Grayscale Bitcoin Mini Trust ETF 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read together with, and is qualified in its entirety by reference to, our unaudited financial statements and related notes included elsewhere in this Quarterly Report, which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The following discussion may contain forward-looking statements based on assumptions we believe to be reasonable. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those set forth under “Part II, Item 1A. Risk Factors” in this Quarterly Report or in “Risk Factors” and “Forward-Looking Statements” or other sections of our Registration Statement. Trust Overview The Trust is a passive entity that is managed and administered by the Sponsor and does not have any officers, directors or employees. The Trust holds Bitcoin and, from time to time on a periodic basis, issues Creation Baskets in exchange for deposits of Bitcoin. On July 30, 2024, in connection with the approval of application under Rule 19b-4 of the Securities Exchange Act of 1934 on July 26, 2024 and the effectiveness of the registration statement on Form S-1, as amended (File No. 333-277837), the Sponsor authorized the commencement of a redemption program. Shares of the Trust began trading on NYSE Arca on July 31, 2024, following the effectiveness of the Registration Statement. The Trust issues Shares only in one or more blocks of 10,000 Shares (a block of 10,000 Shares is called a “Basket”) to certain Authorized Participants from time to time. Baskets are offered in exchange for Bitcoin. Through its redemption program, the Trust redeems Shares from Authorized Participants on an ongoing basis. As a passive investment vehicle, the Trust’s investment objective is for the value of the Shares (based on Bitcoin per Share) to reflect the value of Bitcoin held by the Trust, determined by reference to the Index Price, less the Trust’s expenses and other liabilities. While an investment in the Shares is not a direct investment in Bitcoin, the Shares are designed to provide investors with a cost-effective and convenient way to gain investment exposure to Bitcoin. The Trust will not utilize leverage, derivatives or any similar arrangements in seeking to meet its investment objective. The Trust is not managed like a business corporation or an active investment vehicle. The Initial Distribution On July 31, 2024, the Grayscale Bitcoin Trust (BTC) (“GBTC”) completed its previously announced pro rata distribution of 303,690,100 Shares of the Trust to shareholders of GBTC as of July 30, 2024 (the “Record Date”), as described in GBTC ’ s definitive information statement on Schedule 14C, filed with the SEC on July 30, 2024 (referred to as the “Initial Distribution”). In connection therewith, on July 31, 2024, GBTC contributed to the Trust an amount of Bitcoin equal to 10% of the total Bitcoin held by GBTC as of the Record Date, equal to 26,935.83753443 Bitcoin, as consideration and in exchange for the issuance of Shares of the Trust. Subject to the limitations and qualifications set forth in GBTC’s definitive information statement on Schedule 14C, filed with the SEC on July 30, 2024 (including with respect to the qualification of both GBTC and the Trust as grantor trusts for U.S. federal income tax purposes and the proper allocation of existing tax basis between GBTC shares and Shares of the Trust), it is expected that neither GBTC nor any beneficial owner of GBTC shares will recognize any gain or loss for U.S. federal income tax purposes as a result of the Initial Distribution. Accordingly, it is expected that neither GBTC’s contribution of Bitcoin to the Trust nor GBTC’s distribution of Shares in the Trust to shareholders as of 4:00 PM ET on the Record Date will be reported to any beneficial owner of GBTC shares (or to any intermediary holding GBTC shares) as giving rise to income, gain, loss, deduction, credit or proceeds. Any beneficial owner of GBTC shares who received Shares of the Trust in the Initial Distribution, and any intermediary holding GBTC shares or Shares of the Trust, should consult their own tax advisor regarding the U.S. federal income tax consequences of the Initial Distribution, including the proper allocation of existing tax basis between GBTC shares and Shares of the Trust. Please refer to GBTC’s definitive information statement on Schedule 14C, filed with the SEC on July 30, 2024, for more information, including other U.S. federal income tax considerations relating to the Initial Distribution and ownership of Shares of the Trust. Critical Accounting Policies and Estimates Investment Transactions and Revenue Recognition The Trust considers investment transactions to be the receipt of Bitcoin for Share creations and the delivery of Bitcoin for Share redemptions or for payment of expenses in Bitcoin. The Trust records its investment transactions on a trade date basis and changes in fair value are reflected as net change in unrealized appreciation or depreciation on investments. Realized gains and losses are calculated using the specific identification method. Realized gains and losses are recognized in connection with transactions including settling obligations for the Sponsor’s Fee in Bitcoin. 