. The Manager 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 Bitcoin Cash Trust (BCH) (OTCQX: BCHG), 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, and Grayscale Smart Contract Platform Ex Ethereum (ETH) Fund LLC, each of which is an affiliate of the Fund. The following investment products sponsored or managed by the Manager are also SEC reporting companies with their shares registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”): Grayscale Bitcoin Trust (BTC), Grayscale Bitcoin Cash Trust (BCH), Grayscale Ethereum Trust (ETH), Grayscale Ethereum Classic Trust (ETC), and Grayscale Litecoin Trust (LTC). 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 Fund 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 Manager and the Fund. Additional Authorized Participants may be added at any time, subject to the discretion of the Manager.

The custodian of the Fund is Coinbase Custody Trust Company, LLC (the “Custodian”), a third-party service provider. The Custodian is responsible for safeguarding the Fund Components and Forked Assets held by the Fund, and holding the private key(s) that provide access to the Fund’s digital wallets and vaults.

The transfer agent for the Fund (the “Transfer Agent”) is Continental Stock Transfer & Trust Company. The responsibilities of the Transfer Agent are to maintain creations, redemptions, transfers, and distributions of the Fund’s Shares which are primarily held in book-entry form.

On October 14, 2019, the Fund received notice that its Shares were qualified for public trading on the OTCQX U.S. Marketplace of the OTC Markets Group, Inc. (“OTCQX”). The Fund’s trading symbol on OTCQX is “GDLC” and the CUSIP number for its Shares is G40705108. The Fund’s previous trading symbol was “GDLCF” on OTCQX and was changed to “GDLC” on April 14, 2020.

8


 

On July 21, 2020, the Fund registered with the Cayman Islands Monetary Authority (reference number: 1688783). The Fund is registered and regulated as a private fund under the Private Funds Act, 2020 of the Cayman Islands.

 

2. Summary of Significant Accounting Policies

In the opinion of management of the Manager of the Fund, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position as of 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 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 Company’s Annual Report on Form 10-K.

The following is a summary of significant accounting policies followed by the Fund:

The financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The Fund qualifies as an investment company for accounting purposes pursuant to the accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services—Investment Companies. The Fund uses fair value as its method of accounting for digital assets in accordance with its classification as an investment company for accounting purposes. The Fund is not a registered investment company under the Investment Company Act of 1940. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates and these differences could be material.

The Fund conducts its transactions in Fund Components, including receiving Fund Components for the creation of Shares and delivering Fund Components for the redemption of Shares and for the payment of the Manager’s Fee. At this time, the Fund is not accepting redemption requests from shareholders. Since its inception, the Fund has not held cash or cash equivalents.

Principal Market and Fair Value Determination

To determine which market is the Fund’s principal market (or in the absence of a principal market, the most advantageous market) for purposes of calculating the Fund’s net asset value (“NAV”), the Fund follows ASC 820-10, which outlines the application of fair value accounting. ASC 820-10 determines fair value to be the price that would be received for each Fund Component in a current sale, which assumes an orderly transaction between market participants on the measurement date. ASC 820-10 requires the Fund to assume that each Fund Component is sold in its principal market to market participants or, in the absence of a principal market, the most advantageous market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact.

The Fund only receives Fund Components from the Authorized Participant and does not itself transact on any Digital Asset Markets. Therefore, the Fund 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 Manager, provides information about the Digital Asset Markets on which it transacts to the Fund.

In determining which of the eligible Digital Asset Markets is the Fund’s principal market, the Fund reviews these criteria in the following order:

First, the Fund reviews a list of each Digital Asset Markets and excludes any Digital Asset Markets that are non-accessible to the Fund and the Authorized Participant. The Fund 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 Fund sorts the remaining Digital Asset Markets from high to low by entity-specific and market-based volume and level of activity of each Fund Component traded on each Digital Asset Market in the trailing twelve months.

Third, the Fund then reviews 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 Fund then selects a Digital Asset Market as its principal market based on the highest market-based volume, level of activity and price stability in comparison to the other Digital Asset Markets on the list. Based on information reasonably available to the Fund, Exchange Markets have the greatest volume and level of activity for the Fund Components. The Fund therefore looks to accessible

9


 

Exchange Markets as opposed to the Brokered Market, Dealer Market and Principal-to-Principal Markets to determine its principal market for each Fund Component. As a result of the analysis, an Exchange Market has been selected as the Fund’s principal market for each Fund Component.

