Item 1. Business
Item
1. Business.
Summary
CoinShares
Bitcoin ETF (the “Trust”), formerly CoinShares Valkyrie Bitcoin Fund, was organized as a Delaware statutory trust
on January 20, 2021. The fiscal year for the Trust is December 31st. The Trust issues common units of beneficial interest (“Shares”),
which represent units of fractional undivided beneficial interest in and ownership of the Trust. The Shares of the Trust are listed
on The Nasdaq Stock Market, LLC (“Nasdaq” or the “Exchange”). On March 15, 2024, CoinShares Co., a Delaware
corporation, was appointed as the co-sponsor of the Trust. On June 14, 2024, CoinShares Co. (the “Sponsor”) succeeded
Valkyrie Digital Assets LLC, a Delaware limited liability company (the “Initial Sponsor”), as the sponsor of the Trust.
The trustee is CSC Delaware Trust Company (the “Trustee”). U.S. Bancorp Fund Services, LLC is the transfer agent of
the Trust (in such capacity, the “Transfer Agent”) and the administrator of the Trust (in such capacity, the “Administrator”),
Paralel Distributors LLC is the marketing agent of the Trust (the “Marketing Agent”), Coinbase Custody Trust Company,
LLC (“Coinbase”), BitGo Trust Company, Inc. (“BitGo”), and Komainu (Jersey) Limited (“Komainu”
and collectively with Coinbase and BitGo, the “Custodians”) are the custodians of the Trust’s bitcoin, Coinbase,
Inc., an affiliate of Coinbase, is the prime broker of the Trust (the “Prime Broker”), and U.S. Bank, N.A., an affiliate
of the Transfer Agent and Administrator, is the cash custodian of the Trust (the “Cash Custodian”). The operations
of the Trust are governed by the provisions of the Amended and Restated Trust Agreement of the Trust, among the Trustee, the Sponsor,
and the shareholders from time to time thereunder (the “Shareholders”), as may be amended from time to time (the “Trust
Agreement”). The Trust is an exchange-traded fund that sells or redeems common shares of beneficial interest (“Shares”)
in blocks of 5,000 Shares (a “Basket”) based on the quantity of bitcoin attributable to each Share of the Trust (net
of accrued but unpaid expenses and liabilities). There are an unlimited number of authorized Shares.
The
Trust’s inception of operation was January 11, 2024. The Trust had no operations prior to January 11, 2024, other than matters
relating to its organization and the registration of the Shares under the Securities Act of 1933, as amended (the “1933
Act”).
The
offering of the Trust’s Shares is registered with the Securities and Exchange Commission (the “SEC”) in accordance
with the 1933 Act.
The
Sponsor maintains a website at https://coinshares.com/us/etf/brrr/, through which the Trust’s Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), can be accessed free of charge,
as soon as reasonably practicable after such material is electronically file with, or furnished to, the SEC. Additional information
regarding the Trust may also be found on the SEC’s EDGAR database at www.sec.gov.
Investment
Objectives and Principal Investment Strategies
Investment
Objectives
The
investment objective of the Trust is for the Shares to reflect the performance of the value of a bitcoin as represented by the
CME CF Bitcoin Reference Rate – New York Variant (the “Index”), less the Trust’s liabilities and expenses.
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Principal
Investment Strategies
In
seeking to achieve its investment objective, the Trust holds bitcoin and values its Shares daily based on the value of bitcoin
as reflected by the Index, which is an independently calculated value based on an aggregation of executed trade flow of major
bitcoin spot exchanges. The Sponsor is authorized under the Trust Agreement to substitute an alternative index, reference rate,
or other methodology for valuing bitcoin for the Index for purposes of the Trust’s investment objective and valuation policies
at its sole discretion and without Shareholder approval. The Shares are designed to provide investors with a cost-effective and
convenient way to invest in bitcoin.
Information
About Bitcoin, Bitcoin Markets and Regulation of Bitcoin
The
following provides a more detailed description of bitcoin and various elements of the bitcoin ecosystem.
Bitcoin
Bitcoin
is the digital asset that is native to, and created and transmitted through the operations of, the peer-to-peer Bitcoin Network,
a decentralized network of computers that operates on cryptographic protocols. No single entity owns or operates the Bitcoin Network,
the infrastructure of which is collectively maintained by a decentralized user base. The Bitcoin Network allows people to exchange
tokens of value, called bitcoin, which are recorded on a public transaction ledger known as the Blockchain. Bitcoin can be used
to pay for goods and services, or it can be converted to fiat currencies, such as the U.S. dollar, at rates determined on bitcoin
trading platforms or in individual end-user-to-end-user transactions under a barter system. Although nascent in use, bitcoin may
be used as a medium of exchange, unit of account or store of value.
The
Bitcoin Network is decentralized and does not require governmental authorities or financial institution intermediaries to create,
transmit or determine the value of bitcoin. In addition, no party may easily censor transactions on the Bitcoin Network. As a
result, the Bitcoin Network is often referred to as decentralized and censorship resistant.
The
value of bitcoin is determined by the supply of and demand for bitcoin. New bitcoin are created and rewarded to the parties providing
the Bitcoin Network’s infrastructure (“miners”) in exchange for their having expended computational power to
verifying transactions and adding them to the Blockchain. The Blockchain is effectively a decentralized database that includes
all blocks that have been solved by miners and it is updated to include new blocks as they are solved. Each bitcoin transaction
is broadcast to the Bitcoin Network and, when included in a block, recorded in the Blockchain. As each new block records outstanding
bitcoin transactions, and outstanding transactions are settled and validated through such recording, the Blockchain represents
a complete, transparent and unbroken history of all transactions of the Bitcoin Network.
Bitcoin
Network
Bitcoin
was first described in a white paper released in 2008 and published under the pseudonym “Satoshi Nakamoto.” The protocol
underlying Bitcoin was subsequently released in 2009 as open-source software and currently operates on a worldwide network of
computers.
The
first step in directly using the Bitcoin Network for transactions is to download specialized software referred to as a “bitcoin
wallet.” A user’s bitcoin wallet can run on a computer or smartphone and can be used both to send and to receive bitcoin.
