Item 1. Business
ITEM 1. BUSINESS
Summary
WisdomTree Bitcoin Fund (the “Trust”) is an exchange-traded
fund that issues common shares of beneficial interest that are listed on the Cboe BZX Exchange, Inc. and which began trading under the
ticker symbol “BTCW” on January 11, 2024. The purpose of the Trust is to gain exposure to the price of bitcoin by holding
bitcoin and valuing its Shares daily based on the Reference Rate. Each Share represents a fractional undivided beneficial interest in
the net assets of the Trust. The assets of the Trust consist primarily of bitcoin held by the Trust’s custodian on behalf of the
Trust.
The Trust is a Delaware statutory trust, formed on March 8, 2021, pursuant
to the Delaware Statutory Trust Act. The Trust operates pursuant to the Trust Agreement. Delaware Trust Company, a Delaware trust company,
is the Trustee of the Trust. The Trust is managed and controlled by the Sponsor, WisdomTree Digital Commodity Services, LLC, a limited
liability company formed in the state of Delaware on March 5, 2021. Coinbase Custody Trust Company LLC is the Bitcoin Custodian of the
Trust that holds all of the Trust’s bitcoin on the Trust’s behalf.
The fiscal year of the Trust is the calendar year and the Trust has
no fixed termination date. The Sponsor may select an alternate fiscal year. The Trust does not have any directors, officers or employees.
The Trust is managed by the Sponsor and pays the Sponsor a sponsor’s fee.
The Trust is not registered as an investment company under the 1940
Act and the Sponsor is not registered as an investment adviser under the Investment Advisers Act of 1940. The Trust does not hold or trade
in commodity futures contracts regulated by the CEA, as administered by the CFTC. The Trust is not a commodity pool for purposes of the
CEA and neither the Sponsor, nor the Trustee is subject to regulation as a commodity pool operator or a commodity trading adviser in connection
with the Shares.
The number of outstanding Shares is expected to increase and decrease
from time to time as a result of the creation and redemption of Baskets. The creation and redemption of Baskets requires the delivery
to the Trust or the distribution by the Trust of the amount of bitcoin represented by the NAV of the Baskets being created or redeemed.
The total amount of bitcoin required for the creation of Baskets is based on the combined net assets represented by the number of Baskets
being created or redeemed.
Further information about the Trust or the Shares can be obtained from
the website at www.wisdomtree.com/investments. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on
Form 8-K (including any amendments thereto) filed with, or furnished to, the SEC, are made available, free of charge, at that website
as soon as reasonably practicable after such documents are so filed or furnished. Additional information regarding the Trust may also
be found on the SEC’s EDGAR database at www.sec.gov.
The contents of the websites referred to above and any websites referred
to herein are not incorporated into this filing. Further, any reference to the URLs of a website is intended to be inactive textual references
only.
The Trust’s Investment Objective and Strategies
The Trust’s investment objective is to gain exposure to the price
of bitcoin, less expenses and liabilities of the Trust’s operations. 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 Reference Rate, which is an independently calculated
value based on an aggregation of executed trade flow of major bitcoin spot platforms. The Reference Rate currently uses substantially
the same methodology as the CME CF Bitcoin Reference Rate (“BRR”), including utilizing the same five bitcoin platforms, which
is the underlying rate to determine settlement of CME bitcoin futures contracts, except that the Reference Rate is calculated as of 4
pm Eastern Time (“ET”), whereas the BRR is calculated as of 4 pm London time. There can be no assurance that the Trust will
achieve its investment objective. The Trust is a passive investment vehicle that does not seek to generate returns beyond tracking the
price of bitcoin. Accordingly, the Sponsor does not speculatively sell bitcoin at times when its price is high nor does the Sponsor speculatively
acquire bitcoin at low prices in the expectation of future price increases. The Trust does not utilize leverage, derivatives or any similar
arrangements in seeking to meet its investment objective. Except with respect to securing the repayment of Trade Credits, the Sponsor
and the service providers do not loan or pledge the Trust’s assets, nor do the Trust’s assets serve as collateral for any
loan or similar arrangement.
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When the Trust sells or redeems its Shares, it does so 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). These transactions take place in exchange for cash. Subject to the Exchange receiving the necessary regulatory
approval to permit the Trust to create and redeem Shares in-kind for bitcoin (“In-Kind Regulatory Approval”) these transactions
may also take place in exchange for bitcoin. For a subscription of Shares, the subscription is in the amount of cash needed to purchase
the amount of bitcoin represented by the Basket being created as calculated by the Administrator. For a redemption of Shares, the Sponsor
arranges for the bitcoin represented by the Basket to be sold and the cash proceeds distributed. Authorized Participants deliver cash
to the Trust’s account with the Cash Custodian in exchange for Shares when they purchase Shares, and receive cash from the Cash
Custodian, as applicable, when they redeem Shares with the Trust. The Transfer Agent facilitates the processing of purchase and sale orders
in Baskets from the Trust. 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.
An investment in the Shares is intended to be:
· Easily Accessible. As the Shares are listed on the Exchange, investors can invest in a portfolio comprised of bitcoin through a traditional
brokerage account. The Trust provides investors with the opportunity to access the market for bitcoin through a traditional brokerage
account without the potential barriers to entry or certain of the risks involved with holding or transferring bitcoin directly, acquiring
it from a bitcoin platform, or mining it. Investors may be able to more effectively implement strategic and tactical asset allocation
strategies by investing in the Shares as compared to other means of investing in bitcoin.
· Exchange-traded and Transparent. The Shares trade on the Exchange, providing investors with an efficient means to implement various
investment strategies. Furthermore, the Trust’s holdings in bitcoin are posted at www.wisdomtree.com/investments on a daily basis,
providing investors with a clear and timely picture of the Trust’s holdings in bitcoin.
· Competitively Priced. The Sponsor’s fee and certain other expenses paid by the Trust represent costs to an investor in the Shares.
An investor’s decision to purchase Shares may be influenced by such fees and expenses relative to the costs associated with investing
in bitcoin by other means.
Bitcoin, Bitcoin Market, Bitcoin Platforms and
Regulation of Bitcoin
In this annual report, Bitcoin with an upper case “B” is
used to describe the system as a whole that is involved in maintaining the ledger of bitcoin ownership and facilitating the transfer of
bitcoin among parties. When referring to the digital asset within the Bitcoin network, bitcoin is written with a lower case “b”
(except at the beginning of sentences or paragraph sections, as below).
Bitcoin
Bitcoin is a digital asset that can be transferred among participants
on the Bitcoin network on a peer-to-peer basis via the internet. Unlike other means of electronic payments, bitcoin can be transferred
without the use of a central administrator or clearing agency. Because a central party is not necessary to administer bitcoin transactions
or maintain the bitcoin ledger, the term decentralized is often used in descriptions of bitcoin.
Bitcoin Network
Bitcoin was first described in a white paper released in 2008 and published
under the name “Satoshi Nakamoto.” The protocol underlying Bitcoin was subsequently released in 2009 as open-source software
and currently operates on a worldwide network of computers.
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The first step in using bitcoin for transactions is generally 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 by attributing a certain amount of bitcoin to the user’s
wallet address. Within a bitcoin wallet, a user can sometimes generate one or more unique “bitcoin addresses,” which are conceptually
similar to bank account numbers on the Bitcoin blockchain and are associated with a pair of public and private keys. After establishing
a bitcoin address, a user can send or receive bitcoin from his or her bitcoin address to another user’s address using the public
and private keys. Sending bitcoin from one bitcoin address to another is similar in concept to sending a bank wire from one person’s
bank account to another person’s bank account.
The amount of bitcoin associated with each bitcoin address is listed
in a public ledger, referred to as a “blockchain.” Copies of the Bitcoin blockchain exist on thousands of computers on the
Bitcoin network throughout the internet. A user’s bitcoin wallet will either contain a copy of the Bitcoin blockchain or be
able to connect with another computer that holds a copy of the Bitcoin blockchain.
When a bitcoin user wishes to transfer bitcoin to another user, the
sender must first request a bitcoin address from the recipient. The sender then uses his or her bitcoin wallet software to create a data
packet containing the proposed addition (often referred to as a “transaction”) to the Bitcoin blockchain. The proposed transaction
would reduce the sender’s address and increase the recipient’s address by the amount of bitcoin desired to be transferred,
and is sent on a peer-to-peer basis to other computers participating in the Bitcoin network.
Bitcoin Protocol
Bitcoin is an open-source project with no official company or group
that controls the Bitcoin network, and anyone can review the underlying code and suggest changes. There are, however, a number of individual
developers that regularly contribute to a specific distribution of Bitcoin software known as the “Bitcoin Core,” and who loosely
oversee the development of its source code. There are many other compatible versions of Bitcoin software, but Bitcoin Core is the most
widely adopted and currently provides the de facto standard for the Bitcoin protocol. The core developers are able to access, and can
alter, the Bitcoin network source code and, as a result, they are responsible for quasi-official releases of updates and other changes
to the Bitcoin network’s source code. However, because Bitcoin has no central authority, the release of updates to the Bitcoin network’s
source code by the core developers does not guarantee that the updates will be automatically adopted by the other participants in the
Bitcoin network. Users and miners must accept any changes made to the Bitcoin source code by downloading the proposed modification of
the Bitcoin network’s source code. A modification of the Bitcoin network’s source code is effective only with respect to those
Bitcoin users and miners who choose to download it. If a modification is accepted by only 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.” See “Risk Factors-Risks Associated with bitcoin and the Bitcoin network-A
temporary or permanent “fork” of the Bitcoin blockchain could adversely affect an investment in the Trust.” Consequently,
as a practical matter, a modification to the source code becomes part of the Bitcoin network only if accepted by participants collectively
having most of the processing power on the Bitcoin network. There have been several prominent forks in the Bitcoin network, including
forks resulting in the creation of Bitcoin Cash (August 1, 2017), Bitcoin Gold (October 24, 2017) and Bitcoin SegWit2X (December 28, 2017),
among others.
At this time, Shareholders will not receive the benefits of any forks,
and the Trust will not participate in any airdrop, notwithstanding that it may be permitted under the Trust Agreement. Therefore, the
only cryptocurrency or digital asset that the Trust may hold, barring separate regulatory approval, is bitcoin. We refer to the right
to receive any such benefit ( i.e., the right to participate in or benefit from a fork, airdrop or similar event) as an “Incidental
Right” and any such digital asset acquired through an Incidental Right as “IR Virtual Currency.” The Sponsor is under
no obligation to realize any economic benefit from any Incidental Rights or IR Virtual Currency on behalf of the Trust. With respect to
any fork, airdrop or similar event, the Trust will, at the direction of the Sponsor, permanently and irrevocably abandon any Incidental
Rights or IR Virtual Currency for no consideration. As the Trust will not receive any direct or indirect consideration for the Incidental
Rights or IR Virtual Currency, the value of the Shares will not reflect the value of the Incidental Rights or IR Virtual Currency.
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Although the Sponsor is under no obligation to do so, the inability
to realize any economic benefit from a hard fork or airdrop could adversely affect the value of the Shares. Investors who prefer to have
a greater degree of control over events such as forks, airdrops, and similar events, and any assets made available in connection with
each, should consider investing in bitcoin directly rather than purchasing Shares. The Sponsor’s policy with respect to the Trust’s
treatment of Incidental Rights or IR Virtual Currency can only be changed by the Exchange filing an application with the SEC seeking the
SEC’s approval to amend its listing rules. In the event that the Exchange receives approval to amend its listing rules and the Sponsor
seeks to change the Trust’s policy with respect to forks or airdrops, the Shareholders will be given 60 days’ advance notice
via a posting on the Trust’s website, prospectus supplement, post-effective amendment, through a current report on Form 8-K or in
the Trust’s annual or quarterly reports.
Bitcoin Transactions
A bitcoin transaction is similar in concept to an irreversible digital
check. The transaction contains the sender’s bitcoin address, the recipient’s bitcoin address, the amount of bitcoin to be
sent, a transaction fee and the sender’s digital signature. The sender’s use of his or her digital signature enables participants
on the Bitcoin network to verify the authenticity of the bitcoin transaction.
A user’s digital signature is generated via usage of the user’s
so-called “private key,” one of two numbers in a so-called cryptographic “key pair.” A key pair consists of a
“public key” and its corresponding private key, both of which are lengthy alphanumeric codes, derived together and possessing
a unique relationship.
Public keys are associated with bitcoin addresses that are publicly
known and can accept a bitcoin transfer. Private keys are used to sign transactions that initiate the transfer of bitcoin from a sender’s
bitcoin address to a recipient’s bitcoin address. Only the holder of the private key associated with a particular bitcoin address
can digitally sign a transaction proposing a transfer of bitcoin from that particular bitcoin address.
A user’s public key bitcoin address may be safely distributed,
but 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. Only by using a private key can a bitcoin user create a digital signature to transfer bitcoin to another user.
In addition, 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 bitcoin public key address, thereby stealing the user’s bitcoin.