The Fund determines its principal market (or in the absence of a principal market the most advantageous market) annually and conducts a quarterly analysis to determine (i) if there have been recent changes to each Digital Asset Market’s trading volume and level of activity in the trailing twelve months, (ii) if any Digital Asset Markets have developed that the Fund has access to, or (iii) if recent changes to each Digital Asset Market’s price stability have occurred that would materially impact the selection of the principal market and necessitate a change in the Fund’s determination of its principal market.

The cost basis of the investment in each Fund Component recorded by the Fund for financial reporting purposes is the fair value of the Fund Component at the time of transfer. The cost basis recorded by the Fund may differ from proceeds collected by the Authorized Participant from the sale of the corresponding Shares to investors.

Investment Transactions and Revenue Recognition

The Fund considers investment transactions to be the receipt of Fund Components for Share creations and the delivery of Fund Components for Share redemptions, the payment of expenses in Fund Components or the sale of Fund Components when the Manager rebalances the Fund’s portfolio. At this time, the Fund is not accepting redemption requests from shareholders. The Fund records its investment transactions on a trade date basis and changes in fair value are reflected as net change in unrealized appreciation or depreciation on investments. Realized gains and losses are calculated using the specific identification method. Realized gains and losses are recognized in connection with transactions including settling obligations for the Manager’s Fee and selling Fund Component(s) when the Manager rebalances the Fund’s portfolio.

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the ‘exit price’) in an orderly transaction between market participants at the measurement date.

GAAP utilizes a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The fair value hierarchy is categorized into three levels based on the inputs as follows:

• Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Fund 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 Fund.

10


 

 

 

 

 

 

Fair Value Measurement Using

 

(Amounts in thousands)

 

Amount at
Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Investment in Bitcoin

 

$

299,545

 

 

$

299,545

 

 

$

-

 

 

$

-

 

Investment in Ethereum

 

 

132,699

 

 

 

132,699

 

 

-

 

 

-

 

Investment in Solana

 

 

12,875

 

 

-

 

 

 

12,875

 

 

-

 

Investment in Cardano

 

 

13,175

 

 

 

13,175

 

 

-

 

 

-

 

Investment in Uniswap

 

 

2,366

 

 

 

2,366

 

 

-

 

 

-

 

Investment in Litecoin

 

 

2,947

 

 

 

2,947

 

 

-

 

 

-

 

Investment in Chainlink

 

 

2,687

 

 

 

2,687

 

 

-

 

 

-

 

Investment in Bitcoin Cash

 

 

2,596

 

 

 

2,596

 

 

-

 

 

-

 

 

 

$

468,890

 

 

$

456,015

 

 

$

12,875

 

 

$

-

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Investment in Bitcoin

 

$

255,175

 

 

$

-

 

 

$

255,175

 

 

$

-

 

Investment in Ethereum

 

 

101,625

 

 

-

 

 

 

101,625

 

 

-

 

Investment in Bitcoin Cash

 

 

3,845

 

 

-

 

 

 

3,845

 

 

-

 

Investment in Litecoin

 

 

3,707

 

 

-

 

 

 

3,707

 

 

-

 

Investment in Chainlink

 

 

2,956

 

 

-

 

 

 

2,956

 

 

-

 

 

 

$

367,308

 

 

$

-

 

 

$

367,308

 

 

$

-

 

 

3. Fair Value of Investments in Digital Assets

The Fund Components are held by the Custodian on behalf of the Fund and are carried at fair value. The following table represents the fair value of each Fund Component using the price provided at 4:00 p.m., New York time, by the relevant Digital Asset Exchange Market considered to be its principal market, as determined by the Fund:

Fund Component

 

Principal Market

 

March 31, 2022

 

 

June 30, 2021

 

BTC

 

Coinbase Pro

 

$

45,595.55

 

 

$

34,764.81

 

ETH

 

Coinbase Pro

 

$

3,284.17

 

 

$

2,243.98

 

SOL1

 

Coinbase Pro

 

$

122.97

 

 

N/A

 

ADA2

 

Coinbase Pro

 

$

1.15

 

 

N/A

 

UNI1

 

Coinbase Pro

 

$

11.23

 

 

N/A

 

LTC

 

Coinbase Pro

 

$

124.25

 

 

$

141.61

 

LINK3

 

Coinbase Pro

 

$

16.86

 

 

$

19.28

 

BCH

 

Coinbase Pro

 

$

377.34

 

 

$

520.99

 

 

1 Effective October 1, 2021, the Manager adjusted the Fund’s portfolio by selling the existing Fund Components in proportion to their respective weightings and using the cash proceeds to purchase Solana (SOL) and Uniswap (UNI) in accordance with the Fund Construction Criteria See Note 4. Portfolio Rebalancing for a description of the portfolio rebalancing.