19 Principal Market and Fair Value Determination To determine which market is the Trust’s principal market (or in the absence of a principal market, the most advantageous market) for purposes of calculating the Trust’s net asset value in accordance with U.S. GAAP (“Principal Market NAV”), the Trust follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820-10, Fair Value Measurement , 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 only receives Bitcoin in connection with a creation order from the Authorized Participant (or a Liquidity Provider) and does not itself transact on any Digital Asset Markets. Therefore, the Trust looks to market-based volume and level of activity for Digital Asset Markets. The Authorized Participant(s), or a Liquidity Provider, may transact in a Brokered Market, a Dealer Market, Principal-to-Principal Markets and Exchange Markets (referred to as “Trading Platform Markets” in this Quarterly Report), each as defined in the FASB ASC Master Glossary (collectively, “Digital Asset Markets”). In determining which of the eligible Digital Asset Markets is the Trust’s principal market, the Trust reviews these criteria in the following order: • First, the Trust reviews a list of Digital Asset Markets that maintain practices and policies designed to comply with anti-money laundering (“AML”) and know-your-customer (“KYC”) regulations, and non-Digital Asset Trading Platform Markets that the Trust reasonably believes are operating in compliance with applicable law, including federal and state licensing requirements, based upon information and assurances provided to it by each market. • Second, the Trust sorts these Digital Asset Markets from high to low by market-based volume and level of activity of Bitcoin traded on each Digital Asset Market in the trailing twelve months. • Third, the Trust then reviews pricing fluctuations and the degree of variances in price on Digital Asset Markets to identify any material notable variances that may impact the volume or price information of a particular Digital Asset Market. • Fourth, the Trust then selects a Digital Asset Market as its principal market based on the highest market-based volume, level of activity and price stability in comparison to the other Digital Asset Markets on the list. Based on information reasonably available to the Trust, Trading Platform Markets have the greatest volume and level of activity for the asset. The Trust therefore looks to accessible Trading Platform 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, a Trading Platform Market has been selected as the Trust’s principal market. The Trust determines its principal market(or in the absence of a principal market the most advantageous market) annually and conducts a quarterly analysis to determine (i) if there have been recent changes to each Digital Asset Market’s trading volume and level of activity in the trailing twelve months, (ii) if any Digital Asset Markets have developed that the Trust has access to, or (iii) if recent changes to each Digital Asset Market’s price stability have occurred that would materially impact the selection of the principal market and necessitate a change in the Trust’s determination of its principal market. The cost basis of Bitcoin received in connection with a creation order is recorded by the Trust at the fair value of Bitcoin at 4:00 p.m., New York time, on the creation date for financial reporting purposes. The cost basis recorded by the Trust may differ from proceeds collected by the Authorized Participant from the sale of the corresponding Shares to investors. 20 Investment Company Considerations The Trust is an investment company for U.S. 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. U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates and these differences could be material. Review of Financial Results (unaudited) Financial Highlights for the Period from July 31, 2024 (the commencement of the Trust’s operations) to September 30, 2024 (All amounts in the following table and the subsequent paragraphs, except Share, per Share, Bitcoin and price of Bitcoin amounts, are in thousands) July 31, 2024 (the commencement of the Trust’s operations) to September 30, 2024 Net realized and unrealized loss on investment in Bitcoin $ (34,633 ) Net decrease in net assets resulting from operations $ (35,124 ) Net assets (1) $ 2,142,086 (1) Net assets in the above table and subsequent paragraphs are calculated in accordance with U.S. GAAP based on the Digital Asset Market price of Bitcoin on the Digital