Within a bitcoin wallet, a user can generate one or more unique “bitcoin wallet addresses,” which are conceptually
similar to bank account numbers. After establishing a bitcoin wallet address, a user can send or receive bitcoin from his or her
bitcoin wallet address to another user’s wallet address. Sending bitcoin from one bitcoin wallet to another is similar in
concept to sending a bank wire from one person’s bank account to another person’s bank account; provided, however,
that such transactions are not managed by an intermediary and erroneous transactions generally may not be reversed or remedied
once sent.
The
amount of bitcoin associated with each bitcoin wallet address, as well as each bitcoin transaction to or from such wallet address,
is transparently reflected in the Blockchain and can be viewed by websites that operate as “Blockchain explorers.”
Copies of the Blockchain exist on thousands of computers on the Bitcoin Network. A user’s bitcoin wallet will either contain
a copy of the Blockchain or be able to connect with another computer that holds a copy of the Blockchain. The innovative design
of the Bitcoin Network protocol allows each Bitcoin user to trust that their copy of the Blockchain will generally be updated
consistent with each other user’s copy.
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When
a Bitcoin user wishes to transfer bitcoin to another user, the sender must first have the recipient’s bitcoin wallet address.
The sender then uses his or her Bitcoin wallet software to create a proposed transaction to be added to the Blockchain. The proposal
would reduce the amount of bitcoin allocated to the sender’s wallet address and increase the amount allocated recipient’s
wallet address, in each case by the amount of bitcoin desired to be transferred. The proposal is completely digital in nature,
similar to a file on a computer, and it can be sent to other computers participating in the Bitcoin Network; however, the use
of “unspent transaction outputs” that are verified cryptographically prevents the ability to duplicate or counterfeit
bitcoin.
Bitcoin
Protocol
The
Bitcoin protocol is open-source software, meaning any developer can review the underlying code and suggest changes. There is no
official company or group that is responsible for making modifications to Bitcoin. There are, however, a number of individual
developers that regularly contribute to a specific distribution of Bitcoin software known as the “Bitcoin Core,” which
is maintained in an open-source repository on the website Github. There are many other compatible versions of Bitcoin software,
but Bitcoin Core provides the de-facto standard for the Bitcoin protocol, also known as the “reference software.”
The core developers for Bitcoin Core operate on a volunteer basis and without strict hierarchical administration.
Significant
changes to the Bitcoin protocol are typically accomplished through a so-called “Bitcoin Improvement Proposal” or BIP.
Such proposals are generally posted on websites, and the proposals explain technical requirements for the protocol change as well
as reasons why the change should be accepted. Upon its inclusion in the most recent version of Bitcoin Core, a new BIP becomes
part of the reference software’s Bitcoin protocol. Several BIPs have been implemented since 2011 and have provided various
new features and scaling improvements.
Because
Bitcoin has no central authority, updating the reference software’s Bitcoin protocol will not immediately change the Bitcoin
Network’s operations. Instead, the implementation of a change is achieved by users and miners downloading and running updated
versions of Bitcoin Core or other Bitcoin software that abides by the new Bitcoin protocol. Users and miners must accept any changes
made to the Bitcoin source code by downloading a version of their Bitcoin software that incorporates the proposed modification
of the Bitcoin Network’s source code. A modification of the Bitcoin Network’s source code is only effective with respect
to the Bitcoin users and miners that download it. If an incompatible modification is accepted only by a percentage of users and
miners, a division in the Bitcoin Network will occur such that one network will run the pre-modification source code and the other
network will run the modified source code. Such a division is known as a “fork” in the Bitcoin Network.
Bitcoin
Transactions
A
bitcoin transaction contains the sender’s bitcoin wallet address, the recipient’s bitcoin wallet address, the amount
of bitcoin to be sent, a transaction fee and the sender’s digital signature. Bitcoin transactions are secured by cryptography
known as public-private key cryptography, represented by the bitcoin wallet addresses and digital signature in a transaction’s
data file. Each Bitcoin Network wallet address is associated with a unique “public key” and “private key”
pair, both of which are lengthy alphanumeric codes, derived together and possessing a unique relationship.
The
public key is visible to the public and analogous to the Bitcoin Network wallet. The private key is a secret and may be used to
digitally sign a transaction in a way that proves the transaction has been signed by the holder of the public-private key pair,
without having to reveal the private key. A user’s private key must be kept in accordance with appropriate controls and
procedures to ensure it is used only for legitimate and intended transactions. If an unauthorized third person learns of a user’s
private key, that third person could forge the user’s digital signature and send the user’s bitcoin to any arbitrary
bitcoin wallet address, thereby stealing the user’s bitcoin. Similarly, if a user loses his private key and cannot restore
such access (e.g., through a backup), the user may permanently lose access to the bitcoin contained in the associated wallet address.
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The
Bitcoin Network incorporates a system to prevent double-spending of a single bitcoin. To prevent the possibility of double-spending
a single bitcoin, each validated transaction is recorded, time stamped and publicly displayed in a “block” in the
Blockchain, which is publicly available. Thus, the Bitcoin Network provides confirmation against double-spending by memorializing
every transaction in the Blockchain, which is publicly accessible and downloaded in part or in whole by all users of the Bitcoin
Network software program. Any user may validate, through their Bitcoin wallet or a Blockchain explorer, that each transaction
in the Bitcoin Network was authorized by the holder of the applicable private key, and Bitcoin Network mining software consistent
with reference software requirements typically validates each such transaction before including it in the Blockchain. This cryptographic
security ensures that bitcoin transactions may not generally be counterfeited, although it does not protect against the “real
world” theft or coercion of use of a Bitcoin user’s private key, including the hacking of a Bitcoin user’s computer
or a service provider’s systems.
A
Bitcoin transaction between two parties is settled when recorded in a block added to the Blockchain. Validation of a block is
achieved by confirming the cryptographic hash value included in the block’s solution and by the block’s addition to
the longest confirmed Blockchain on the Bitcoin Network. For a transaction, inclusion in a block on the Blockchain constitutes
a “confirmation” of a Bitcoin transaction. As each block contains a reference to the immediately preceding block,
additional blocks appended to and incorporated into the Blockchain constitute additional confirmations of the transactions in
such prior blocks, and a transaction included in a block for the first time is confirmed once against double-spending. The layered
confirmation process makes changing historical blocks (and reversing transactions) exponentially more difficult the further back
one goes in the Blockchain.