The usage of key pairs is a cornerstone of the Bitcoin network. This
is because the use of a private key is the only mechanism by which a bitcoin transaction can be signed. If a private key is lost, the
corresponding bitcoin is thereafter permanently non-transferable. Moreover, the theft of a private key enables the thief immediate and
unfettered access to the corresponding bitcoin. Bitcoin users must therefore understand that in this regard, bitcoin is a bearer asset,
similar to cash: that is, the person or entity in control of the private key corresponding to a particular quantity of bitcoin has de
facto control of the bitcoin. For large quantities of bitcoin, holders often employ sophisticated security measures. For a discussion
of how the Trust secures its bitcoin, see the section titled “The Bitcoin Custodian”.
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 Bitcoin blockchain, which is publicly available. Thus, the Bitcoin network provides
confirmation against double-spending by memorializing every transaction in the Bitcoin blockchain, which is publicly accessible and downloaded
in part or in whole by all users of the Bitcoin network software program.
The process by which bitcoin are created and bitcoin transactions are
verified is called mining. To begin mining, a user, or “miner,” can download and run special mining software, which, like
regular Bitcoin network software programs, turns the user’s computer into a “node” on the Bitcoin network, and also
has the ability to validate transactions and add new blocks of transactions to the blockchain.
Miners,
through the use of the bitcoin software program, engage in a set of prescribed complex mathematical calculations imposed by the Bitcoin
network’s software protocol, called “proof of work”, in order to validate proposed transactions and bundle them into
a data packet known as a “block.” The first miner who successfully solves the cryptographic puzzle imposed by the Bitcoin
network’s software protocol is permitted to add a block of transactions to the Bitcoin blockchain and is rewarded by a grant of
newly-issued bitcoin, known as the “block reward.” Bitcoin is created and allocated by the Bitcoin network protocol and distributed
through a “mining” process subject to a strict, well-known issuance schedule. Block rewards for mining are the method by
which new bitcoin is issued. The supply of bitcoin is limited to 21 million by the Bitcoin network’s software protocol and as of
December 31, 2023, there were approximately 19.5 million bitcoin in existence.
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Confirmed and validated bitcoin transactions are recorded in blocks
added to the Bitcoin blockchain. 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 bitcoin to the miner who added the new block. Each unique block can only be solved
and added to the Bitcoin blockchain by one miner; as a result, individual miners and mining pools on the Bitcoin network engage in a competitive
process of constantly increasing their computing power to improve their individual likelihood of solving new blocks. As more miners join
the Bitcoin network and its processing power increases, or if miners leave the Bitcoin network and its processing power declines, the
Bitcoin network adjusts the complexity of a block-solving equation to maintain a predetermined pace of adding a new block to the Bitcoin
blockchain approximately every ten minutes.
Bitcoin Market
and Bitcoin Platforms
Bitcoin can be transferred in direct peer-to-peer transactions through
the direct sending of bitcoin over the Bitcoin blockchain from one bitcoin address to another. Among end-users, bitcoin can be used to
pay other members of the Bitcoin network for goods and services under what resembles a barter system. Consumers can also pay merchants
and other commercial businesses for goods or services through direct peer-to-peer transactions on the Bitcoin blockchain or through third-party
service providers.
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 global bitcoin
market, market expectations for the adoption of bitcoin as a store of value, the number of merchants that accept bitcoin as a form of
payment, and the volume of peer-to-peer transactions, among other factors.
A bitcoin platform generally provides investors with a website that
permits investors to open accounts with the exchange and then purchase and sell bitcoin. Prices for trades on bitcoin platforms are typically
reported publicly. An investor opening a trading account must deposit an accepted government-issued currency into their account with the
bitcoin platform, or a previously acquired digital asset, before they can purchase or sell assets on the platform. The process of establishing
an account with a bitcoin platform and trading bitcoin is different from, and should not be confused with, the process of users sending
bitcoin from one bitcoin address to another bitcoin address on the Bitcoin blockchain. This latter process is an activity that occurs
on the Bitcoin network, while the former is an activity that occurs entirely on the private website operated by the bitcoin platform and
via accounts and addresses managed by the platform. The bitcoin platform typically records the investor’s ownership of bitcoin in
its internal books and records, rather than on the Bitcoin blockchain. The bitcoin platform ordinarily does not transfer bitcoin to the
investor on the Bitcoin blockchain unless the investor makes a request to the platform to withdraw the bitcoin in their exchange account
to an off-platform bitcoin wallet.
Outside
of bitcoin platforms, bitcoin can be traded in over-the-counter (“OTC”) transactions that are not publicly reported. The
OTC market is largely institutional in nature, and OTC market participants generally consist of institutional entities, such as firms
that offer two-sided liquidity for bitcoin, investment managers, proprietary trading firms, high-net-worth individuals that trade bitcoin
on a proprietary basis, entities with sizeable bitcoin holdings, and family offices. The OTC market provides a relatively flexible market
in terms of quotes, price, quantity, and other factors, although it tends to involve large blocks of bitcoin. The OTC market has no formal
structure and no open-outcry meeting place. Parties engaging in OTC transactions will agree upon a price-often via phone or email-and
then one of the two parties will then initiate the transaction. For example, a seller of bitcoin could initiate the transaction by sending
the bitcoin to the buyer’s bitcoin address. The buyer would then wire U.S. dollars to the seller’s bank account. OTC trades
are sometimes hedged and eventually settled with concomitant trades on bitcoin platforms.
Although bitcoin was the first digital asset, in the ensuing years,
the number of digital assets, market participants and companies in the space has increased dramatically. In addition to bitcoin, other
well-known digital assets include ether, XRP, bitcoin cash, and litecoin. The category and protocols are still being defined and evolving.
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Market Volatility
Cryptocurrencies, such as bitcoin, are one of the most volatile asset
classes, even higher than small cap equities, emerging market equities or energy futures. It is not uncommon for even the most established
digital assets, such as bitcoin, to have periods of annualized volatility of over 100%.
Several factors influence those high volatility levels. Firstly, as
digital assets evolve in a fast-changing environment, major developments are commonplace. Changes in areas such as regulation, technology,
financialization, etc., can have a profound impact on digital assets’ potential for adoption, development and growth.
Secondly, the digital asset space lacks frameworks for fundamental
analysis of price and growth. As a new market, desired data sets can be non-existent or difficult to access. Valuation theory and frameworks
are still in development, and the estimation of digital assets intrinsic value varies dramatically depending on the use case, models and
assumption sets used.
In this situation, the digital assets market, and particularly the
bitcoin market, is very sensitive to news releases, and largely driven by sentiment. This situation may continue in the short and medium
term.
Regulation of
Bitcoin and Government Oversight
As digital assets have grown in both popularity and market size, the
U.S. Congress and a number of federal and state agencies (including FinCEN, SEC, CFTC, FINRA, the Consumer Financial Protection Bureau,
the Department of Justice, the Department of Homeland Security, the Federal Bureau of Investigation, the IRS and state financial institution
regulators) have been examining the operations of digital asset networks, digital asset users and the digital asset platform markets,
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 platforms or other service-providers that hold digital assets for users. Many
of these federal and state 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.
Various foreign jurisdictions have, and may continue to, in the near
future, propose, adopt or suggest the potential for laws, regulations or directives that affect the Bitcoin network, the bitcoin markets,
and their users, particularly bitcoin platforms and service providers that fall within such jurisdictions’ regulatory scope, including
to require virtual asset service providers to register and comply with an anti-money laundering (“AML”) and countering the
financing of terrorism framework, banning trading or shutting down digital asset platforms, ordering financial institutions to stop providing
banking or funding to any activity related to cryptocurrencies, or banning entities from providing services to any individuals or business
entities dealing with or settling digital assets, among others. There remains significant uncertainty regarding governments’ future
actions with respect to the regulation of digital assets and digital asset platforms. Such laws, regulations or directives may conflict
with those of the United States and may negatively impact the acceptance of Bitcoin by users, merchants and service providers outside
the United States and may therefore impede the growth or sustainability of the Bitcoin economy in the United States and globally, or otherwise
negatively affect the value of Bitcoin.
The Trust and the Sponsor have adopted and implemented policies and
procedures that are designed to comply with applicable AML laws and sanctions laws and regulations, including applicable know your customer
(“KYC”) laws and regulations. The Sponsor and the Trust only interact with known third-party service providers with respect
to whom the Sponsor or its affiliates have engaged in a due diligence process. Each Authorized Participant is confirmed to be a U.S. registered
broker-dealer.
Furthermore, Authorized Participants, as broker-dealers and Bitcoin
Custodian, as an entity licensed to conduct virtual currency business activity by the New York State Department of Financial Services
(“NYDFS”) and a limited purpose trust company subject to New York banking law, respectively, are “financial institutions”
subject to the U.S. Bank Secrecy Act, as amended (“BSA”), and U.S. economic sanctions laws. In addition, with respect
to all bitcoin delivered in connection with creation requests, the party delivering bitcoin must establish an account with the Prime Execution
Agent who has represented that diligence will be conducted to confirm that delivery is not from a digital currency address which has been
added to the list of Specially Designated Nationals whose assets are blocked under applicable sanctions laws and regulations, and with
whom U.S. persons are generally prohibited from dealing.
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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. The following are
specific risks that could have a substantial and adviser impact on the Trust and the value of the Shares:
It may be illegal now, or in the future, to acquire, own, hold,
sell or use bitcoin in one or more countries, and ownership of, holding or trading in Shares may also be considered illegal and subject
to sanctions.
Although currently cryptocurrencies and certain other digital assets
are not regulated or are lightly regulated in many countries, some countries have taken, and may take in the future, regulatory actions
that severely restrict the right to acquire, own, hold, sell or use such cryptocurrencies or digital assets or to exchange cryptocurrencies
or digital assets for fiat currency. Such regulatory actions or restrictions could adversely affect the value of the Shares or result
in the termination and liquidation of the Trust at a time that is disadvantageous to Shareholders or may adversely affect an investment
in the Shares.
States may require licenses that apply to blockchain technologies
and digital assets, such as bitcoin and tokens, and token offerings. The Trust or Sponsor may be unable to comply with state licensing
requirements or policies, which may materially adversely affect the value of the Shares.
In the case of virtual currencies, state regulators such as the NYDFS
have created new regulatory frameworks. NYDFS has implemented a regulatory framework for licensing participants in “virtual currency
business activity” known as the “BitLicense,” which is intended to focus on consumer protection. The “BitLicense”
regulates the conduct of businesses that are involved in “virtual currencies” in New York or with New York customers and prohibits
any person or entity involved in such activity from conducting such activities without a license. In addition, California’s “Digital
Financial Assets Law” was signed into law in October 2023, and imposes significant obligations on companies involved in virtual
currency activities within California and with California residents.
Other states, such as Texas, have published guidance on how their existing
regulatory regimes apply to virtual currencies. Some states, such as New Hampshire, North Carolina and Washington, have amended their
state’s statutes to include virtual currencies into existing licensing regimes. It is likely that, as blockchain technologies and
the use of virtual currencies continues to grow, additional states will take steps to monitor the developing industry.
The issuance of Shares may require such state licenses. The effect
of any future regulatory action on the Trust, bitcoin, or the Shares is impossible to predict, but such change could be substantial and
could adversely affect the value of the Shares.
The Trust or Sponsor may be required to register as an MSB with
FinCEN and as a money transmitter in states with applicable money transmitter regulations. If the Trust fails to operate with appropriate
state or federal licenses the Trust and/or Sponsor could suffer reputational harm and also extraordinary, recurring and/or nonrecurring
expenses, which would adversely impact an investment in the Shares.
The Trust’s or Sponsor’s activities may require the registration
of the Trust or Sponsor as an MSB under the regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act. If regulatory
changes or interpretations of the Trust’s or Sponsor’s activities require the licensing or other registration as a money transmitter
or business engaged in digital currency activity ( e.g. , under the New York BitLicense framework) (or equivalent designation) under
state law in any state in which the Trust or Sponsor operate, the Trust or Sponsor may be required to seek a license or otherwise register
with a state regulator and comply with state regulations that may include, among other things, the implementation of anti-money laundering
programs, cyber security, consumer protection, financial and reporting requirements and maintenance of certain records and other operational
requirements. In the event of any such requirement, to the extent that the Sponsor decides to continue the Trust, the required registrations,
licensure and regulatory compliance steps may result in extraordinary, nonrecurring expenses to the Trust. Rather than incur these expenses
or comply with licensing requirements, the Sponsor may decide to terminate the Trust. Any termination of the Trust in response to the
changed regulatory circumstances may be at a time that is disadvantageous to Shareholders.
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Furthermore, the process of obtaining the necessary licenses could
take an extensive period of time. There is also a risk that necessary state or federal licenses will not be granted and therefore, the
Sponsor may have to act to dissolve and liquidate the Trust. Any such termination could result in the liquidation of the Trust’s
bitcoin at a time that is disadvantageous to Shareholders.
In addition, to the extent the Trust or Sponsor are found to have operated
without appropriate state or federal licenses, the Trust or Sponsor may be subject to investigation, administrative or court proceedings,
and civil or criminal monetary fines and penalties, all of which could harm the reputation of the Trust or Sponsor and affect the value
of the Shares.
The Trust and Bitcoin Prices
Bitcoin Value
and Trading Volume
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 platforms where bitcoin is traded publicly and transparently ( e.g., Bitstamp, Coinbase, Gemini, Kraken, itBit
and LMAX Digital).