Asset Trading Platform that the Trust considered its principal market, as of 4:00 p.m., New York time, on the valuation date. Net realized and unrealized loss on investment in Bitcoin for the period from July 31, 2024 (the commencement of the Trust’s operations) to September 30, 2024 was ($34,633), which includes a realized loss of ($35) on the transfer of Bitcoins to pay the Sponsor’s Fee, a realized loss of ($3,289) on the sale of Bitcoins to meet redemptions, and net change in unrealized depreciation on investment in Bitcoin of ($31,309). Net realized and unrealized loss on investment in Bitcoin for the period was driven by Bitcoin price depreciation from $65,222.44 per Bitcoin as of July 31, 2024 (the commencement of the Trust’s operations), to $63,464.76 per Bitcoin as of September 30, 2024. Net decrease in net assets resulting from operations was ($35,124) for the period from July 31, 2024 (the commencement of the Trust’s operations) to September 30, 2024, which consisted of the net realized and unrealized loss on investment in Bitcoin, plus the Sponsor’s Fee of $491. Net assets increased to $2,142,086 at September 30, 2024. The increase in net assets resulted from the contribution of approximately 7,236 Bitcoin with a value of $443,672 to the Trust in connection with Share creations during the period and the contribution of approximately 26,936 Bitcoin with a value of $1,756,821 to the Trust in connection with the Initial Distribution from Grayscale Bitcoin Trust (BTC), partially offset by the aforementioned Bitcoin price depreciation, the redemption of approximately 412 Bitcoin with a value of $23,283 from the Trust, and the withdrawal of approximately 8 Bitcoin to pay the foregoing Sponsor’s Fee. Cash Resources and Liquidity The Trust only receives and holds cash in order to facilitate creations and redemptions pursuant to Cash Orders, and has not otherwise had or maintained a cash balance at any time since the completion of the Initial Distribution. When selling Bitcoin in the Digital Asset Market to pay Additional Trust Expenses on behalf of the Trust, the Sponsor endeavors to sell the exact amount of Bitcoin needed to pay expenses in order to minimize the Trust’s holdings of assets other than Bitcoin. In addition, upon the consummation or deemed failure of a Cash Order to create or redeem Baskets, the Trust will promptly return any excess cash it continues to hold with respect to such Cash Order to the applicable counterparty. As a consequence, the Sponsor expects that the Trust will not record any cash flow from its operations and that its cash balance will be zero at the end of each reporting period. Furthermore, the Trust is not a party to any off-balance sheet arrangements. In exchange for the Sponsor’s Fee, the Sponsor has agreed to assume most of the expenses incurred by the Trust. As a result, the only ordinary expense of the Trust expected to be incurred is the Sponsor’s Fee and, if applicable, any Additional Trust Expenses. 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. 21 Selected Operating Data July 31, 2024 (the commencement of the Trust’s operations) to September 30, 2024 (All Bitcoin balances are rounded to the nearest whole Bitcoin) Bitcoins: Opening balance - Creations 7,236 Creation from Initial Distribution (1) 26,936 Redemptions (412 ) Sponsor’s Fee, related party (8 ) Closing balance 33,752 Accrued but unpaid Sponsor’s Fee, related party - Net closing balance 33,752 Number of Shares: Opening balance - Creations 81,590,000 Creation from Initial Distribution (1) 303,690,100 Redemptions (4,640,000 ) Closing balance 380,640,100 As of September 30, 2024 Price of Bitcoin on principal market (2) $ 63,464.76 Principal Market NAV per Share (3) $ 5.63 Index Price (4) $ 63,430.51 NAV per Share (4) $ 5.62 (1) Represents the impact of the Initial Distribution of 26,935.83753443 Bitcoin, with a value of approximately $1,756.8 million from Grayscale Bitcoin Trust (BTC), completed on July 31, 2024, as discussed in Note 4 of the notes to the unaudited financial statements. (2) The Trust performed an assessment of the principal market at September 30, 2024, and identified the principal market as Coinbase. (3) As of September 30, 2024, the Principal Market NAV per Share was calculated using the fair value of Bitcoin based on the price provided by Coinbase, the Digital Asset Trading Platform that the Trust considered its principal market, as of 4:00 p.m., New York time, on the valuation date. The Trust’s NAV per Share is calculated using a non-GAAP methodology where the price is derived from multiple Digital Asset Trading Platforms. (4) The Trust’s NAV per Share is derived from the Index Price as represented by the Index as of 4:00 p.m., New York time, on the valuation date. The Trust’s NAV per Share is calculated using a non-GAAP methodology where the price is derived from multiple Digital Asset