To
undo past transactions in a block recorded on the Blockchain, a malicious actor would have to exert tremendous computer power
in re-solving each block in the Blockchain starting with and after the target block and broadcasting all such blocks to the Bitcoin
Network. The Bitcoin Network is generally programmed to consider the longest Blockchain containing solved and valid blocks to
be the most accurate Blockchain. In order to undo multiple layers of confirmation and alter the Blockchain, a malicious actor
must re-solve all of the old blocks sought to be regenerated and be able to continuously add new blocks to the Blockchain at a
speed that would have to outpace that of all of the other miners on the Bitcoin Network, who would be continuously solving for
and adding new blocks to the Blockchain.
Bitcoin
Mining – Creation of New Bitcoins
Mining
Process
The
process by which bitcoins are created and bitcoin transactions are verified is called mining. To begin mining, a user, or “miner,”
can download and run a mining client, which, like regular Bitcoin Network software, turns the user’s computer into a “node”
on the Bitcoin Network that validates blocks. Each time transactions are validated and bundled into new blocks added to the Blockchain,
the Bitcoin Network awards the miner solving such blocks with newly issued bitcoin and any transaction fees paid by bitcoin transaction
senders. This reward system is the method by which new bitcoins enter into circulation to the public. Over time, the size of the
fixed reward of new bitcoin decreases, and miners increasingly rely on transaction fees to compensate them for exerting computational
power in solving blocks.
Each
block contains the details of some or all of the most recent transactions that are not memorialized in prior blocks, as well as
a record of the award of bitcoins to the miner who solved the new block. In order to add blocks to the Blockchain, a miner must
map an input data set (i.e., the Blockchain, plus a block of the most recent Bitcoin Network transactions and an arbitrary number
called a “nonce”) to a desired output data set of a predetermined length (the “hash value”) using the
SHA-256 cryptographic hash algorithm. Each unique block can only be solved and added to the Blockchain by one miner; therefore,
all individual miners and mining pools on the Bitcoin Network are engaged in a competitive process of constantly increasing their
computing power to improve their likelihood of solving for new blocks. As more miners join the Bitcoin Network and its processing
power increases, the Bitcoin Network adjusts the complexity of the block-solving equation to maintain a predetermined pace of
adding a new block to the Blockchain approximately every ten minutes.
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Mathematically
Controlled Supply
The
method for creating new bitcoin is mathematically controlled in a manner so that the supply of bitcoin grows at a limited rate
pursuant to a pre-set schedule. The number of bitcoin awarded for solving a new block is automatically halved every 210,000 blocks.
Thus, the current fixed reward for solving a new block is 3.125 bitcoin per block; the reward halved in November 2012, July 2016,
May 2020, and April 2024. It is estimated to halve again in 2028. This deliberately controlled rate of bitcoin creation means
that the number of bitcoin in existence will never exceed twenty-one (21) million and that bitcoin cannot be devalued through
excessive production unless the Bitcoin Network’s source code (and the underlying protocol for bitcoin issuance) is altered.
As of January 31, 2026, approximately 19.96 million bitcoin have been mined.
Forms
of Attack Against the Bitcoin Network
All
networked systems are vulnerable to various kinds of attacks. As with any computer network, the Bitcoin Network contains certain
flaws. For example, the Bitcoin Network is currently vulnerable to a “51% attack” where, if a mining pool were to
gain control of more than 50% of the hash rate for a digital asset, a malicious actor would be able to gain full control of the
network and the ability to manipulate the Blockchain.
In
addition, many digital asset networks have been subjected to a number of denial of service attacks, which has led to temporary
delays in block creation and in the transfer of native tokens. Any similar attacks on the Bitcoin Network that impact the ability
to transfer bitcoin could have a material adverse effect on the price of bitcoin and the value of the Shares.
Bitcoin
Market and Bitcoin Trading Platforms
In
addition to using bitcoin to engage in transactions, investors may purchase and sell bitcoin to speculate as to the value of bitcoin
in the bitcoin market, or as a long-term investment to diversify their portfolio. The value of bitcoin within the market is determined,
in part, by the supply of and demand for bitcoin in the bitcoin market, market expectations for the adoption of bitcoin by individuals,
the number of merchants that accept bitcoin as a form of payment and the volume of private end-user-to-end-user transactions.
The
most common means of determining a reference value is by surveying trading platforms where secondary markets for bitcoin exist.
The most prominent bitcoin trading platforms are often referred to as “exchanges,” although they are not regulated
in the same fashion as national securities exchanges and do not report trade information in the same way as a national securities
exchange. As such, there is some difference in the form, transparency and reliability of trading data from bitcoin trading platforms.
Generally speaking, bitcoin data is available from these trading platforms with publicly disclosed valuations for each executed
trade, measured by one or more fiat currencies such as the U.S. dollar or Euro or another digital asset such as ether or tether.
Over-the-counter (“OTC”) dealers or market makers do not typically disclose their trade data.
Currently,
there are several digital asset trading platforms operating worldwide and trading platforms represent a substantial percentage
of bitcoin buying and selling activity and provide the most data with respect to prevailing valuations of bitcoin. A bitcoin trading
platform provides investors with a way to purchase and sell bitcoin, similar to stock exchanges like the New York Stock Exchange
or Nasdaq, which provide ways for investors to buy stocks and bonds in the so-called “secondary market.” Unlike stock
exchanges regulated to monitor securities trading activity, bitcoin trading platforms are largely regulated as money services
businesses (or a foreign regulatory equivalent) that monitor against money laundering and other illicit financing. Bitcoin trading
platforms operate websites designed to permit investors to open accounts with the trading platform and then purchase and sell
bitcoin.
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Market
Participants
Miners
Miners
range from Bitcoin enthusiasts to professional mining operations that design and build dedicated machines and data centers, including
mining pools, which are groups of miners that act cohesively and combine their processing to solve blocks. When a pool solves
a new block, the pool operator receives the bitcoin and, after taking a nominal fee, distributes the resulting reward among the
pool participants. Mining pools may provide participants with access to smaller, but steadier and more frequent, bitcoin payouts.