On these bitcoin platforms, 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.
Platforms provide the necessary data with respect to the prevailing
valuations of bitcoin due to the many bitcoin platforms operating worldwide that represent a substantial percentage of bitcoin buying
and selling activity. The Benchmark Administrator relies on a selection of platforms for use in the Reference Rate. A platform selected
for use must meet the criteria of the Benchmark Administrator, which is governed by the CME CF Oversight Committee (the “Oversight
Committee”). The below tables reflect the average daily trading volume (in thousands of USD) and market share percentage of each
of the constituent bitcoin platforms included in the Reference Rate (the “Constituent Bitcoin Platforms” or “Constituent
Platforms”) over the preceding four calendar quarters:
Aggregate Trading Volume of BTC-USD Markets of CME CF Constituent Platforms*
Period
itBit
LMAX Digital
Bitstamp
Coinbase
Gemini
Kraken
2023 Q1
624,309,916
9,211,206,684
4,901,570,836
41,979,489,484
1,060,844,250
9,054,883,308
2023 Q2
482,998,994
8,322,968,385
5,133,173,679
31,402,570,192
1,004,667,694
8,975,159,682
2023 Q3
457,362,562
4,719,053,825
3,747,028,275
24,090,687,496
797,891,783
4,590,616,407
2023 Q4
652,054,618
12,562,443,890
5,629,709,159
41,384,277,704
1,652,803,646
10,056,208,374
Spot Trading Platforms Market Share of BTC-USD Trading*
Period
itBit
LMAX Digital
Bitstamp
Coinbase
Gemini
Kraken
Others*
2023 Q1
0.69%
10.23%
5.45%
46.64%
1.18%
10.06%
25.75%
2023 Q2
0.70%
12.05%
7.43%
45.45%
1.45%
12.99%
19.93%
2023 Q3
1.10%
11.32%
8.98%
57.76%
1.91%
11.01%
7.92%
2023 Q4
0.67%
12.86%
5.76%
42.36%
1.69%
10.29%
26.37%
* Source: CF Benchmarks
The domicile, regulation and legal compliance of the bitcoin platforms
included in the Reference Rate, along with the information or reporting requirements applicable to each platform, varies. Information
regarding each bitcoin platform may be found, where available, on the websites for such bitcoin platforms and public registers for compliance
with local regulations, among other places.
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Changes
to the regulatory landscape, both domestic and foreign, may impact the global trading volume of bitcoin. For example, a large percentage
of the global bitcoin trading volume previously occurred on self-reported, unregulated bitcoin platforms located in China. Throughout
2017, however, the Chinese government took several steps to tighten controls on bitcoin platforms, culminating in a ban on domestic platforms
in November 2017, which forced such platforms to cease their operations or relocate. As a result, reported bitcoin trading volume on
Chinese bitcoin platforms is now substantially lower, representing a de minimis share of the reported global trade volume.
From time to time, there may be intra-day price fluctuations across
bitcoin platforms. However, they are generally relatively immaterial. These variances usually stem from small changes in the fee structures
on different bitcoin platforms or differences in administrative procedures required to deposit and withdraw fiat currency in exchange
for bitcoin and vice versa. The greatest variances are found at (i) smaller platforms with relatively low transaction volumes where even
small trades can be large relative to a bitcoin platform’s transaction volume and as a result impact the trading price on those
platforms and (ii) bitcoin platforms that are inaccessible to the Trust.
In order to provide updated information relating to the Trust for use
by Shareholders, the Trust publishes an intraday indicative value (“IIV”) using the CME CF Bitcoin Real Time Index (“BRTI”).
One or more major market data vendors provide an IIV updated every 15 seconds, as calculated by the Exchange or a third-party financial
data provider during the Exchange’s regular market session of 9:30 a.m. to 4:00 p.m. ET (the “Regular Market Session”).
The IIV is calculated by using the prior day’s closing NAV as a base and updating that value during the Regular Market Session to
reflect changes in the value of the Trust’s NAV during the trading day.
The IIV’s dissemination during the Regular Market Session should
not be viewed as an actual real time update of the NAV, which is calculated only once at the end of each trading day. The IIV is widely
disseminated every 15 seconds during the Regular Market Session by one or more major market data vendors. In addition, the IIV is available
through online information services.
All aspects of the BRTI methodology are publicly available at the website
of the provider CF Benchmarks (www.cfbencharks.com). The BRTI is calculated once per second, in real time by utilizing the Order Books
of bitcoin - U.S. dollar trading pairs operated by all Constituent Platforms. An “Order Book” is a list of buy and sell orders
with associated limit prices and sizes that have not yet been matched, that is reported and disseminated by CF Benchmarks Ltd., as
the BRTI calculation agent. The Order Books are aggregated into one consolidated order book by the BRTI calculation agent. The mid-price
volume curve, which is the average of the bid price-volume curve (which maps transaction volume to the marginal price per cryptocurrency
unit a seller is required to accept in order to sell this volume to the consolidated order book) and the ask price-volume curve (which
maps a transaction volume to the marginal price per cryptocurrency unit a buyer is required to pay in order to purchase this volume from
the consolidated order book). The mid price-volume curve is weighted by the normalized probability density of the exponential distribution
up to the utilized depth (utilized depth being calculated as the maximum cumulative volume for which the mid spread-volume curve does
not exceed a certain percentage deviation from the mid price). The BRTI is then given by the sum of the weighted mid price-volume curve
obtained in the previous step.
The Reference Rate
The Reference Rate is a once-a-day benchmark index price for Bitcoin
denominated in US Dollars that synchronizes with the traditional close of U.S. financial markets. The index is calculated and published
every day of the year at 4:00 p.m. ET and has been since its launch on February 28 th , 2022. The index is provided by CF Benchmarks
as a Registered Benchmark under the UK Benchmarks Regulation overseen by the UK Financial Conduct Authority (“UK FCA”). The
Reference Rate was created to facilitate financial products based on bitcoin. Specifically, the Reference Rate is calculated based on
the “Relevant Transactions” (as defined below) of all of its Constituent Bitcoin Platforms, as follows:
· All Relevant Transactions that are executed between 3:00 p.m. and 4:00 p.m. ET are added to a joint list, recording the trade price
and size for each transaction.
· The list is partitioned into a number of equally sized, twelve (12) individual time intervals of five (5) minute length.
· For each of the twelve (12) partitions separately, the volume-weighted median trade price is calculated from the trade prices and
sizes of all Relevant Transactions, i.e., across all Constituent Bitcoin 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.
15
· The Reference Rate is then given by the equally-weighted average of the volume-weighted medians of all partitions.
The Reference Rate does not include any futures prices in its methodology.
A “Relevant Transaction” is any cryptocurrency versus U.S. dollar spot trade (the “Relevant Pair”) that occurs
during the “TWAP Period” on a Constituent Bitcoin Platform in the BTC/USD pair that is reported and disseminated by a Constituent
Bitcoin Platform through its publicly available application programming interface (“API”) and observed by the Benchmark Administrator,
CF Benchmarks Ltd. “TWAP” refers to the Time Weighted Average Price period for which trade data is observed, or 60 minutes
observation window between 3:00 p.m. and 4:00 p.m. ET.
An oversight function is implemented by the Benchmark Administrator
in seeking to ensure that the Reference Rate is administered through the Benchmark Administrator’s codified policies for Reference
Rate integrity. The Reference Rate is administered through the Benchmark Administrator’s codified policies for index integrity,
which have been developed to ensure compliance with the UK Benchmark Regulation, which the Benchmark Administrator is subject as a Registered
Benchmark. The codified policies include the following:
· Input Data Policy: The Input Data Policy governs the data that the Benchmark Administrator uses in benchmark determinations.
· Surveillance Policy: The Surveillance Policy governs benchmark surveillance, which is accomplished through a series of measures that
are the product of an analysis of the Benchmark Administrator’s methodologies and their susceptibility to manipulation.
· Conflicts of Interest Policy: The Conflicts of Interest Policy governs the measures by which the Benchmark Administrator identifies,
records, mitigates, and escalates potential and actual conflicts of interest that might impact the integrity of the benchmarks.
· Governance & Oversight Framework: This framework sets forth the measures by which the Benchmark Administrator manages the benchmark
life cycle including the relevant junctures where Oversight Committee notification, escalation, review and resolution is relevant and
required including the manner in which the Benchmark Administrator identifies risks to benchmark integrity and the processes and procedures
it follows to mitigate and eliminate such risks.
The Benchmark Administrator’s compliance such regulations has
been subject to a Limited Assurance Audit under the ISAE 3000 standard as of September 12, 2022, which is publicly available.
The Reference Rate is also subject to oversight by the Oversight Committee.
The Oversight Committee was jointly established by the Benchmark Administrator and the Chicago Mercantile Exchange (“CME”)
and is comprised of five members, including two who are representatives of CME, one who is a representative of the Benchmark Administrator,
and two others who bring expertise and industry knowledge relating to benchmark determination, issuance, and operations. The Oversight
Committee’s founding charter and quarterly meeting minutes are publicly available. The Oversight Committee meets at least quarterly
basis, and more frequently as needed, to review and make determinations of cryptocurrency pricing products, including the Reference Rate,
and attend to all other matters relating to such determination, including their definition, setting, scope, methodology, and distribution.
A platform must meet a set of predefined criteria to be approved by
the Oversight Committee, and the operation of existing Constituent Platforms are also monitored against the same criteria:
1. The platform’s spot trading volume of the Relevant Pair for an index must meet the minimum thresholds as detailed below for
it to be admitted as a constituent platform:
a. The average daily volume the venue would have contributed during the observation window for the Reference Rate of the Relevant Pair
exceeds 3% for two consecutive calendar quarters.
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2. The platform has policies to ensure fair and transparent market conditions at all times and has processes in place to identify and
impede illegal, unfair or manipulative trading practices.
3. The platform does not impose undue barriers to entry or restrictions on market participants, and utilizing the platform does not expose
market participants to undue credit risk, operational risk, legal risk or other risks.
4. The platform complies with applicable law and regulation, including, but not limited to capital markets regulations, money transmission
regulations, client money custody regulations, KYC regulations and AML regulations.
5. The platform cooperates with inquiries and investigations of regulators and the Benchmark Administrator upon request and must execute
data sharing agreements with CME Group.
Following admittance, a Constituent Platform must demonstrate that
it continues to fulfill criteria two through five. In cases where a Constituent Platform’s average daily contribution falls below
three percent for the Reference Rate, then the continued inclusion of the platform as a Constituent Platform to the Relevant Pair shall
be assessed by the Oversight Committee. The Constituent Platforms have changed over time. For example, the BRR previously included OKCoin.com
(HK) and Bitfinex, both of which were removed April 2017 due to trading restrictions. As of November 20, 2023, the Constituent Platforms
include:
· Bitstamp: A U.K.-based platform registered as an MSB with FinCEN and licensed as a virtual currency business under the NYDFS BitLicense
as well as money transmitter in various U.S. states. It is also regulated as a Payments Institution within the European Union and is registered
as a Crypto Asset Business with the UK FCA.
· Coinbase: A U.S.-based platform registered as an MSB with FinCEN and licensed as a virtual currency business under the NYDFS BitLicense
as well as a money transmitter in various U.S. states. Subsidiaries operating internationally are further regulated as an e-money provider
(Republic of Ireland, Central Bank of Ireland) and Major Payment Institution (Singapore, Monetary Authority of Singapore).
· Kraken: A U.S.-based platform that is registered as an MSB with FinCEN in various U.S. states, Kraken is registered with the UK FCA
as a Crypto Asset Business and is authorized by the Central Bank of Ireland as a Virtual Asset Service Provider (“VASP”).
Kraken also holds a variety of other licenses and regulatory approvals, including from the Canadian Securities Administrators (“CSA”).
· itBit: A U.S.-based platform that is licensed as a virtual currency business under the NYDFS BitLicense. It is also registered FinCEN
as an MSB and is licensed as a money transmitter in various U.S. states.
· LMAX Digital: A Gibraltar-based platform regulated by the Gibraltar Financial Services Commission (‟GFSCˮ) as a DLT provider
for execution and custody services. LMAX Digital does not hold a BitLicense and is part of LMAX Group, a U.K.-based operator of a UK FCA
regulated Multilateral Trading Facility and Broker-Dealer.
· Gemini: A U.S.-based platform that is licensed as a virtual currency business under the NYDFS BitLicense. It is also registered with
FinCEN as an MSB and is licensed as a money transmitter in various U.S. states. It is also registered with the UK FCA as a Crypto Asset
Business.
Once the Sponsor has actual knowledge of material changes to the Constituent
Bitcoin platforms used to calculate the Reference Rate, the Sponsor posts an announcement with respect to such change on its website.
Calculation of NAV
The Trust’s NAV per Share is calculated by:
· taking the current market value of its total assets including, but not limited to, all bitcoin, cash or other assets;
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· subtracting any liabilities; and
· dividing that total by the total number of outstanding Shares.
