Item 7. Management’s Discussion and Analysis
Item
7. 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 audited financial statements and related notes included elsewhere in this Annual 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.
Overview
of the Trust
The
business and operations of the Trust are described above under Part I, Item I under the heading “Business”, which is incorporated
into this Item by reference.
Results
of Operations for the Year Ended December 31, 2023
During
the year ended December 31, 2023, the Trust had not commenced operations other than matters relating to its organization and the registration
of the Shares under the 1933 Act. During this period, the Trust did not issue any Shares and no Shares were outstanding. In addition,
the Trust did not purchase any bitcoin or other assets during the year ended December 31, 2023, nor were there disbursements of cash
from the Trust during this reporting period. Furthermore, the Trust did not receive any revenue or capital gains (losses), or incur any
expenses during this reporting period. The Trust commenced investment operations on January 11, 2024.
Expenses
incurred during the year ended December 31, 2023 in connection with the organization of the Trust and the initial offering costs of the
Shares were borne by the Sponsor and will not be subject to reimbursement by the Trust.
Cash
Resources and Liquidity
The
Trust does not hold a cash balance except in connection with the creation and redemption of Baskets or to pay expenses not assumed by
the Sponsor. To the extent the Trust does not have available cash to facilitate redemptions or pay expenses not assumed by the Sponsor,
the Trust will sell bitcoin. When selling bitcoin on behalf of the Trust, the Sponsor endeavors to minimize the Trust’s holdings
of assets other than bitcoin. As a consequence, the Sponsor expects that the Trust will have an immaterial amount of cash flow from its
operations and that its cash balance will be insignificant at the end of each reporting period. The Trust’s only sources of cash
are proceeds from the sale of Baskets and bitcoin. The Trust will not borrow to meet liquidity needs.
In
exchange for the Sponsor’s Fee, the Sponsor has agreed to assume most of the expenses incurred by the Trust. The Sponsor contractually
waived the Sponsor’s Fee until April 10, 2024, and will of accrue at an annual rate of 0.25% of the Trust’s Bitcoin Holdings
beginning thereafter. As a result, the only ordinary expense of the Trust is expected to be the Sponsor 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. See Part I,
Item I under the heading “Business –Expenses” for an additional discussion of the Trust’s fees and expenses.
Off
Balance Sheet Arrangements and Contractual Obligations
The
Trust has not used, nor does it expect to use in the future, special purpose entities to facilitate off balance sheet financing arrangements
and have no loan guarantee arrangements or off balance sheet arrangements of any kind other than agreements entered into in the normal
course of business, which may include indemnification provisions related to certain risks service providers undertake in performing services
for the Trust. While the Trust’s exposure under such indemnification provisions cannot be estimated, these general business indemnifications
are not expected to have a material impact on a Trust’s financial position.
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Sponsor’s
Fee payments made to the Sponsor are calculated as a fixed percentage of the Trust’s Bitcoin Holdings. As such, the Sponsor cannot
anticipate the payment amounts that will be required under these arrangements for future periods as the Trust’s net assets are
not known until a future date.
Critical
Accounting Policies
Principal
Market and Fair Value Determination
The
Trust’s periodic financial statements may not utilize the net asset value of the Trust determined by reference to the Index to
the extent the methodology used to calculate the Index is deemed not to be consistent with GAAP. The Trust’s periodic financial
statements will be prepared in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”) and utilize an exchange-traded price from
the Trust’s principal market for bitcoin on the Trust’s financial statement measurement date. The Sponsor will determine
at its sole discretion the valuation sources and policies used to prepare the Trust’s financial statements in accordance with GAAP.
The Trust intends to engage a third-party vendor to obtain a price from a principal market for bitcoin, which will be determined and
designated by such third-party vendor daily based on its consideration of several exchange characteristics, including oversight, and
the volume and frequency of trades. Under GAAP, such a price is expected to be deemed a Level 1 input in accordance with the ASC Topic
820 because it is expected to be a quoted price in active markets for identical assets or liabilities.
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 financial statements, 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 bitcoin 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 bitcoin 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 may transact through digital asset brokers or dealers, in multiple markets, and its application of ASC 820-10
reflects this fact. The Trust anticipates that, while multiple venues and types of markets will be available to the digital asset brokers
or dealers from whom the Sponsor acquires or disposes of the Trust’s bitcoin, the principal market in each scenario is determined
by looking at the market-based level of volume and bitcoin trading activity. Digital asset brokers or dealers 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). 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) on
a quarterly basis to determine which market is its Principal Market for the purpose of calculating fair value for the creation of quarterly
and annual financial statements.
The
process that the Sponsor has developed for identifying a principal market, as prescribed in ASC 820-10, which outlines the application
of fair value accounting. The process begins by identifying publicly available, well-established and reputable bitcoin trading venues
(Exchange Markets, as defined in the FASB ASC Master Glossary), which are selected by the Sponsor and its affiliates at their sole discretion.
Those markets include Binance, Bitstamp, Coinbase, itBit, Kraken, Gemini, and LMAX. The Sponsor then, through a service provider,
calculates on each valuation period, the highest volume venue during the 60-minute period prior to 4:00 ET for bitcoin. The Sponsor then
identifies that market as the principal market for bitcoin during that period, and uses the price for bitcoin from that venue at 4:00
ET as the principal market price.
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 Bitcoin 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.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
As
a smaller reporting company, the Trust is not required to provide the information required by this item.
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