Investment
and Speculative Sector
This
sector includes the investment and trading activities of both private and professional investors and speculators. Historically,
larger financial services institutions are publicly reported to have limited involvement in investment and trading in digital
assets, although the participation landscape is beginning to change and large corporations, financial institutions and investment
firms are taking positions providing exposure to bitcoin and other digital assets.
Retail
Sector
The
retail sector includes users transacting in direct peer-to-peer bitcoin transactions through the direct sending of bitcoin over
the Bitcoin Network. The retail sector also includes transactions in which consumers pay for goods or services from commercial
or service businesses through direct transactions or third-party service providers.
Service
Sector
This
sector includes companies that provide a variety of services including the buying, selling, payment processing and storing of
bitcoin. As the Bitcoin Network continues to grow in acceptance, it is anticipated that service providers will expand the currently
available range of services and that additional parties will enter the service sector for the Bitcoin Network.
Competition
Thousands
of other digital assets have been developed since the inception of bitcoin, currently considered the most developed digital asset
because of the length of time it has been in existence, the investment in the infrastructure that supports it, and the network
of individuals and entities that are using bitcoin. Some industry groups are also creating private, permissioned Blockchains that
may or may not feature cryptocurrencies or other digital assets. In addition, private enterprises and governments are exploring
the use of stablecoins including central bank-backed digital currencies.
Regulation
of Bitcoin
Bitcoin
and other digital assets have increasingly attracted attention from U.S. and foreign regulators. Such regulatory attention has
included enforcement actions for violations of securities and commodities laws, as well as the release of regulatory guidance
explaining how existing regulatory regimes apply to digital assets, and orders approving certain digital asset-related products.
In more limited cases, new legislation or regulations have been proposed or adopted to govern the use of digital assets and their
networks.
U.S.
federal and state agencies have been examining the operations of digital asset networks, digital asset users and digital asset
trading platforms, with particular focus on the extent to which digital assets can be used to launder the proceeds of illegal
activities or fund criminal or terrorist enterprises and the safety and soundness of trading platforms or other service-providers
that hold digital assets for users. Many of these state and federal agencies have issued consumer advisories regarding the risks
posed by digital assets to investors. In addition, federal and state agencies, and other countries have issued rules or guidance
about the treatment of digital asset transactions or requirements for businesses engaged in digital asset activity.
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On-going
and future regulatory actions may alter, perhaps to a materially adverse extent, the nature of an investment in the Shares or
the ability of the Trust to continue to operate. Additionally, U.S. state and federal, and foreign regulators and legislatures
have taken action against digital asset businesses or enacted restrictive regimes in response to adverse publicity arising from
hacks, consumer harm, or criminal activity stemming from digital asset activity.
Various
U.S. federal and state and foreign jurisdictions have adopted, and may continue in the near future to adopt, laws, regulations
or directives that affect the Bitcoin Network, the bitcoin markets, and their users, particularly digital asset trading platforms
and service providers that fall within such jurisdictions’ regulatory scope. There remains significant uncertainty regarding
the U.S. and foreign government and quasi-governmental regulatory actions with respect to digital assets and digital asset exchanges.
Foreign laws, regulations or directives may conflict with those of the U.S. and may negatively impact the acceptance of bitcoin
by users, merchants and service providers and may therefore impede the growth or sustainability of the Bitcoin economy in the
European Union, China, South Korea, India and the U.S. and globally, or otherwise negatively affect the value of bitcoin.
The
GENIUS Act, signed into law in July 2025, establishes the first federal regulatory framework for the issuance and operation of
payment stablecoins—digital assets designed to maintain a stable value relative to a fiat currency, such as the U.S. dollar.
The GENIUS Act requires that all payment stablecoins be fully backed on a one-to-one basis by high-quality liquid assets, such
as U.S. dollars or short-term U.S. Treasury securities, and subjects issuers to rigorous reserve, audit, and disclosure requirements.
The GENIUS Act introduces a dual licensing regime, allowing stablecoin issuers to operate under either federal or state regulatory
oversight, provided that state regimes are “substantially similar” to federal standards. Issuers with more than $10
billion in outstanding stablecoins must obtain a federal license. The GENIUS Act also imposes strict AML, sanctions compliance,
and consumer protection obligations, including prioritizing stablecoin holders’ claims in the event of issuer insolvency.
Notably, the GENIUS Act prohibits non-financial public companies from issuing stablecoins without special approval and restricts
the payment of interest or yield on stablecoins.
In
addition, the Digital Asset Market Clarity Act of 2025 (the “CLARITY Act”) was passed by the U.S. House of Representatives
in July 2025. The CLARITY Act was designed to resolve longstanding regulatory uncertainty regarding the classification and oversight
of digital assets. The CLARITY Act establishes a clear framework for distinguishing between digital assets that are securities,
commodities, or payment stablecoins. It delineates the respective jurisdictions of the SEC and the CFTC, granting the CFTC exclusive
authority over “digital commodities” and the SEC authority over “digital securities.” The CLARITY Act
also introduces criteria for determining when a digital asset is sufficiently decentralized to be treated as a commodity rather
than a security. In addition, the CLARITY Act imposes registration requirements and operational standards for digital asset intermediaries,
including exchanges, brokers, and dealers. It mandates consumer protection measures, anti-money laundering (“AML”)
and countering the financing of terrorism (“CFT”) compliance, and enhanced disclosure obligations. The CLARITY Act
aims to foster innovation while providing market participants with greater regulatory certainty and aligning U.S. policy with
emerging international standards. Similar market structure legislation is currently under consideration by the U.S. Senate but
there is no certainty whether the legislation will be enacted or what form final legislation will take.
These
legislative efforts were accompanied by additional measures, such as the Anti-CBDC Surveillance State Act, which prohibits the
Federal Reserve from issuing a retail central bank digital currency without congressional authorization. While the GENIUS Act
represents significant progress toward a comprehensive regulatory regime for digital assets, substantial uncertainty remains regarding
the implementation and interpretation of this new law. The effectiveness of this framework, and the framework proposed under the
CLARITY Act, if passed by Congress, will depend on subsequent rulemaking by federal and state regulators, interagency coordination,
and the evolving approach to enforcement. Market participants may face transitional risks as regulatory standards are developed
and applied, and there is potential for further legislative or regulatory changes as the digital asset ecosystem continues to
evolve.