The methodology of the Reference Rate used to value bitcoin for purposes
of calculating NAV Per Share may not be deemed consistent with GAAP. To the extent the methodology used to calculate the Reference Rate
is deemed not to be consistent with GAAP, the Trust will utilize an alternative GAAP-consistent pricing source for purposes of the Trust’s
periodic financial statements, as further discussed below.
The Trust Administrator calculates the NAV of the Trust once each Exchange
trading day. The NAV for a normal trading day is released after 4:00 p.m. ET. Trading during the core trading session on the Exchange
typically closes at 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 Sponsor believes that the Reference Rate is reflective of a reasonable
valuation of the average spot price of bitcoin. However, in the event the Reference Rate is not available or determined by the Sponsor
to not be reliable, the Sponsor will “fair value” the Trust’s bitcoin holdings. The Sponsor does not anticipate that
the need to “fair value” bitcoin will be a common occurrence. The Sponsor reserves the right to replace the Reference Rate
with another valuation methodology which it believes accurately tracks the price of bitcoin. If the Sponsor makes the decision to materially
change the valuation methodology or replace either the Reference Rate or the Benchmark Administrator, the Sponsor will notify Shareholders
via a posting on the Trust’s website, prospectus supplement, post-effective amendment, through a current report on Form 8-K or in
the Trust’s annual or quarterly reports.
The Sponsor publishes the NAV, NAV per Share and the Trust’s
bitcoin holdings at www.wisdomtree.com/investments after their determination and availability. Reference Rate data and the description
of the Reference Rate are based on information made publicly available by the Benchmark Administrator on its website at https://www.cfbenchmarks.com.
The
Reference Rate used to determine the net asset value of the Trust may not be consistent with GAAP. The Trust’s periodic financial
statements are prepared in accordance with GAAP, including the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) and utilizes a platform-traded
price from the Trust’s principal market for bitcoin on the Trust’s financial statement measurement date. The Sponsor determines
in its sole discretion the valuation sources and policies used to prepare the Trust’s financial statements in accordance with GAAP.
The Trust obtains a price from a principal market (or in the absence of a principal market, the most advantageous market) for bitcoin,
which may be through third party vendor or directly from such principal market. ASC 820 defines “principal market” as the
market with the greatest volume and level of activity for the asset or liability. The determination of the principal market (and, as
a result, the market participants in the principal market) is made from the perspective of the reporting entity. ASC 820 defines “most
advantageous market” as the market that maximizes the amount that would be received to sell the asset or minimizes the amount that
would be paid to transfer the liability, after taking into account transaction costs and transportation costs.
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, which outlines the application of fair
value accounting. ASC 820 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 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 bitcoin trading counterparties, in multiple markets, and its application of ASC 820 reflects
this fact. The Trust anticipates that, while multiple venues and types of markets will be available to the bitcoin trading counterparties
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. Bitcoin trading counterparties, 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.
18
The
Sponsor has developed a process for identifying a principal market, as prescribed in ASC 820, which outlines the application of fair
value accounting. The process begins by identifying publicly available, well established and reputable bitcoin trading venues (Platform
Markets, as defined in the FASB ASC Master Glossary), which are selected by the Sponsor and its affiliates in their sole discretion.
Those markets include, but are not limited to, Binance, Bitfinex, Bitflyer, Bitstamp, Coinbase, Crypto.com, Gemini, HitBTC, Huobi, itBit,
Kraken, KuCoin, LMAX Digital, OKEx and Poloniex. 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.
To the extent there are any determinations that the Sponsor and the
Trust Administrator make, such determinations will be made in good faith, and neither the Sponsor nor the Trust Administrator will be
liable for any errors contained therein. Neither the Sponsor nor the Trust Administrator will be liable to DTC, Authorized Participants,
the Shareholders or any other person for errors in judgment.
Additional Information About the Trust
The Trust’s
Fees and Expenses
The
Trust pays the Sponsor a fee of 0.25% (the “Sponsor Fee”). The Sponsor Fee is calculated on a daily basis (accrued at 1/365,
or 1/366 in a leap year, of the applicable percentage of the NAV on that day) and paid on a monthly basis. For a six-month period commencing
on January 11, 2024 (the day the Shares are initially listed on the Exchange) and ending on July 11, 2024, the Sponsor will waive the
entire Sponsor Fee for the first $1.0 billion of the Trust’s assets. Except for periods during which all or a portion of the Sponsor
Fee is being waived, the Sponsor Fee will accrue and be payable in U.S. dollars. The Trust’s only ordinary recurring expense is
expected to be the Sponsor Fee. In exchange for the Sponsor’s Fee, the Sponsor has agreed to assume the marketing and the following
administrative expenses of the Trust: the fees of the Trustee, the fees of the Trust Administrator, the Custodians’ fees, Exchange
listing fees, SEC registration fees, printing and mailing costs, tax reporting fees, audit fees, license fees and ordinary legal fees
and expenses. The Sponsor also pays the costs of the Trust’s organization and the initial sale of the Shares. There is no cap on
the amount of these Sponsor paid expenses.
The Sponsor may, in its sole discretion and from time to time, waive
all or a portion of the Sponsor Fee for stated periods of time. The Sponsor is under no obligation to waive any portion of its fees and
any such waiver shall create no obligation to waive any such fees during any period not covered by the waiver.
The Trust may incur certain non-recurring expenses that are not assumed
by the Sponsor, including but not limited to, taxes and governmental charges, any applicable brokerage commissions, financing charges
or fees, Bitcoin network fees and similar transaction fees, expenses and costs of any extraordinary services performed by the Sponsor
(or any other service provider) on behalf of the Trust to protect the Trust or the interests of Shareholders (including, for example,
in connection with any fork of the Bitcoin blockchain), any indemnification of the Cash Custodian, Bitcoin Custodian, Trust Administrator
or other agents, service providers or counterparties of the Trust and extraordinary legal fees and expenses, including any legal fees
and expenses incurred in connection with litigation, regulatory enforcement or investigation matters.
Because the Trust does not have any income, it sells bitcoin to cover
the Sponsor’s Fee and expenses not assumed by the Sponsor, if any. Trust expenses not assumed by the Sponsor accrue daily and are
payable by the Trust to the Sponsor on a monthly basis, in arrears. The Trust may also be subject to other liabilities (for example, as
a result of litigation) that have also not been assumed by the Sponsor. The only source of funds to cover those liabilities are sales
of bitcoin held by the Trust. Even if there are no expenses other than those assumed by the Sponsor, and there are no other liabilities
of the Trust, the Trust will still need to sell bitcoin to pay the Sponsors Fee. The result of these sales is a decrease in the amount
of bitcoin represented by each Share.
19
To cover the Sponsor’s Fee and expenses not assumed by the Sponsor,
the Sponsor or its delegate will cause the Trust (or its delegate) to convert bitcoin into U.S. dollars at the price available through
an affiliate of the Bitcoin Custodian. The number of bitcoins represented by a Share will decline each time the Trust pays the Sponsor’s
Fee or any Trust expenses not assumed by the Sponsor by transferring or selling bitcoins. The Trust is responsible for paying any costs
associated with the transfer of bitcoin to the Sponsor or the sale of bitcoin. However, under the terms of each Authorized Participant
Agreement, the Authorized Participants will be responsible for any brokerage or transaction costs associated with the sale of transfer
of bitcoin incurred in connection with the fulfillment of a creation and redemption order.
The quantity of bitcoins to be sold to permit payment of the Sponsor’s
Fee or Trust expenses not assumed by the Sponsor, will vary from time to time depending on the level of the Trust’s expenses and
the value of bitcoins held by the Trust. Assuming that the Trust is a grantor trust for U.S. federal income tax purposes, each delivery
or sale of bitcoins by the Trust for the payment of expenses generally will be a taxable event to Shareholders.
Termination
of the Trust
The
Trust may be dissolved at any time for any reason, or for no reason at all, by the Sponsor in its sole discretion. Any termination by
the Trust will result in the compulsory redemption of all outstanding Shares.
The term of the Trust is perpetual (unless terminated earlier in certain
circumstances). On and after termination of the Trust, the Sponsor or liquidating trustee will wind up the business and affairs of the
Trust and deliver Trust property upon surrender and cancellation of Shares. The Sponsor or liquidating trustee will not accept any purchase
order or redemption order after the date of dissolution. If any Shares remain outstanding after the date of dissolution of the Trust,
the Sponsor or liquidating trustee thereafter will (i) discontinue the registration of transfer of Shares; (ii) continue to collect distributions
pertaining to Trust property and hold proceeds thereof uninvested, without liability for interest; and (iii) pay the Trust’s expenses
and may sell Trust property as necessary to meet those expenses. After the dissolution of the Trust, the Sponsor or liquidating trustee
will sell or otherwise liquidate the Trust property then held and after deducting any fees, expenses, taxes or other governmental charges
payable by the Trust and any expenses for the account of DTC of such Shares and any applicable taxes or other governmental charges, promptly
distribute the net proceeds from such sale to DTC. The Trustee and the Sponsor are not liable for any loss or depreciation resulting from
any sale or other disposition of property made by the Sponsor or liquidating trustee pursuant to the Sponsor’s or liquidating trustee’s
instruction or otherwise made in good faith. The proceeds of the liquidation of the Trust’s assets are expected to be distributed
in cash. Shareholders are not entitled to any of the Trust’s underlying bitcoin holdings upon the dissolution of the Trust.
Upon termination of the Trust, following completion of winding up of
its business by the Sponsor or liquidating trustee, the Sponsor or liquidating trustee will cause a certificate of cancellation of the
Trust’s Certificate of Trust to be filed in accordance with applicable Delaware law. Upon the termination of the Trust, the Sponsor
will be discharged from all obligations under the Trust Agreement except for its certain obligations that survive termination of the Trust
Agreement.
Amendments
The Sponsor and the Trustee may agree to amend the Trust Agreement
without Shareholder consent. The Sponsor shall determine the contents and manner of notice of any Trust Agreement amendment. Such notice
may be provided on the Trust’s website, prospectus supplement, post-effective amendment or through a current report on Form 8-K
and/or in the Trust’s annual or quarterly reports. If an amendment to the Trust Agreement materially adversely effects the interests
of Shareholders, it will become effective for outstanding Shares 30 days after notice of such amendment is given to Shareholders. Moreover,
at the time an amendment becomes effective, by continuing to hold Shares, Shareholders are deemed to agree to the amendment and to be
bound by the Trust Agreement without specific agreement to such increase (other than through the “negative consent” procedure
described above).
The Trust’s Service Providers
The Sponsor
The Sponsor arranged for the creation of the Trust and is responsible
for the ongoing registration of the Shares for their public offering in the United States and the listing of Shares on the Exchange. The
Sponsor does not exercise day-to-day oversight over the Trustee or the Custodians.
20
The Sponsor develops the marketing plan for the Trust, prepares marketing
materials regarding the Shares of the Trust, and exercises the marketing plan of the Trust on an ongoing basis. The Sponsor pays all routine
operational, administrative and ordinary expenses of the Trust out of the Sponsor’s fee as more fully described herein.
The Sponsor appoints and may remove the Trust’s other service
providers, as well as any additional, replacement, or successor service providers. The Sponsor does not take responsibility for the Trust’s
other service providers.
The Sponsor is a wholly-owned subsidiary of WisdomTree, Inc. (formerly
WisdomTree Investments, Inc.), a global financial innovator that, through its other subsidiaries worldwide (collectively, “WisdomTree”),
makes available ETFs, including those that hold bitcoin and other digital assets, as well as bitcoin futures. WisdomTree launched a European
ETP holding bitcoin in 2019, followed by the launch of European ETPs holding other digital assets in 2021 and 2022, and WisdomTree was
among the first U.S. ETF providers with an ETF investing in bitcoin futures in 2021. WisdomTree invested in Securrency, Inc., a blockchain
infrastructure provider, in 2020 and has worked closely with Securrency on blockchain and digital asset market related matters since such
time, including in relation to the sale of Securrency, Inc. to DTCC in 2023. WisdomTree has also developed and launched next-generation
digital products, services and structures, including digital or blockchain-enabled mutual funds and tokenized assets, as well as a blockchain-native
digital wallet launched in 2023 with bitcoin and ether available for purchase, sale and holding. While the Sponsor has not managed an
ETF investing in commodities or digital assets, such as bitcoin, prior to the Trust, the Sponsor leverages WisdomTree’s heritage
of innovation and extensive experience, including as described above, regarding bitcoin and the digital asset markets.
The principal office of the Sponsor is located at 250 West 34th Street,
3rd Floor, New York, NY 10119.
The Trustee
Delaware Trust Company, a Delaware trust company, acts as the trustee
of the Trust for the purpose of creating a Delaware statutory trust in accordance with the Delaware Statutory Trust Act (“DSTA”).
The Trustee is appointed to serve as the trustee of the Trust in the State of Delaware for the sole purpose of satisfying the requirement
of Section 3807(a) of the DSTA that the Trust have at least one trustee with a principal place of business in the State of Delaware.
General Duty of Care of Trustee
The Trustee is a fiduciary under the Trust Agreement; provided, however,
that the fiduciary duties and responsibilities and liabilities of the Trustee are limited by, and are only those specifically set forth
in, the Trust Agreement.