2 Effective July 1, 2021, the Manager adjusted the Fund’s portfolio by selling the existing Fund Components in proportion to their respective weightings and using the cash proceeds to purchase Cardano (ADA) in accordance with the Fund Construction Criteria See Note 4. Portfolio Rebalancing for a description of the portfolio rebalancing.

3 Effective April 2, 2021, the Manager adjusted the Fund’s portfolio by selling the existing Fund Components in proportion to their respective weightings and using the cash proceeds to purchase Chainlink (LINK) in accordance with the Fund Construction Criteria See Note 4. Portfolio Rebalancing for a description of the portfolio rebalancing.

The following represents the changes in quantity of each Fund Component and their respective fair values:

11


 

(Amounts in thousands, except BTC amounts)

 

Quantity

 

 

Fair Value

 

BTC balance at July 1, 2020

 

 

2,890.95335771

 

 

$

26,406

 

BTC contributed

 

 

4,668.87490748

 

 

 

61,878

 

BTC distributed from portfolio rebalancing

 

 

(49.26609880

)

 

 

(4,018

)

BTC distributed for Manager's Fee, related party

 

 

(170.54073785

)

 

 

(5,373

)

Net change in unrealized appreciation on investment in BTC

 

 

-

 

 

 

168,230

 

Net realized gain on investment in BTC

 

 

-

 

 

 

8,052

 

BTC balance at June 30, 2021

 

 

7,340.02142854

 

 

$

255,175

 

BTC contributed

 

 

13.24337963

 

 

 

613

 

BTC distributed from portfolio rebalancing

 

 

(656.52708407

)

 

 

(26,334

)

BTC distributed for Manager's Fee, related party

 

 

(127.13324060

)

 

 

(5,892

)

Net change in unrealized appreciation on investment in BTC

 

 

-

 

 

 

52,611

 

Net realized gain on investment in BTC

 

 

-

 

 

 

23,372

 

BTC balance at March 31, 2022

 

 

6,569.60448350

 

 

$

299,545

 

 

(Amounts in thousands, except ETH amounts)

 

Quantity

 

 

Fair Value

 

ETH balance at July 1, 2020

 

 

16,713.06457809

 

 

$

3,760

 

ETH contributed

 

 

27,048.35623477

 

 

 

11,956

 

ETH contributed from portfolio rebalancing

 

 

2,541.65341845

 

 

 

2,993

 

ETH distributed for Manager's Fee, related party

 

 

(1,015.29289476

)

 

 

(1,362

)

Net change in unrealized appreciation on investment in ETH

 

 

-

 

 

 

83,519

 

Net realized gain on investment in ETH

 

 

-

 

 

 

759

 

ETH balance at June 30, 2021

 

 

45,287.78133655

 

 

$

101,625

 

ETH contributed

 

 

77.55708625

 

 

 

252

 

ETH distributed from portfolio rebalancing

 

 

(4,191.03512819

)

 

 

(9,393

)

ETH distributed for Manager's Fee, related party

 

 

(768.76495022

)

 

 

(2,533

)

Net change in unrealized appreciation on investment in ETH

 

 

-

 

 

 

33,074

 

Net realized gain on investment in ETH

 

 

-

 

 

 

9,674

 

ETH balance at March 31, 2022

 

 

40,405.53834439

 

 

$

132,699

 

 

(Amounts in thousands, except SOL amounts)

 

Quantity

 

 

Fair Value

 

SOL balance at July 1, 2021

 

 

-

 

 

$

-

 

SOL contributed

 

 

-

 

 

 

-

 

SOL contributed from portfolio rebalancing

 

 

106,015.34887688

 

 

 

14,914

 

SOL distributed for Manager's Fee, related party

 

 

(1,313.40289157

)

 

 

(199