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These
events are continuing to develop at a rapid pace and it is not possible to predict at this time all of the risks that they may
pose to bitcoin, the Trust, the Trust’s third-party service providers, or to the digital asset industry as a whole. Continued
disruption and instability in the digital asset markets as these events develop, including declines in the trading price and liquidity
of bitcoin, could have a material adverse effect on the value of the Shares and the Shares could lose all or substantially all
of their value.
The
effect of any future regulatory change on the Trust or bitcoin is impossible to predict, but such change could be substantial
and adverse to the Trust and the value of the Shares.
Bitcoin
Value
The
value of bitcoin is determined by the value that various market participants place on bitcoin through their transactions. The
most common means of determining the value of a bitcoin is by surveying one or more bitcoin exchanges where bitcoin is traded
publicly and transparently.
On
exchanges, bitcoin is traded with publicly disclosed valuations for each executed trade, measured by one or more fiat currencies
such as the U.S. dollar or Euro. OTC dealers or market makers do not typically disclose their trade data.
From
time to time, there may be intra-day price fluctuations across bitcoin exchanges. However, they are generally relatively immaterial.
These variances usually stem from small changes in the fee structures on different bitcoin exchanges or differences in administrative
procedures required to deposit and withdraw fiat currency in exchange for Bitcoins and vice versa. The greatest variances are
found at (i) smaller exchanges with relatively low transaction volumes where even small trades can be large relative to an exchange’s
transaction volume and as a result impact the trading price on those exchanges and (ii) exchanges that are inaccessible to the
Trust because they do not meet the Trust’s regulatory requirements, and as a result are accessed and used by a captured
market or by parties that do not have regulatory or compliance requirements.
Custody
of the Trust’s Assets
The
Sponsor, on behalf of the Trust, is responsible for acquiring bitcoin from bitcoin trading counterparties that has been approved
by the Sponsor (“Bitcoin Trading Counterparties”). The Custodians custody all of the Trust’s bitcoin, other
than that which may be standing to the credit of or maintained in trading accounts with the Prime Broker or other Bitcoin Trading
Counterparties, as the case may be (the “Trading Accounts”). The accounts held with the Custodians (the Vault Accounts”)
are required to be segregated from both the assets held by the Custodians as principal and the assets of other customers of each
of the Custodians.
A
portion of the Trust’s bitcoin holdings and cash holdings from time to time may be held with the Prime Broker or other Bitcoin
Trading Counterparties in the Trading Accounts in connection with creations and redemptions of Baskets utilizing Bitcoin Trading
Counterparties and any sales of bitcoin to pay the Sponsor’s Fee and Trust expenses not assumed by the Sponsor. Within the
Trust’s Trading Accounts, the Trust may not have an identifiable claim to any particular bitcoin (and cash). Instead, the
Trust’s Trading Accounts represent an entitlement to a pro rata share of the bitcoin (and cash) the Bitcoin Trading Counterparties
hold on behalf of customers who hold similar entitlements against the Bitcoin Trading Counterparties. In this way, the Trust’s
Trading Accounts represent an omnibus claim on the respective Bitcoin Trading Counterparty’s bitcoin (and cash) held on
behalf of the Bitcoin Trading Counterparty’s customers. Generally, the Trust will only hold bitcoin in the Trading Accounts
to the extent the Sponsor reasonably expects is necessary in connection with the redemption of Shares by Authorized Participants
or necessary to pay the Trust’s expenses.
Other
than the bitcoin held in the Trading Accounts, the Sponsor will allocate the Trust’s bitcoin between Vault Accounts at the
Custodians. In determining the amount and percentage of the Trust’s bitcoin to allocate to each Vault Account, the Sponsor
will consider (i) the concentration of the Trust’s bitcoin at each Custodian, (ii) the Sponsor’s assessment of the
safety and security policies and procedures of each Custodian, (iii) the insurance policies of each Custodian, (iv) the fees and
expenses associated with the storage of the Trust’s bitcoin at each Custodian, (v) the fees and expenses associated with
the transfer to or from the Vault Account at each Custodian, and (vi) any other factor the Sponsor deems relevant in making the
allocation determination. The Sponsor does not intend to disclose the amount or percentage of the Trust’s bitcoin held at
each Custodian, and the Sponsor may change the allocation between the Custodians at any time and without notice to Shareholders.
The fees and expenses associated with the transfer of bitcoin between the Vault Accounts at each Custodian will be borne by the
Sponsor, not the Trust or the Shareholders. Any transfer of bitcoin between the Vault Accounts at each Custodian will occur “on-chain”
over the Bitcoin Network. On-chain transactions are subject to all of the risks of the Bitcoin Network, including the risk that
transactions will be made erroneously and are generally irreversible.
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Purchases
and Sales of Bitcoin
Because
the Trust will conduct creations and redemptions of Shares for cash, it will be responsible for purchasing and selling bitcoin
via transactions with the Bitcoin Trading Counterparties in connection with those creation and redemption orders. The Bitcoin
Trading Counterparties with which the Sponsor engage in bitcoin transactions are unaffiliated third parties and all transactions
are done on an arm’s-length basis. The Trust may also be required to sell bitcoin to pay certain extraordinary, non-recurring
expenses that are not assumed by the Sponsor.
The
Sponsor, on behalf of the Trust, may engage additional Bitcoin Trading Counterparties at any time. As of January 31, 2026, the
Bitcoin Trading Counterparties approved by the Sponsor are BitGo Prime LLC, Coinbase Inc., Cumberland DRW LLC, JSCT LLC, Foris
DAX, Inc., and Payward Inc. dba Kraken.
Use
of the CME CF Bitcoin Reference Rate – New York Variant
The
Trust will determine the Bitcoin Index Price and value its Shares daily based on the value of bitcoin as reflected by the Index.
The Index is calculated daily and aggregates the notional value of bitcoin trading activity across major bitcoin spot exchanges.