Trading Platforms. See “Business—Overview of the Bitcoin Industry and Market—Bitcoin Value—The Index and the Index Price” in the Registration Statement for a description of the Index and the Index Price. The Digital Asset Trading Platforms included in the Index as of September 30, 2024 were Coinbase, Bitstamp, Kraken, LMAX Digital, and Crypto.com. On October 27, 2024, the Index Provider added Bullish to the Index due to the trading platform meeting the Index Provider’s minimum liquidity requirement, and did not remove any Constituent Trading Platforms as part of its scheduled quarterly review. See “Business—Valuation of Bitcoin and Determination of NAV” in the Registration Statement for a description of the Trust’s NAV per Share. T he Trust reflects creations and redemptions and the Bitcoin for proceeds receivable or payable with respect to such creations and redemptions, respectively, on the business day following the receipt of a notification of a creation or redemption order by an Authorized Participant. Creation and redemption orders are settled on T+1 or T+2, as established at the time of order placement, and therefore the Bitcoin for proceeds receivable or payable with respect to such creations and redemptions, respectively, are recorded as a receivable or payable until the Bitcoin are delivered or removed from the Trust for settlement. As of September 30, 2024, the Trust had a net closing balance of 33,752.36277471 Bitcoin with a value of $2,140,929,585, based on the Index Price of $63,430.51 on September 30, 2024 (non-GAAP methodology). As of September 30, 2024, the total market value of the Trust’s Bitcoin was $2,142,085,603, based on the price of one Bitcoin in the principal market (Coinbase) of $63,464.76 on September 30, 2024. Historical NAV and Bitcoin Prices As movements in the price of Bitcoin will directly affect the price of the Shares, investors should understand recent movements in the price of Bitcoin. Investors, however, should also be aware that past movements in the Bitcoin price are not indicators of future 22 movements. Movements may be influenced by various factors, including, but not limited to, government regulation, security breaches experienced by service providers, as well as political and economic uncertainties around the world. The follow ing chart illustrates the movement in the Trust’s NAV per Share versus the Index Price and the Trust’s Principal Market NAV per Share from July 31, 2024 (the commencement of the Trust’s operations) to September 30, 2024. For more information on the determination of the Trust’s NAV, see “Business—Valuation of Bitcoin and Determination of NAV” in the Registration Statement. The following table illustrates the movements in the Index Price from July 31, 2024 (the commencement of the Trust’s operations) to September 30, 2024. During such period, the Index Price has ranged from $53,461.36 to $65,972.56, with the straight average being $60,218.06 through September 30, 2024. The Sponsor has not observed a material difference between the Index Price and average prices from the constituent Digital Asset Trading Platforms individually or as a group. High Low Period Average Index Price Date Index Price Date End of period Last business day July 31, 2024 (the commencement of the Trust’s operations) to September 30, 2024 $ 60,218.06 $ 65,972.56 9/29/2024 $ 53,461.36 8/5/2024 $ 63,430.51 $ 63,430.51 The following table illustrates the movements in the Digital Asset Market price of Bitcoin, as reported on the Trust’s principal market, from July 31, 2024 (the commencement of the Trust’s operations) to September 30, 2024. During such period, the price of Bitcoin has ranged from $53,469.64 to $65,967.93, with the straight average being $60,216.01 through September 30, 2024. 23 High Low Period Average Digital Asset Market Price Date Digital Asset Market Price Date End of period Last business day July 31, 2024 (the commencement of the Trust’s operations) to September 30, 2024 $ 60,216.01 $ 65,967.93 9/29/2024 $ 53,469.64 8/5/2024 $ 63,464.76 $ 63,464.76 The following chart sets out the historical closing prices for the Shares as reported by NYSE Arca from July 31, 2024 (the commencement of the Trust’s operations) to September 30, 2024 and the Trust’s NAV per Share from July 31, 2024 (the commencement of the Trust’s operations) to September 30, 2024. BTC Premium/(Discount): BTC Share Price vs. NAV per Share (Non-GAAP) ($) The following chart sets out the historical premium and discount for the Shares calculated as a percentage of the historical closing prices for the Shares as reported by NYSE Arca from July 31, 2024 (the commencement of the Trust’s operations) to September 30, 2024 divided by the Trust’s NAV per Share from July 31, 2024 (the commencement of the Trust’s operations) to September 30, 2024. 24 BTC Premium/(Discount): BTC Share Price vs. NAV per Share (Non-GAAP) (%)