Resignation, Discharge or Removal of
Trustee; Successor Trustees
The Trustee may resign at any time by giving at least 180 days advance
written notice to the Sponsor. The Sponsor may remove the Trustee at any time by giving at least 30 days advance written notice to the
Trustee. Upon effective resignation or removal, the Trustee will be discharged of its duties and obligations.
If the Trustee resigns or is removed, the Sponsor, acting on behalf
of the Shareholders, is required to use reasonable efforts to appoint a successor trustee. Any successor Trustee must satisfy the requirements
of Section 3807 of the DSTA. Upon the resignation or removal of the Trustee, the Sponsor will appoint a successor Trustee by delivering
a written instrument to the outgoing Trustee, and the successor Trustee shall become fully vested with all of the rights, powers, duties
and obligations of the outgoing Trustee under this Trust Agreement, with like effect as if originally named as Trustee, and the outgoing
Trustee shall be discharged of its duties and obligations under this Trust Agreement.
If the Trustee resigns and no successor trustee is appointed within
180 days after the date the Trustee issues its notice of resignation, the Sponsor will terminate and liquidate the Trust and distribute
its remaining assets.
The Trust Administrator
Under the Administration Agreement, dated as of December 31, 2023,
by and between the exchange-traded funds listed on Schedule A thereto and State Street Bank and Trust Company (the “Administration
Agreement”), the Trust Administrator provides certain services necessary for the operation and administration of the Trust, including
net asset value calculations, accounting and other administrative services.
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The Bitcoin
Custodian
The Bitcoin Custodian is responsible for safekeeping all of the bitcoin
owned by the Trust, except for bitcoin held in the Trading Account (the “Trading Balance”) with respect to the trading activity
facilitated by the Prime Execution Agent from time to time.
The Cash Custodian
The Cash Custodian is responsible for safekeeping all of the non-bitcoin
assets owned by the Trust, except for cash held in the Trading Account with respect to the trading activity facilitated by the Prime Execution
Agent from time to time.
The Benchmark
Administrator
The Benchmark Administrator and the Sponsor’s affiliate, which
also covers the activities hereunder, have entered into a reference rate license agreement (the “License Agreement”), governing
the use of the Reference Rate. The Benchmark Administrator may adjust the calculation methodology for the Reference Rate without notice
to, or consent of, the Trust or its Shareholders. Under the License Agreement, the Sponsor pays a fee to the Benchmark Administrator in
consideration of its license of Reference Rate-related intellectual property.
Custody of the Trust’s Assets and Certain
Other Operational Matters
Bitcoin Custodian
The Trust has entered into an agreement with the Bitcoin Custodian,
(the “Bitcoin Custody Agreement”), pursuant to which the Bitcoin Custodian will custody all of the Trust’s bitcoin in
a segregated account from time to time (the “Vault Balance”), other than the Trust’s bitcoin that is maintained in the
Trading Balance with the Prime Execution Agent as described below. The Bitcoin Custodian keeps the bitcoin within the Vault Balance and
the associated private keys in a “cold storage” environment where the private keys are generated and secured. The Trust’s
bitcoin held with the Prime Execution Agent in the Trading Balance are generally held in a “hot storage” environment. The
Trust’s bitcoin remain in the Vault Balance, and thereby in cold storage, except when maintained in the Trading Balance in connection
with (i) receipt and delivery of bitcoin from and to third parties, such as the Prime Execution Agent (ii) selling bitcoin to pay the
Trust’s expenses and liabilities that are not included in the Sponsor Fee, if any and (iii) paying the Sponsor Fee.
Custody of bitcoin typically involves the generation, storage and utilization
of private keys. These private keys are used to effect transfer transactions ( i.e. , transfers of bitcoin from an address associated
with the private key to another address). Cold storage of private keys may involve keeping such keys on a non-networked computer or electronic
device or storing the private keys on a storage device or printed medium and deleting the keys from all computers. Cold storage is a safeguarding
method with multiple layers of protections and protocols, by which the private key(s) corresponding to the Trust’s bitcoin is (are)
generated and stored in an offline manner. Private keys are generated in offline computers that are not connected to the internet so that
they are resistant to being hacked. By contrast, in hot storage, the private keys are held online, where they are more accessible,
leading to more efficient transfers, though they are potentially more vulnerable to being hacked. The Bitcoin Custodian keeps all of the
Trust’s bitcoin in the Vault Balance ( i.e. , cold storage) on an ongoing basis unless otherwise transferred to and maintained
in the Trading Balance, which takes place at the direction of the Sponsor in connection with creations and redemptions of Baskets, and
to sell bitcoin to pay Trust expenses or the Sponsor Fee, as necessary. The Trust’s bitcoin held in the Vault Balance by the Bitcoin
Custodian are held in segregated wallets and therefore are not commingled with the Bitcoin Custodian’s or other customer assets.
The private key materials are stored within secure storage facilities within the U.S. and Europe. Exact locations are never disclosed
for security reasons. A limited number of employees at the Bitcoin Custodian are involved in private key management operations, and the
Bitcoin Custodian has represented that no single individual has access to full private keys. The Bitcoin Custodian carefully considers
the design of the physical, operational and cryptographic systems for secure storage of the Trust’s private keys in an effort to
lower the risk of loss or theft. No such system is perfectly secure and loss or theft due to operational or other failure is always possible.
The Sponsor and the Trust’s service providers have the ability to verify the existence of the Trust’s bitcoin through information
provided from the Custodian.
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The Bitcoin Custodian’s internal audit team performs periodic
internal audits over custody operations, and the Bitcoin Custodian has represented that systems and organizational control attestations
covering private key management controls are also performed on the Bitcoin Custodian by an external provider.
The Trust’s bitcoin held in the Vault Balance by the Bitcoin
Custodian is not commingled with assets of the Bitcoin Custodian or its affiliates or with assets of other customers of the Bitcoin Custodian.
Except with respect to securing the repayment of Trade Credits, the Sponsor and the service providers do not loan or pledge the Trust’s
assets, nor do the Trust’s assets serve as collateral for any loan or similar arrangement. The Bitcoin Custodian has also agreed
in the Bitcoin Custody Agreement that it will not, directly or indirectly, lend, pledge, hypothecate or rehypothecate any of the Trust’s
bitcoin, and that the Trust’s bitcoin assets are not treated as general assets of the Bitcoin Custodian but are instead considered
custodial assets that remain the Trust’s property. Additionally, the Bitcoin Custodian has agreed to provide the Trust or its authorized
independent public accountant with confirmation of or access to information sufficient to confirm the bitcoin held by the Bitcoin Custodian
for the Trust and that the Trust’s bitcoin is held in a separate, segregated account under the Trust’s name. Under the Bitcoin
Custody Agreement, the Bitcoin Custodian is required to obtain and maintain, at its sole expense, commercially reasonable insurance coverage
for the custody services it provides to the Trust. The Bitcoin Custody Agreement does not require that private key information with respect
to the Trust’s bitcoin be kept in a particular physical location.
The Bitcoin Custodian may receive deposits of bitcoin but may not send
bitcoin without use of the corresponding private keys. In order to send bitcoin when the private keys are kept in cold storage, unsigned
transactions must be physically transferred to the offline cold storage facility and signed using a software/hardware utility with the
corresponding offline keys. At that point, the Bitcoin Custodian can upload the fully signed transaction to an online network and transfer
the bitcoin. Because the Bitcoin Custodian may need to retrieve private keys from offline storage prior to initiating transactions, the
initiation or crediting of withdrawals or other transactions may be delayed.
The Bitcoin Custodian maintains a commercial crime insurance policy,
which is intended to cover the loss of client assets held in cold storage, including from employee collusion or fraud, physical loss including
theft, damage of key material, security breach or hack, and fraudulent transfer. The insurance maintained by the Bitcoin Custodian is
shared among all of the Bitcoin Custodian’s customers, is not specific to the Trust or to customers holding bitcoin with the Bitcoin
Custodian, and may not be available or sufficient to protect the Trust from all possible losses or sources of losses.
The Bitcoin Custodian maintains an annually renewed insurance policy
in the amount of $320 million with comprehensive coverage terms and conditions. This insurance policy covers the loss of client assets
held in cold storage at the Bitcoin Custodian. This insurance program, which has continuously run since 2013, provides the Bitcoin Custodian
and its clients with some of the broadest and deepest insurance coverage in the crypto industry, with coverage designed to be comprehensive,
including losses from employee collusion or fraud, physical loss (including theft), or damage of key material, security breach or hack,
and fraudulent transfer.
The Bitcoin Custodian has advised the Sponsor that, through its insurance
program, it has insurance coverage up to a certain amount that could be used to repay losses of the digital assets it custodies on behalf
of its clients, including the Trust’s bitcoin, resulting from theft. However, Shareholders cannot be assured that the Bitcoin Custodian
will maintain adequate insurance such that coverage will cover losses with respect to the Trust’s bitcoins, or that sufficient insurance
proceeds necessarily will be available to cover the Trust’s losses in full.
The Bitcoin Custodian’s insurance covers losses resulting from
employee collusion or fraud, physical loss (including theft), or damage of key material, security breach or hack, and fraudulent transfer,
but does not cover losses resulting from the Bitcoin Custodian’s insolvency or certain other events. The Bitcoin Custodian’s
insurance will not cover losses associated with the value of bitcoin and should not be viewed as insuring against losses caused by the
Trust’s operations, performance, management or any of its other activities. For events that are covered by the Bitcoin Custodian’s
insurance program, the Trust may be forced to share such insurance proceeds with other clients or customers of the Bitcoin Custodian,
which could reduce the amount of such proceeds that are available to the Trust. In addition, the bitcoin insurance market is limited,
and the level of insurance maintained by the Bitcoin Custodian may be substantially lower than the assets of the Trust. While the Bitcoin
Custodian maintains certain capital reserve requirements depending on the assets under custody, and such capital reserves may provide
additional sources of recovery in the event of losses, the Trust cannot be assured that the Bitcoin Custodian will maintain capital reserves
sufficient to cover actual or potential losses with respect to the Trust’s digital assets.
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The Bitcoin Custodian will not be liable for any amount greater than
the value of the supported digital assets on deposit in the Trust’s custodial account(s) at the time of the event giving rise to
the liability, subject further to the maximum liability limit of $100 million for each cold storage address. There are no contractual
limitations on the amount of bitcoin that may be deposited in each cold storage address.
The Bitcoin Custodian may terminate the Bitcoin Custody Agreement for
any reason upon providing the applicable notice to the Trust, or immediately for “Cause” (as defined in the Bitcoin Custody
Agreement), including, among others, if the Trust materially breaches the Bitcoin Custody Agreement and such breach remains uncured, or
the Trust undergoes a bankruptcy event.
The Transfer Agent facilitates the settlement of Shares in response
to the placement of creation orders and redemption orders from Authorized Participants.
Cash Custodian
The Trust has entered into a Cash Custody Agreement (“Cash Custody
Agreement”) with the Cash Custodian under which the Cash Custodian acts as custodian of the Trust’s cash and cash equivalents.
Under the Cash Custody Agreement, the Cash Custodian maintains one or more cash deposit accounts to keep all cash and open other accounts
for other non-digital assets of the Trust delivered to the Cash Custodian and, on behalf of the Trust, the Cash Custodian shall, from
time to time, accept delivery of cash and other non-bitcoin assets for safekeeping. Amounts received in connection with the sale of bitcoin
are deposited into the cash account. The Cash Custodian is required to exercise the reasonable skill, care and diligence expected of a
professional provider of custody services to institutional investors and is generally liable to the Trust for losses caused by the negligence,
willful default or fraud of the Cash Custodian.
Additional Custodial
Matters
The Trust may engage third-party custodians or vendors besides the
Bitcoin Custodian and the Cash Custodian to provide custody and security services for all or a portion of its bitcoin and/or cash, and
the Sponsor will pay the custody fees and any other expenses associated with any such third-party custodian or vendor. The Sponsor may,
in its sole discretion, add or terminate custodians at any time. The Sponsor may, in its sole discretion, change the custodian for the
Trust’s holdings, but it will have no obligation whatsoever to do so or to seek any particular terms for the Trust from other such
custodians.
Prime Execution
Agent
The Prime Execution Agent, Coinbase Inc., an affiliate of the Bitcoin
Custodian, provides prime execution agent services, including bitcoin trade execution, from time to time as requested by the Sponsor,
although the Sponsor may also trade directly with other third parties and/or market makers. The Trust may engage in purchases of bitcoin
(creation of Baskets) or sales of bitcoin (redemptions of Baskets, Trust expenses, or the Sponsor Fee, as necessary) by placing orders
with the Prime Execution Agent. The Prime Execution Agent routes orders placed by the Trust through the Prime Execution Agent’s
execution platform, where the order is executed. Each order placed by the Trust is sent, processed and settled at each Connected Trading
Venue to which it is routed. Subject to the foregoing, the Prime Execution Agent (as well as the Trust and the Sponsor) shall have no
liability, obligation, or responsibility whatsoever for the selection or performance of any trading venue, and that other trading venues
not used for the specific execution and/or trading venues not used by Coinbase may offer better prices and/or lower costs than the trading
venue used to execute the Trust’s orders.