The Index currently uses substantially the same methodology as the CME CF Bitcoin Reference Rate (“BRR”), including
utilizing the same constituent bitcoin exchanges, which is the underlying rate to determine the settlement of CME bitcoin futures
contracts, except that the Index is calculated as of 4:00 p.m. ET, whereas the BRR is calculated as of 4:00 p.m. London time.
The Index is designed based on the IOSCO Principals for Financial Benchmarks. The administrator of the Index is CF Benchmarks
Ltd. (the “Benchmark Administrator”). The Trust also uses the Bitcoin Index Price to calculate its “Bitcoin
Holdings,” which is the aggregate U.S. dollar value of bitcoins in the Trust, based on the Bitcoin Index Price, less its
liabilities and expenses. “Bitcoin Holdings per Share” is calculated by dividing Bitcoin Holdings by the number of
Shares currently outstanding. Bitcoin Holdings and Bitcoin Holdings per Share are not measures calculated in accordance with US
Generally Accepted Accounting Principles (“US GAAP”). Bitcoin Holdings is not intended to be a substitute for the
Trust’s NAV calculated in accordance with US GAAP, and Bitcoin Holdings per Share is not intended to be a substitute for
the Trust’s NAV per Share calculated in accordance with US GAAP.
The
Index was created to facilitate financial products based on bitcoin. It serves as a once-a-day benchmark rate of the U.S. dollar
price of bitcoin (BTC-USD), calculated as of 4 p.m. ET. The Index, which has been calculated and published since February 28,
2022, aggregates the trade flow of several bitcoin exchanges, during an observation window between 3:00 p.m. and 4:00 p.m. ET
into the U.S. dollar price of one bitcoin at 4:00 p.m. ET. Specifically, the Index is calculated based on the “Relevant
Transactions” (as defined below) of all of its constituent bitcoin exchanges as follows:
● All
Relevant Transactions are added to a joint list, recording the time of execution, trade
price and size for each transaction.
● The
list is partitioned by timestamp into 12 equally sized time intervals of five (5) minutes’
length.
● For
each partition separately, the volume-weighted median trade price is calculated from
the trade prices and sizes of all Relevant Transactions, i.e., across all Constituent
Platforms. A volume-weighted median differs from a standard median in that a weighting
factor, in this case trade size, is factored into the calculation.
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● The
Index is then determined by the equally weighted average of the volume medians of all
partitions.
The
Index does not include any futures prices in its methodology. A “Relevant Transaction” is any cryptocurrency versus
U.S. dollar spot trade that occurs during the observation window between 3:00 p.m. and 4:00 p.m. ET on a constituent bitcoin exchange
in the BTC-USD pair that is reported and disseminated by a constituent bitcoin exchange through its publicly available API and
observed by the Benchmark Administrator. An oversight function is implemented by the Benchmark Administrator in seeking to ensure
that the Index is administered through the Benchmark Administrator’s codified policies for Index integrity.
The
Index methodology and constituent digital asset trading platforms may be changed from time to time at the discretion of the Index
Provider without Shareholder approval. For example, if the Index Provider determines that there have been material efforts to
manipulate the price of bitcoin on a constituent digital asset trading platform or that the data feeds from such trading platform
are unreliable, the Index Provider may remove such trading platform for the Index methodology. To the extent that such changes
to the methodology result in a more limited set of constituent digital asset trading platforms, there is an increased risk that
the price of bitcoin used in Trust’s calculation of NAV would deviate from the price quoted on digital asset trading platforms
not included within the Index methodology. Shareholders will be notified of changes to the Index methodology only if the Sponsor
determines that such changes are material with respect to an investment decision regarding the Shares. Once it has actual knowledge
of material changes to the Index methodology, the Trust will notify Shareholders in a prospectus supplement and/or a current report
on Form 8-K or in its annual or quarterly reports.
Calculation
of NAV
General
The
Shares are valued on a daily basis as of 4:00 p.m. ET. The value of bitcoin held by the Trust is determined based on the fair
market value price for bitcoin determined by the Benchmark Administrator.
The
Trust’s NAV is calculated by:
● taking
the current market value of its bitcoin (determined as set forth below) and any other;
and assets;
● subtracting
any liabilities (including accrued by unpaid expenses).
The
Trust’s NAV per Share is calculated by taking the Trust’s NAV and dividing it by the total amount of Shares outstanding.
The
Trust uses the Index to calculate a per-bitcoin value in U.S. dollars (the “Bitcoin Index Price”). The bitcoin held
by the Trust will typically be valued based on the Bitcoin Index Price. The Administrator calculates the NAV of the Trust once
each business day. The end-of-day bitcoin price is calculated using the Bitcoin Index Price as of 4:00 p.m. ET. However, NAVs
are not officially struck until later in the day (often by 5:30 p.m. ET and almost always by 8:00 p.m. ET). The pause after 4:00
p.m. ET provides an opportunity for the Sponsor to detect, flag, investigate, and correct unusual pricing should it occur. If
the Sponsor determines in good faith that the Index does not reflect an accurate bitcoin price, then the Sponsor will instruct
the Benchmark Administrator to employ an alternative method to determine the fair value of the Trust’s assets. The CME CF
Bitcoin Reference Rate - New York Variant shall constitute the Index, but if the Index is not available or the Sponsor at its
sole discretion determines the Index is unreliable (together a “Fair Value Event”), the Trust’s holdings may
be fair valued in accordance with the fair value policies approved by the Sponsor.
A
Fair Value Event value determination will be based on all available factors that the Sponsor deems relevant at the time of the
determination, and may be based on analytical values determined by the Sponsor using third-party valuation models.
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Fair
value policies approved by the Sponsor will seek to determine the fair value price that the Trust might reasonably expect to receive
from the current sale of that asset or liability in an arm’s-length transaction on the date on which the asset or liability
is being valued. In the instance of a Fair Value Event, the price set by the Trust’s principal market as of 4:00 p.m. ET,
on the valuation date would be utilized. In the event the principal market price is not available or the Sponsor at its sole discretion
determines the principal market valuation is unreliable the Sponsor will use its best judgement to determine a good faith estimate
of fair value.
The
bitcoin markets are generally open on days when U.S. markets are closed, which means that the value of the bitcoin owned by the
Trust could change on days when Shares cannot be bought or sold.
Expenses
Expenses
to Be Paid by the Sponsor
The
Sponsor has agreed to assume the following fees and expenses incurred by the Trust (in each case as defined in the Trust Agreement):
the Marketing Fee, the Administrator Fee, the Custodian Fee, the Cash Custodian Fee, the Prime Broker Fee, the Transfer Agent
Fee, the Trustee’s fee, applicable license fees, including the licensing fees related to the Index License Agreement, fees
and expenses related to public trading of the Shares on Nasdaq (including marketing, legal and audit fees and expenses), ordinary
legal expenses, audit fees, regulatory fees, including any fees relating to the registration of the Shares with the SEC, printing
and mailing costs and costs of maintaining the Trust’s website (the “Sponsor-paid Expenses”). There is no cap
on the amount of Sponsor-paid Expenses. At the Sponsor’s sole discretion, all or any portion of a Sponsor-paid Expense may
be redesignated as an Additional Trust Expense. The Sponsor will provide Shareholders with notice of any such redesignation in
a prospectus supplement and/or through a current report on Form 8-K or in the Trust’s annual or quarterly reports.
Extraordinary
and Other Expenses
In
certain extraordinary circumstances, the Trust may pay expenses in addition to the Sponsor’s Fee, including, but not limited
to, any expenses of the Trust that are not assumed by the Sponsor, 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, indemnification expenses of the Custodians,
Administrator or other agents, service providers or counterparties of the Trust and extraordinary legal fees and expenses (collectively,
“Additional Trust Expenses”). If the Trust incurs any Additional Trust Expenses, the Sponsor or its delegate will
cause the Trust (or its delegate) to convert bitcoin into U.S. dollars at the price available through the Bitcoin Trading Counterparties
(less applicable trading fees) through the Trading Platform which the Sponsor is able to obtain using commercially reasonable
efforts. The number of bitcoins represented by a Share will decline each time the Trust pays Additional Trust Expenses by transferring
or selling bitcoins. Although the Sponsor cannot definitively state the frequency or magnitude of the Additional Trust Expenses,
the Sponsor expects that they may occur infrequently, if at all.
Description
of Creation and Redemption of Shares
The
Trust creates and redeems Shares from time to time, but only in one or more Baskets. Baskets are only made in exchange for delivery
to the Trust or the distribution by the Trust of the amount of cash represented by the Baskets being created or redeemed (the
“Basket Deposit”). The amount of cash required in a Basket Deposit (the “Basket Cash Deposit”) is based
on the quantity or value of the quantity, as applicable, of bitcoin and cash attributable to each Share of the Trust (net of accrued
but unpaid Sponsor’s Fees and any accrued but unpaid Extraordinary Expenses) being created or redeemed determined as of
4:00 p.m. ET on the day the order to create or redeem Baskets is properly received.
Baskets
are only made in exchange for delivery to the Trust or the distribution by the Trust of the amount of cash represented by the
Shares being created or redeemed, the amount of which is based on the value of the bitcoin attributable to each Share of the Trust
(net of accrued but unpaid Sponsor’s Fees and any accrued but unpaid expenses or liabilities) being created or redeemed
determined as of 4:00 p.m. ET on the day the order to create or redeem Baskets is properly received. The Trust will engage in
bitcoin transactions for converting cash into bitcoin (in association with purchase orders) and bitcoin into cash (in association
with redemption orders). The Trust will conduct its bitcoin purchase and sale transactions as described above under the heading
“Purchases and Sales of Bitcoin.”
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Authorized
Participants are the only persons that may place orders to create and redeem Baskets. Authorized Participants must be (1) registered
broker-dealers or other securities market participants, such as banks or other financial institutions, that are not required to
register as broker-dealers to engage in securities transactions as described below, and (2) direct participants (“DTC Participants”)
in the Depository Trust Company (“DTC”). To become an Authorized Participant, a person must enter into an Authorized
Participant Agreement. The Authorized Participant Agreement provides the procedures for the creation and redemption of Shares
and for the delivery of the cash required for such creation and redemptions. The Authorized Participant Agreement and the related
procedures attached thereto may be amended by the Trust and the Sponsor, without the consent of any Shareholder or Authorized
Participant. Authorized Participants pay the Transfer Agent a fee for each order they place to create or redeem one or more Baskets
(the “Transfer Agent Fee”). In addition, an Authorized Participant is responsible for any operational processing and
brokerage costs, transfer fees, financing fees, network fees and stamp taxes incurred in connection with the satisfaction of any
creation or redemption orders (the “Execution Charges,” and collectively with the Transfer Agent Fee, the “Transaction
Fees”). The Transaction Fees may be reduced, increased or otherwise changed by the Sponsor. Authorized Participants (or
their designees) who make deposits of cash with the Trust in exchange for Shares receive no fees, commissions or other form of
compensation or inducement of any kind from either the Trust or the Sponsor, and no such person will have any obligation or responsibility
to the Sponsor or the Trust to effect any sale or resale of Shares. The Authorized Participants deliver only cash to create Shares
and receive only cash when redeeming Shares. Further, Authorized Participants do not directly or indirectly purchase, hold, deliver,
or receive bitcoin as part of the creation or redemption process or otherwise direct the Trust or a third party with respect to
purchasing, holding, delivering, or receiving bitcoin as part of the creation or redemption process.
Certain
Authorized Participants are expected to be capable of participating directly in the spot bitcoin markets. Some Authorized Participants
or their affiliates may from time to time buy or sell bitcoin and may profit in these instances. To the extent that the activities
of Authorized Participants have a meaningful effect on the bitcoin market, it could affect the price of bitcoin and impact the
ability of the Authorized Participants to effectively arbitrage the difference between the price at which the shares trade and
the net asset value of the Trust. While the Sponsor currently expects that Authorized Participants’ direct activities in
the bitcoin or securities markets in connection with the creation and redemption activities of the Trust will not significantly
affect the price of bitcoin or the Shares, the impact of the activities of the Trust and its Authorized Participants on bitcoin
or securities markets is unknown and beyond the control of the Sponsor.