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Pursuant to the agreement with the Prime Execution Agent (the “Prime
Execution Agent Agreement”), the Trust’s bitcoin holdings and cash holdings from time to time may be temporarily held with
the Prime Execution Agent, an affiliate of the Bitcoin Custodian, in the Trading Balance, for certain limited purposes, including in connection
with creations and redemptions of Baskets, and the sale of bitcoin to pay the Sponsor’s Fee and any other Trust expenses not assumed
by the Sponsor, to the extent applicable, and in extraordinary circumstances, in connection with the liquidation of the Trust’s
bitcoin. The Sponsor may, in its sole discretion, add or terminate prime execution agents at any time. The Sponsor may, in its sole discretion,
change the prime execution agent for the Trust, but it has no obligation whatsoever to do so or to seek any particular terms for the Trust
from other such prime execution agents. The Prime Execution Agent is experienced in providing such services with a focus, though itself
and its affiliates, on building the technology to power the crypto economy since 2012. The Prime Execution Agent currently provides services
to thousands of customers, including institutions. Any costs related to on-chain transactions through the Prime Execution Agent, including
in connection with payment of the Sponsor’s Fee, are borne by the Prime Execution Agent (and not the Trust or its Shareholders).
The Prime Execution Agent is compensated through the payment of a fixed
rate in basis points on any purchase or sale of bitcoin on behalf of the Trust. Where the Prime Execution Agent purchases or sells bitcoin
with respect to a creation or redemption basket, the fixed basis point fee is communicated to the applicable Authorized Participant in
advance of the order and is included in the transaction fee charged to the applicable Authorized Participant. The Trust pays such fee
when the Prime Execution Agent sells bitcoin to pay Trust expenses.
Within the Trust’s Trading Balance, the Prime Execution Agent
Agreement provides that the Trust does not have an identifiable claim to any particular bitcoin (and cash). Instead, the Trust’s
Trading Balance represents an entitlement to a pro rata share of the bitcoin (and cash) the Prime Execution Agent holds on behalf of customers
who hold similar entitlements against the Prime Execution Agent. In this way, the Trust’s Trading Balance represents an omnibus
claim on the Prime Execution Agent’s bitcoin (and cash) held on behalf of the Prime Execution Agent’s customers. There are
no policies that would limit the amount of bitcoin that can be held temporarily in the Trading Balance maintained by the Prime Execution
Agent. However, bitcoin is only moved into the Trading Balance in connection with and to the extent of purchases and sales of bitcoin
by the Trust and such bitcoin is swept from the Trust’s Trading Balance to the Trust’s Vault Balance each trading day pursuant
to a regular end-of-day sweep process. The Trust’s use of Trade Credits and early order cutoffs are also designed to limit the amount
of time that any of the Trust’s bitcoin is held in the Trust’s Trading Balance.
The Prime Execution Agent holds the bitcoin associated with customer
entitlements across a combination of omnibus cold wallets, omnibus “hot wallets” (meaning wallets whose private keys are generated
and stored online, in internet-connected computers or devices) or in omnibus accounts in the Prime Execution Agent’s name on a trading
venue (including third-party venues and the Prime Execution Agent’s own execution venue) where the Prime Execution Agent executes
orders to buy and sell bitcoin on behalf of its clients. The Sponsor has no control over, and for security reasons the Prime Execution
Agent does not disclose to the Sponsor, the percentage of bitcoin that the Prime Execution Agent holds for customers holding similar entitlements
as the Trust which are kept in omnibus cold wallets, as compared to omnibus hot wallets or omnibus accounts in the Prime Execution Agent’s
name on a trading venue. The Prime Execution Agent has represented to the Sponsor that the percentage of assets maintained in cold versus
hot storage is determined by ongoing risk analysis and market dynamics, in which the Prime Execution Agent attempts to balance anticipated
liquidity needs for its customers as a class against the anticipated greater security of cold storage.
The Prime Execution Agent is not required by the Prime Execution Agent
Agreement to hold any of the bitcoin in the Trust’s Trading Balance in cold storage or to hold any such bitcoin in segregation,
and neither the Trust nor the Sponsor can control the method by which the Prime Execution Agent holds the bitcoin credited to the Trust’s
Trading Balance. The Prime Execution Agent relies on bank accounts to provide its trading platform services and including temporarily
holding any cash related to a customer’s purchase or sale of bitcoin.
The Prime Execution Agent Agreement provides that the Prime Execution
Agent is subject to certain conflicts of interest, including: (i) the Trust’s orders may be routed to the Prime Execution Agent’s
own execution venue where the Trust’s orders may be executed against other customers of the Prime Execution Agent or with the Coinbase
acting as principal, (ii) the beneficial identity of the counterparty purchaser or seller with respect to the Trust’s orders may
be unknown and therefore may inadvertently be another client of the Prime Execution Agent, (iii) the Prime Execution Agent may execute
a trade for its own inventory (or the account of an affiliate) while in possession of that knowledge and (iv) the Prime Execution Agent
may act in a principal capacity with respect to certain orders. As a result of these and other conflicts, when acting as principal, the
Prime Execution Agent may have an incentive to favor its own interests and the interests of its affiliates over the Trust’s interests.
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The Prime Execution Agent does not guarantee uninterrupted access or
the services it provides to the Trust. The Prime Execution Agent Agreement provides that the Prime Execution Agent shall have no liability,
obligation, or responsibility whatsoever for the selection or performance of any Connected Trading Venue, and that other Connected Trading
Venues and/or trading venues not used by Coinbase may offer better prices and/or lower costs than the Connected Trading Venue used to
execute the Trust’s orders. Under the Prime Execution Agent Agreement, the Prime Execution Agent’s liability is limited. Both
the Trust and the Prime Execution Agent and its affiliates (including the Bitcoin Custodian) are required to indemnify each other under
certain circumstances. The Prime Execution Agent Agreement is governed by New York law and provides that disputes arising under it are
subject to arbitration.
Coinbase Global maintains a commercial crime insurance policy, which
is intended to cover the loss of client assets held by Coinbase Global and all of its subsidiaries, including the Prime Execution Agent.
The insurance maintained by the Coinbase Insureds is shared among all of Coinbase’s customers, is not specific to the Trust or to
customers holding bitcoin with the Bitcoin Custodian or Prime Execution Agent and may not be available or sufficient to protect the Trust
from all possible losses or sources of losses.
Trade Credit
Lender
To avoid having to pre-fund purchases or sales of bitcoin in connection
with cash creations and redemptions and sales of bitcoin to pay the Sponsor’s Fee and any other Trust expenses not assumed by the
Sponsor, to the extent applicable, the Trust may borrow bitcoin or cash as Trade Credit from the Trade Credit Lender on a short-term basis.
This allows the Trust to buy or sell bitcoin through the Prime Execution Agent in an amount that exceeds the cash or bitcoin credited
to the Trust’s Trading Balance at the Prime Execution Agent at the time such order is submitted to the Prime Execution Agent, which
is expected to facilitate the Trust’s ability to process cash creations and redemptions and pay the Sponsor’s Fee and any
other Trust expenses not assumed by the Sponsor, to the extent applicable, in a timely manner by seeking to lock in the bitcoin price
on the trade date for creations and redemptions or the payment date for payment of the Sponsor’s Fee or any other Trust Expenses
not assumed by the Sponsor, rather than waiting for the funds associated with the creation to be transferred by the Cash Custodian to
the Prime Execution Agent prior to purchasing the bitcoin or for the bitcoin held in the Vault Balance to be transferred to a Trading
Balance prior to selling the bitcoin. The amount of Trade Credit available to the Trust is at the discretion of the Trade Credit Lender
and such amount is expected to be dynamic. The Trade Credit Lender reserves the right to change the amount available to the Trust from
time to time in its sole discretion. The Trust is required by the terms of the Trade Financing Agreement, which is part of the Prime Execution
Agent Agreement, to repay any extension of Trade Credit by the Trade Credit Lender by 6:00 p.m. ET on the business day following the day
that the Trade Credit was extended to the Trust. The Trade Credit Lender is only required to extend Trade Credits to the Trust to the
extent such bitcoin or cash is actually available to the Trade Credit Lender. For example, if the Trade Credit Lender is unable to itself
borrow bitcoin to lend to the Trust as a Trade Credit, or there is a material market disruption (as determined by the Trade Credit Lender
in good faith and in its sole discretion), the Trade Credit Lender is not obligated to extend Trade Credits to the Trust. To secure the
repayment of Trade Credits, the Trust has granted a first-priority lien to the Trade Credit Lender over the assets in its Trading Balance
and Vault Balance. If the Trust fails to repay a Trade Credit within the required deadline, the Trade Credit Lender is permitted to take
control of bitcoin or cash credited to the Trust’s Trading Balance and Vault Balance (though it is required to exhaust the Trading
Balance prior to taking control of assets in the Vault Balance) and liquidate them to repay the outstanding Trade Credit. Trade Credits
bear interest. Interest is payable on Trade Credits that exceeds the Federal Funds rate. Although the Trust anticipates that generally
the Authorized Participants will pre-fund their creation Baskets, the Trade Financing Arrangement will be utilized to the extent the amount
of the cash deposit necessary for a creation Basket is not pre-funded by the Authorized Participant. It is not anticipated that the Trade
Financing Arrangement will be used for a redemption Basket. To the extent the execution price of the bitcoin acquired exceeds the cash
deposit amount, the Authorized Participant would be responsible for the difference.
The Sponsor may require the Authorized Participant to deliver cash
on the trade date so that a purchase order can be settled in a timely manner, including in the event Trade Credits are unavailable from
the Trade Credit Lender or become exhausted. For a redemption order, the Trust may use financing when the bitcoin remains in the Trust’s
Custody Account at the point of intended execution of a sale of bitcoin.
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This arrangement could cause the execution price associated with such
trades, following the completion of the transfer, to materially deviate from the execution price that would have existed on the original
trade or payment date, which could negatively impact Shareholders.
Interest payable on Trade Credits utilized under the Trade Financing
Agreement is the responsibility of the Authorized Participants. In addition, to the extent that the execution price for purchases and
sales of bitcoin related to creations and redemptions and sales of bitcoin in connection with paying the Sponsor’s Fee and any other
Trust expenses, to the extent applicable, deviate significantly from the Index price used to determine the NAV of the Trust, the Shareholders
may be negatively impacted.
Other Matters
The Shareholders’ recourse against the Sponsor, the Trustee,
and the Trust’s other service providers for the services they provide to the Trust, including, without limitation, those relating
to the holding of bitcoin or the provision of instructions relating to the movement of bitcoin, is limited. For the avoidance of doubt,
neither the Sponsor, the Trustee, nor any of their affiliates, nor any other party has guaranteed the assets or liabilities, or otherwise
assumed the liabilities, of the Trust, or the obligations or liabilities of any service provider to the Trust, including, without limitation,
the Bitcoin Custodian. Consequently, a loss may be suffered with respect to the Trust’s bitcoin that is not covered by the Bitcoin
Custodian’s insurance and for which no person is liable in damages. As a result, the recourse of the Trust or the Shareholders,
under applicable law, is limited.
Form of Shares
Registered Form
Shares are issued in registered form in accordance with the Trust Agreement.
The Transfer Agent has been appointed registrar and transfer agent for the purpose of transferring Shares in certificated form. The Transfer
Agent keeps a record of all Shareholders and holders of the Shares in certified form in the registry. The Sponsor recognizes transfers
of Shares in certificated form only if done in accordance with the Trust Agreement. The beneficial interests in such Shares are held in
book-entry form through participants and/or accountholders in DTC.
Book Entry
Individual certificates are not issued for the Shares. Instead, Shares
are represented by one or more global certificates, which are deposited by the Transfer Agent with DTC and registered in the name of Cede
& Co., as nominee for DTC. The global certificates evidence all of the Shares outstanding at any time. Shareholders are limited to
(1) DTC Participants, (2) Indirect Participants, and (3) those who hold interests in the Shares through DTC Participants or Indirect
Participants, in each case who satisfy the requirements for transfers of Shares. DTC Participants acting on behalf of Shareholders holding
Shares through such participants’ accounts in DTC follow the delivery practice applicable to securities eligible for DTC’s
Same-Day Funds Settlement System. Shares are credited to DTC Participants’ securities accounts following confirmation of receipt
of payment.
DTC
DTC is a limited purpose trust company organized under the laws of
the State of New York and is a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New
York Uniform Commercial Code and a “clearing agency” registered pursuant to the provisions of Section 17A of the 1934 Act.
DTC holds securities for DTC Participants and facilitates the clearance and settlement of transactions between DTC Participants through
electronic book-entry changes in accounts of DTC Participants.