Each
Authorized Participant is required to be registered as a broker-dealer under the 1934 Act and a member in good standing with FINRA
or exempt from being or otherwise not required to be licensed as a broker-dealer or a member of FINRA, and is qualified to act
as a broker or dealer in the states or other jurisdictions where the nature of its business so requires. Certain Authorized Participants
may also be regulated under federal and state banking laws and regulations. Each Authorized Participant has its own set of rules
and procedures, internal controls and information barriers as it determines is appropriate in light of its own regulatory regime.
The
following description of the procedures for the creation and redemption of Baskets is only a summary and a Shareholder should
refer to the relevant provisions of the Trust Agreement and the form of Authorized Participant Agreement for more detail. The
Trust Agreement and the form of Authorized Participant Agreement are filed as exhibits to this Annual Report.
Creation
Procedures
On
any business day, an Authorized Participant may place an order with the Transfer Agent to create one or more Baskets. Purchase
orders must be placed by 2:00 p.m. ET or the close of regular trading on the Exchange, whichever is earlier. The day on which
a valid order is received by the Transfer Agent is considered the “Purchase Order Date.”
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The
manner by which creations are made is dictated by the terms of the Authorized Participant Agreement. Creation orders are denominated
and settled in cash (“Cash Creation Order”). By placing a Cash Creation Order, an Authorized Participant agrees to
facilitate the deposit of cash with the Cash Custodian. In either case, if an Authorized Participant fails to consummate the foregoing,
the order will be cancelled or delayed until the full cash deposit has been received. An Authorized Participant may not withdraw
a creation order without the prior consent of the Sponsor at its discretion.
Following
an Authorized Participant’s Cash Creation Order, the settlement of both the cash amount required to purchase the Shares
and the number of Shares created will be credited to the Trust and Authorized Participant, respectively, by the end of the following
business day or such later time as may be agreed upon by the Authorized Participant and the Sponsor following the Purchase Order
Date. The settlement of cash and Shares occurs trough net settlement between the Trust’s and Authorized Participant’s
DTC account.
To
the extent not held to facilitate redemption orders or pay the Trust’s expenses, the Sponsor will use cash proceeds received
in connection with Cash Creation Orders to purchase bitcoin and deposit it in the Vault Accounts with the Custodians. Bitcoin
held in the Vault Accounts is the property of the Trust and is only transferred outside the Vault Accounts or sold in connection
with creation and redemption transactions or to pay the Trust’s expenses and liabilities. The Trust’s bitcoin are
not leased, loaned or used as collateral for any loan, margin, rehypothecation or similar activities. Expenses related to the
acquisition of bitcoin in connection with a creation order and transfer of acquired bitcoin to the Vault Accounts are not the
responsibility of the Trust.
Determination
of Required Deposits
The
quantity of cash required to create each Basket Deposit changes from day to day. On each day that the Exchange is open for regular
trading, the Administrator adjusts the quantity of cash constituting the Basket Deposit as appropriate to reflect the value of
the Trust’s bitcoin and cash less accrued expenses. The computation is made by the Administrator as promptly as practicable
after 4:00 p.m. ET or at a later time set forth in the Authorized Participant Agreement or otherwise provided to all Authorized
Participants on the date such order is placed in order for the creation of Baskets to be effected based on the NAV of Shares as
next determined on such date after receipt of the order in proper form.
To
the extent there is a difference between the price actually paid by the Trust to acquire a Basket worth of bitcoin in the creation
process compared to the cash value of the Basket (i.e., if there is a difference between the amount paid by the Trust to purchase
the requisite amount of bitcoin and the valuation of bitcoin as part of the Trust’s NAV calculation), that difference will
also be charged to the creating Authorized Participant.
The
Basket Deposit is an amount of cash that is in the same proportion to the total assets of the Trust, net of accrued expenses and
other liabilities, on the Purchase Order Date, as the number of Shares constituting a Basket is in proportion to the total number
of Shares outstanding on the Purchase Order Date, plus the amount of any Transaction Fees. The Authorized Participant is responsible
for all expenses related to the acquisition of bitcoin in connection with a creation order. For a discussion of how the Trust
determines the value of bitcoin, see “Calculation of NAV” above. The Basket Deposit so determined is communicated
via electronic mail message to all Authorized Participants.
Redemption
Procedures
The
procedures by which an Authorized Participant can redeem one or more Baskets mirror the procedures for the creation of Baskets.
On any business day, an Authorized Participant may place an order with the Transfer Agent to redeem one or more Baskets. Redemption
orders must be placed by the close of Regular Trading Hours on the Exchange or an earlier time as determined and communicated
by the Sponsor and its agent. A redemption order will be effective on the date it is received by the Transfer Agent (“Redemption
Order Date”).
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In
the case of a redemption order for cash (“Cash Redemption Order”), the settlement of both the cash amount required
to redeem the Shares and the number of Shares redeemed will be credited to the Authorized Participant and Trust, respectively,
by the end of the following business day or such later time as may be agreed upon by the Authorized Participant and the Sponsor
following the Redemption Order Date. The settlement of cash and Shares occurs through net settlement between the Trust’s
and Authorized Participant’s DTC account.
By
placing a redemption order, an Authorized Participant agrees to deliver the Baskets to be redeemed through DTC’s book-entry
system to the Trust by the end of the following business day or such later time as may be agreed upon by the Authorized Participant
and the Sponsor following the Redemption Order Date. An Authorized Participant may not withdraw a redemption order without the
prior consent of the Sponsor at its discretion.
Determination
of Redemption Distribution
The
redemption distribution from the Trust will consist of a transfer to the redeeming Authorized Participant or its designee of an
amount of cash that is determined in the same manner as the determination of Basket Deposits discussed above. The Authorized Participant
is responsible for all expenses related to the sale of bitcoin in connection with a redemption order.
U.S.
Federal Income Tax Consequences
The
Sponsor intends to take 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 is 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 sells bitcoin (for example, to pay fees or expenses), such a sale is a taxable
event to Shareholders. Upon a Shareholder’s sale of its Shares, the Shareholder will be treated as having sold the pro rata
share of the bitcoin held in the Trust at the time of the sale and may recognize gain or loss on such sale.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.