Creation and Redemption of Shares
The
Trust issues and redeems Baskets on a continuous basis. Baskets may be created or redeemed only by Authorized Participants and are only
issued or redeemed in exchange for a corresponding amount of cash, whereby such amount of cash for a trading day is disclosed to Authorized
Participants prior to the time that the Exchange is open for regular trading on such trading day ( i.e., the night before such
trading day). As of December 31, 2023, a Basket required delivery of approximately $250,000, although the amount of bitcoin used to determine
the cash necessary to purchase the creation of a Basket, or to be sold upon redemption of a Basket, will decrease over the life of the
Trust, due to the payment or accrual of fees and other expenses or liabilities payable by the Trust. No Shares are issued unless the
Cash Custodian has allocated to the Trust’s account the corresponding amount of cash. Authorized Participants pay a transaction
fee for each order they place to create or redeem one or more Baskets. Transaction fees are expected to include commissions, taxes, and
transaction and market impact costs, as applicable, in relation to the Trust’s purchase or sale of bitcoin related thereto. The
price of bitcoin, the Trust’s NAV and the price of a Basket could rise or fall substantially between the time a creation order
or redemption order is submitted and the time the amount of the purchase price in respect thereof is determined, and the risk of such
price movements will be borne solely by the Authorized Participant.
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The transfers of bitcoin necessary for creations or redemptions require
“on-chain” transactions represented on the Bitcoin blockchain. Bitcoin transactions that occur on the blockchain are susceptible
to delays due to bitcoin network outages, congestion, spikes in transaction fees demanded by miners, or other problems or disruptions.
To the extent that bitcoin transfers from the Trading Balance to the Vault Balance (creations) or from the Vault Balance to the Trading
Balance (redemptions) are delayed due to congestion or other issues with the bitcoin network, applicable order settlement could be delayed.
Further, disruption of services or actions at the Prime Execution Agent, Bitcoin Custodian, Cash Custodian, Transfer Agent or Sponsor
would have the potential to delay applicable order settlement.
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.
The Trust creates Shares by receiving bitcoin from a third-party that
is not the Authorized Participant and the Trust-not the Authorized Participant-is responsible for selecting the third-party to deliver
the bitcoin. Further, the third-party does not act as an agent of the Authorized Participant with respect to the delivery of the bitcoin
to the Trust or act at the direction of the Authorized Participant with respect to the delivery of the bitcoin to the Trust. The Trust
redeems shares by delivering bitcoin to a third-party that is not the Authorized Participant and the Trust-not the Authorized Participant-is
responsible for selecting the third-party to receive the bitcoin. Further, the third-party does not act as an agent of the Authorized
Participant with respect to the receipt of the bitcoin from the Trust or act at the direction of the Authorized Participant with respect
to the receipt of the bitcoin from the Trust.
Creation Procedures
On any business day, an Authorized Participant may place an order with
the Transfer Agent to create one or more Baskets. For purposes of processing creation and redemption orders, a “business day”
means any day other than a day when the Exchange is closed for regular trading. Purchase orders must be placed by 4:00 p.m. ET, or the
close of regular trading on the Exchange, whichever is earlier, or such earlier time as disseminated by the Trust the prior day for the
following day’s transactions ( e.g. , 11:00 a.m. ET). The day on which an order is received by the Transfer Agent is considered
the purchase order date.
The manner by which creations are made is dictated by the terms of
the Authorized Participant Agreement. By placing a creation order, an Authorized Participant agrees to deposit cash with the Cash Custodian.
If an Authorized Participant fails to deposit the required amount of cash, including by the communicated cut-off time, the order may proceed
through Trade Credits or the order may be canceled as directed by the Sponsor, and the Authorized Participant will be obligated to pay
all applicable costs and expenses.
The total deposit of cash required to create each Basket includes the
cash equivalent of an amount of bitcoin that is in the same proportion to the total assets of the Trust (net of accrued but unpaid Sponsor
fees and any accrued but unpaid extraordinary expenses and liabilities). In order to calculate the amount of cash necessary for a creation
Basket, the Administrator multiplies the NAV per share by the number of Shares in a creation Basket (5,000). Each night, the Sponsor
or Trust Administrator publish the amount of cash that will be required in exchange for each creation Basket the next business day.
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In addition, the required cash deposit typically has a value greater
than the value of the corresponding amount of bitcoin as directed by the Trust ( e.g. , an additional 15% of such value as the excess
cash deposit), which is intended to cover the commissions, transaction and market impact costs associated with the Trust’s purchase,
via the Prime Execution Agent, of bitcoin that the Authorized Participant is obligated to pay. The Trust returns any unused portion of
the excess cash deposit to the Authorized Participant. Following an Authorized Participant’s purchase order, the Trust’s Cash
Custodian account must be credited with the required cash by the settlement date, or such earlier time as instructed, which may include
the trade date. Upon receipt of the deposit amount in the Trust’s Cash Custodian account and after purchase by the Trust of corresponding
bitcoin with the cash deposited via the Prime Execution Agent, with transfer of bitcoin from the Trading Balance (Prime Execution Agent)
to the Vault Balance (Bitcoin Custodian), the Bitcoin Custodian notifies the Transfer Agent, the Authorized Participant, and the Sponsor
that the applicable amount of bitcoin has been received into the Trust’s account at the Bitcoin Custodian. The Transfer Agent then
directs DTC to credit the number of Shares created to the Authorized Participant’s DTC account.
Bitcoin held in the Trust’s account at the Bitcoin Custodian
is the property of the Trust and is not traded, leased, or loaned under any circumstances.
Redemption Procedures
The procedures by which an Authorized Participant can redeem one or
more Baskets mirror the procedures for the creation of Baskets with an additional safeguard on bitcoin being removed from the Trust’s
Bitcoin Custodian account. 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 4:00 p.m. ET, or the close of regular trading on the Exchange, whichever is earlier,
or such earlier time as disseminated by the Trust the prior day for the following day’s transactions ( e.g. , 2:00 p.m. ET).
The redemption distribution from the Trust consists of a movement of
bitcoin representing the amount of bitcoin held by the Trust evidenced by the Shares being redeemed from the Vault Balance (Bitcoin Custodian)
to the Trading Balance (Prime Execution Agent). The Prime Execution Agent then sells, at the direction of the Trust, the applicable amount
of bitcoin for cash and delivers such cash to the Cash Custodian. The cash redemption amount due from the Trust (less total transaction
fees) is delivered from the Cash Custodian to the Authorized Participant once the Transfer Agent notifies the Cash Custodian and the Sponsor
that the Authorized Participant has delivered the Shares represented by the Baskets to be redeemed to the Trust’s DTC account. If
the Trust’s DTC account has not been credited with all of the Shares of the Baskets to be redeemed, the redemption distribution
is delayed until such time as the Transfer Agent confirms receipt of all such Shares.
Bitcoin held in the Trust’s Custodian account is the property
of the Trust and is not traded, leased, or loaned under any circumstances.
Suspension or
Rejection of Redemption Orders
The Sponsor may, in its discretion, suspend the right of redemption,
or postpone the redemption settlement date, (1) for any period during which the Exchange is closed other than customary weekend or
holiday closings, or trading on the Exchange is suspended or restricted, (2) for any period during which an emergency (for example, an
interruption in services or availability of the Bitcoin Custodian, Cash Custodian, Administrator, or other service providers to the Trust,
act of God, catastrophe, civil disturbance, government prohibition, war, terrorism, strike or other labor dispute, fire, force majeure,
interruption in telecommunications, order entry systems, internet services, or network provider services, unavailability of Fedwire, SWIFT
or banks’ payment processes, significant technical failure, bug, error, disruption or fork of the Bitcoin network, hacking, cybersecurity
breach, or power, internet, or Bitcoin network outage, or similar event) exists as a result of which delivery, disposal or evaluation
of bitcoin is not reasonably practicable, or (3) for such other period as the Sponsor determines to be necessary for the protection of
the Shareholders. For example, the Sponsor may determine that it is necessary to suspend redemptions to allow for the orderly liquidation
of the Trust’s assets. If the Sponsor has difficulty liquidating the Trust’s positions, e.g. , because of a market
disruption event or an unanticipated delay in the liquidation of a position in an over-the-counter contract, it may be appropriate to
suspend redemptions until such time as such circumstances are rectified. None of the Sponsor, the person authorized to take redemption
orders in the manner provided in the Authorized Participant Agreement, or the Bitcoin Custodian or Cash Custodian will be liable to any
person or in any way for any loss or damages that may result from any such suspension or postponement.
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The Sponsor acting by itself or through the person authorized to take
redemption orders in the manner provided in the Authorized Participant Agreement may, in its sole discretion, reject any redemption order
(1) the Sponsor determines not to be in proper form, (2) the fulfillment of which its counsel advises may be illegal under applicable
laws and regulations, or (3) if circumstances outside the control of the Sponsor, the person authorized to take redemption orders in the
manner provided in the Authorized Participant Agreement or the Custodian make it for all practical purposes not feasible for the Shares
to be delivered under the redemption order. The Sponsor may also reject a redemption order if the number of Shares being redeemed would
reduce the remaining outstanding Shares to 5,000 Shares ( i.e. , 1 Basket) or less.
None of the Trust, Sponsor, the Transfer Agent, the Bitcoin Custodian
or the Cash Custodian are liable for the rejection of any purchase order or Basket.
In the event that the Sponsor intends to suspend or postpone redemptions,
it will provide Shareholders with notice in a prospectus supplement and/or through a current report on Form 8-K or in the Trust’s
annual or quarterly reports.
Creation and
Redemption Transaction Fee
To compensate for expenses incurred in connection with the creation
and redemption of Baskets, an Authorized Participant is required to pay a standard transaction fee of $100 to create or redeem Baskets,
which does vary in accordance with the number of Baskets in such order. The total transaction fee also includes applicable taxes, brokerage
and any other commissions, transaction fees (including financing), trade slippage and market impact costs, as applicable, and may be reduced,
increased or otherwise changed by the Sponsor and the Trust based on changes to the costs or inputs associated with the total transaction
fee. The Sponsor will notify Authorized Participants of any change in the transaction fee and will not implement any change in the fee
until after the date of notice.
Tax Responsibility
Authorized Participants are responsible for any transfer tax, sales
or use tax, stamp tax, recording tax, value added tax or similar tax or governmental charge applicable to the creation or redemption of
Baskets, regardless of whether or not such tax or charge is imposed directly on the Authorized Participant, and agree to indemnify the
Sponsor and the Trust if they are required by law to pay any such tax, together with any applicable penalties, additions to tax and interest
thereon.
Secondary Market
Transactions
Authorized Participants are the only persons that may place orders
to create and redeem Baskets. Authorized Participants must be registered broker-dealers or other securities market participants, such
as banks and other financial institutions that are not required to register as broker-dealers to engage in securities transactions. An
Authorized Participant is under no obligation to create or redeem Baskets, and an Authorized Participant is under no obligation to offer
to the public Shares of any Baskets it does create.
Authorized Participants that do offer to the public Shares from the
Baskets they create will do so at per-Share offering prices that are expected to reflect, among other factors, the trading price of the
Shares on the Exchange, the NAV of the Trust at the time the Authorized Participant purchased the Baskets, the NAV of the Shares at the
time of the offer of the Shares to the public, the supply of and demand for Shares at the time of sale, and the liquidity of bitcoin or
other portfolio investments. Baskets are generally redeemed when the price per Share is at a discount to the NAV per Share. Shares initially
comprising the same Basket but offered by Authorized Participants to the public at different times may have different offering prices.
An order for one or more Baskets may be placed by an Authorized Participant on behalf of multiple clients. Authorized Participants who
make deposits with the Trust in exchange for Baskets receive no fees, commissions or other forms of compensation or inducement of any
kind from either the Trust or the Sponsor and no such person has any obligation or responsibility to the Sponsor or the Trust to effect
any sale or resale of Shares.
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Shares trade in the secondary market on the Exchange. Shares may trade
in the secondary market at prices that are lower (discount) or higher (premium) relative to their NAV per Share. The amount of the discount
or premium in the trading price relative to the NAV per Share may be influenced by various factors, including the number of Shareholders
who seek to purchase or sell Shares in the secondary market and the liquidity of bitcoin. However, the Sponsor believes that the Basket
size of 5,000 shares enable Authorized Participants and market makers to manage inventory and facilitate and effective arbitrage mechanism
for the Trust. In addition, an investor may incur costs attributable to the difference between the highest price a buyer is willing to
pay to purchase shares (bid) and the lowest price a seller is willing to accept for shares (ask) when buying and selling shares in the
secondary market (the “bid/ask spread”).
Description of the Shares
The beneficial interest in the Trust is divided into shares. Each Share
of the Trust represents an equal beneficial interest in the net assets of the Trust, and each holder of Shares is entitled to receive
such holder’s pro rata share of distributions of income and capital gains, if any. The Shares of the Trust are listed on the Exchange
under the symbol “BTCW.” The Trust’s Shares may be bought and sold in the secondary market like any other exchange-listed
security.
All Shares are transferable, fully paid and non-assessable. No Share
has any priority or preference over any other Share of the Trust. All distributions, if any, will be made ratably among all Shareholders
from the assets of the Trust according to the number of Shares held of record by such Shareholders on the record date for any distribution
or on the date of termination of the Trust, as the case may be. Except as otherwise provided by the Sponsor, Shareholders have no preemptive
or other right to subscribe to any additional Shares or other securities issued by the Trust. Every Shareholder, by virtue of having purchased
or acquired one or more Shares, have expressly consented and agreed to be bound by the terms of the Trust Agreement.
The Sponsor has the power and authority, without action or approval
by the Shareholders, to cause the Trust to issue Shares from time to time as it deems necessary or desirable. The number of Shares authorized
is unlimited. From time to time, the Sponsor may cause the Trust to divide or combine the Shares into a greater or lesser number without
thereby changing the proportionate beneficial interests in the Trust, or in any way affecting the rights, of the Shareholders, without
action or approval by the Shareholders. The ownership of Shares are recorded on the books of the Trust or a transfer or similar agent
for the Trust. No certificates certifying the ownership of Shares are issued except as the Sponsor may otherwise determine from time to
time. The Sponsor may make such rules as it considers appropriate for the issuance of share certificates, transfer of Shares and similar
matters. The record books of the Trust as kept by the Trust, or any transfer or similar agent, as the case may be, are conclusive as to
the identity of the Shareholders and as to the number of Shares held from time to time by each.
Description
of Limited Rights
The Shares do not represent a traditional investment and should not
be viewed as similar to “shares” of a corporation operating a business enterprise with management and a board of directors.
A shareholder does not have the statutory rights normally associated with the ownership of shares of a corporation; however, the DSTA
does provide shareholders the right to bring “oppression” or “derivative” actions. All of the Shares are of the
same class with equal rights and privileges. Each of the Shares is transferable through the book-entry system of DTC, is fully paid and
nonassessable. Shareholders have the right to vote only if expressly required under Delaware or federal law or rules or regulations of
the Exchange, or if submitted to the Shareholders by the Sponsor in its sole discretion. The Shares do not entitle their holders to any
conversion or pre-emptive rights or any redemption rights or rights to distributions. See the section titled “Management; Voting
by Shareholders.”
Duties of the Sponsor
The general fiduciary duties that would otherwise be imposed on the
Sponsor (which would make its operation of the Trust as described herein impracticable due to the strict prohibition imposed by such duties
on, for example, conflicts of interest on behalf of a fiduciary in its dealings with its beneficiaries), are replaced entirely by the
terms of the Trust Agreement (to which terms all Shareholders, by subscribing to the Shares, are deemed to consent). Additionally, under
the Trust Agreement, the Sponsor has the following obligations as a sponsor of the Trust:
· devote such of its time to the affairs of the Trust as it shall, in its discretion exercised in good faith, determine to be necessary
to carry out the purposes of the Trust for the benefit of the Shareholders;
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· execute, file, record and/or publish all certificates, statements and other documents and do any and all other things as may be appropriate
for the formation, qualification and operation of the Trust and for the conduct of its affairs in all appropriate jurisdictions;
· retain on behalf of the Trust independent public accountants to audit the accounts of the Trust;
· employ attorneys to represent the Sponsor and, as necessary, the Trust;
· select and enter into agreements with the Trustee and any other service provider to the Trust;
· use its best efforts to maintain the status of the Trust as a grantor trust for U.S. federal income tax purposes under Subpart E,
Part I of Subchapter J of the Code
· monitor all fees charged to the Trust, and the services rendered by the service providers to the Trust, to determine whether the fees
paid by, and the services rendered to, the Trust are at competitive rates and are the best price and services available under the circumstances,
and if necessary, renegotiate the fee structure to obtain such rates and services for the Trust;
· Enter into an Authorized Participant Agreement with each Authorized Participant and discharge the duties and responsibilities of the
Trust and the Sponsor
· Receive directly or through its delegates from Authorized Participants and process properly submitted creation orders
· Receive directly or through its delegates from Authorized Participants and process properly submitted redemption orders (if authorized),
as may from time to time be permitted by the Trust Agreement;
· Interact with the Bitcoin Custodian, Cash Custodian and any other party as required;
· cause the Trust to comply with all rules, orders and regulations of the Exchange to which the Trust is subject as a result of the
listing, quotation or trading of the Shares on the Exchange, and take all such other actions that may reasonably be taken and are necessary
for the Shares to remain listed, quoted or traded on the Exchange until the Trust is terminated or the Shares are no longer listed, quoted
or traded on the Exchange;
· perform such other services as the Sponsor believes the Trust may from time to time require; and
· in general, to carry out any other business in connection with or incidental to any of the foregoing powers, to do everything necessary,
suitable or proper for the accomplishment of any purpose or the attainment of any object or the furtherance of any power herein set forth,
either alone or in association with others, and to do every other act or thing incidental or appurtenant or growing out of or connected
with the aforesaid business or purposes, objects or powers.
To the extent that at law (common or statutory) or in equity, the Sponsor
has duties (including fiduciary duties) or liabilities to the Trust, the Shareholders or to any other person, the Sponsor will not be
liable to the Trust, the Shareholders or to any other person for its good faith reliance on the provisions of the Trust Agreement unless
such reliance constitutes fraud, bad faith, or willful misconduct on the part of the Sponsor.
Liability and Indemnification
Trustee
The Trustee is not liable for the acts or omissions of the Sponsor,
nor is the Trustee liable for supervising or monitoring the performance and the duties and obligations of the Sponsor or the Trust under
the Trust Agreement. The Trustee is not personally liable under any circumstances, except for its own fraud, bad faith, or willful misconduct.
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The Trustee or any officer, affiliate, director, employee, or agent
of the Trustee (each, an “Indemnified Person”) shall be indemnified by the Trust from and against any and all losses, damages, liabilities, claims, actions,
suits, costs, expenses, disbursements (including the reasonable fees and expenses of counsel and fees and expenses incurred in connection
with enforcement of its indemnification rights hereunder), taxes and penalties of any kind and nature whatsoever (collectively, “Expenses”),
to the extent that such Expenses arise out of or are imposed upon or asserted at any time against such Indemnified Persons with respect
to the performance of the Trust Agreement, the creation, operation or termination of the Trust or the transactions contemplated hereby;
provided, however, that the Trust shall not be required to indemnify any Indemnified Person for any Expenses which are a result of the
willful misconduct, bad faith or negligence of an Indemnified Person. To the fullest extent permitted by law and by the requirement for
treatment of the Trust as a grantor trust for tax purposes, Expenses to be incurred by an Indemnified Person shall, from time to time,
be advanced by, or on behalf of, Sponsor prior to the final disposition of any matter upon receipt by Sponsor of an undertaking by, or
on behalf of, such Indemnified Person to repay such amount if it shall be determined that the Indemnified Person is not entitled to be
indemnified under the Trust Agreement.
Sponsor
The Sponsor and its affiliates and their respective members,
managers, directors, officers, employees, agents and controlling persons (each, a “Covered Person”) have no liability to
the Trust or to any Shareholder or other Covered Person for any loss suffered by the Trust which arises out of any action or
inaction of such Covered Person if such course of conduct did not constitute fraud, bad faith or willful misconduct of such Covered
Person. Subject to the foregoing, neither the Sponsor nor any other Covered Person are personally liable for the return or repayment
of all or any portion of the purchase price paid by a Shareholder for its Shares, it being
expressly agreed that any such return made pursuant to this Trust Agreement shall be made solely from the assets of the Trust
without any rights of contribution from the Sponsor or any other Covered Person. A Covered Person is not liable for the conduct
or misconduct of any delegatee selected by the Sponsor with reasonable care.
The Sponsor and any other Covered Person shall be indemnified by
the Trust against any losses, judgments, liabilities, expenses and amounts arising out of or in connection with the performance of its obligations under the Trust Agreement, any actions taken in accordance with the provisions
of the Trust agreement or with its activities for the Trust, provided that (i) the Sponsor was acting on behalf of, or performing
services for, the Trust and such liability or loss was not the result of fraud, bad faith, willful misconduct, or a material breach
of the Trust Agreement on the part of the Sponsor and (ii) any such indemnification will be recoverable only from the Trust Estate,
as defined within the Trust Agreement. Any amounts payable to the Sponsor and any Covered Person under the Trust Agreement may be
payable in advance. The Sponsor has no obligation to appear in, prosecute or defend any legal action that in its opinion may involve
it in any expense or liability; provided, however, that the Sponsor may, in its discretion, undertake any action that it may deem
necessary or desirable in respect of the Trust Agreement and the rights and duties of the parties hereto and the interests of the
Shareholders and, in such event, the legal expenses and costs of any such action will be expenses and costs of the Trust and the
Sponsor will be entitled to be reimbursed therefor by the Trust.
Management; Voting by Shareholders
The Shareholders do not generally have any voting rights. The Shares
do not represent a traditional investment and are not similar to shares of a corporation operating a business enterprise with management
and a board of directors. All Shares are of the same class with equal rights and privileges. The Shares do not entitle their holders to
any conversion or pre-emptive rights or any redemption rights (other than with respect to the dissolution of the Trust).
Shareholders do not participate in the management or control of the
Trust, nor do they enter into any transaction on behalf of the Trust or have the power to sign for or bind the Trust, as such power is
vested solely and exclusively in the Sponsor.
The Sponsor generally has the right to amend the Trust Agreement as
it applies to the Trust provided that the Shareholders have the right to vote only if expressly required under Delaware or federal law
or rules or regulations of the Exchange, or if submitted to the Shareholders by the Sponsor in its sole discretion. No amendment affecting
the Trustee will be binding upon or effective against the Trustee unless consented to by the Trustee in the form of an instruction letter.
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The Trust does not have any directors, officers or employees. The creation
and operation of the Trust has been arranged by the Sponsor. The Sponsor is not governed by a board of directors. However, the Sponsor
is supported by principals and executive officers who perform certain functions that, if the Trust had directors or executive officers,
would typically be performed by them.
Books and Records
The Trust keeps its books of record and account at the office of the
Sponsor located at 250 West 34th Street, 3rd Floor, New York, NY 10119, or at the offices of the Administrator, or such office, including
of an administrative agent, as it may subsequently designate upon notice. No Shareholder shall have any right to inspect any account,
book or document of the Trust that is not publicly available, except as conferred by the Sponsor.
The Trust keeps a copy of the Trust Agreement on file in the Sponsor’s
office which will be available for inspection by any Shareholder at all times during its usual business hours upon reasonable advance
notice.
Governing Law; Consent to Delaware Jurisdiction
The rights of the Sponsor, the Trust, DTC (as registered owner of the
Trust’s global certificate for Shares) and the Shareholders are governed by the laws of the State of Delaware except for causes
of action for violation of U.S. federal or state securities laws. The Sponsor, the Trust and DTC and, by accepting Shares, each DTC Participant
and each Shareholder, consent to the exclusive jurisdiction of the courts of the State of Delaware and any federal courts located in Delaware,
provided that (i) the forum selection provisions do not apply to suits brought to enforce a duty or liability created by the 1934 Act
or any other claim for which the federal courts have exclusive jurisdiction and (ii) the federal district courts of the United States
of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the 1933 Act, or
the rules and regulations promulgated thereunder. Such consent is not required for any person to assert a claim of Delaware jurisdiction
over the Sponsor or the Trust.
Federal Income Tax Considerations
The following discussion of the material U.S. federal income tax consequences
that generally apply to the purchase, ownership and disposition of Shares by a U.S. Shareholder (as defined below), and certain U.S. federal
income consequences that may apply to an investment in Shares by a Non-U.S. Shareholder (as defined below). The discussion below is based
on the Internal Revenue Code of 1986, as amended (the “Code”), “Treasury Regulations” promulgated thereunder and
judicial and administrative interpretations of the Code, all as in effect on the date of this annual report and all of which are subject
to change either prospectively or retroactively. The tax treatment of Shareholders may vary depending upon their own particular circumstances.
Certain Shareholders (including but not limited to banks, financial institutions, insurance companies, regulated investment companies,
real estate investment trusts, tax-exempt organizations, tax-exempt or tax- advantaged retirement plans or accounts, brokers or dealers,
traders, partnerships for U.S. federal income tax purposes, persons holding Shares as a position in a “hedging,” “straddle,”
“conversion,” “constructive sale” or other integrated transaction for U.S. federal income tax purposes, persons
whose “functional currency” is not the U.S. dollar, persons required for U.S. federal income tax purposes to accelerate the
recognition of any item of gross income with respect to the Shares as a result of such income being recognized on an applicable financial
statement, or other investors with special circumstances) may be subject to special rules not discussed below. In addition, the following
discussion applies only to Shareholders who hold Shares as “capital assets” (generally, property held for investment). Moreover,
the discussion below does not address the effect of any state, local or foreign tax law consequences that may apply to an investment in
Shares. Purchasers of Shares are urged to consult their own tax advisers with respect to all federal, state, local and foreign tax law
considerations potentially applicable to their investment in Shares.
For purposes of this discussion, a “U.S. Shareholder” is
a Shareholder that is:
· an individual who is treated as a citizen or resident of the United States for U.S. federal income tax purposes;
· a corporation (or entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws
of the United States, any state thereof or the District of Columbia;
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· an estate, the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or
· a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one
or more United States persons have the authority to control all substantial decisions of the trust.
If a partnership or other entity or arrangement treated as a partnership
for U.S. federal income tax purposes holds Shares, the tax treatment of a partner generally depends upon the status of the partner and
the activities of the partnership. If you are a partner of a partnership holding Shares, the discussion below may not be applicable, and
we urge you to consult your own tax adviser for the U.S. federal income tax implications of the purchase, ownership and disposition of
such Shares.
Taxation of
the Trust
The Sponsor and the Trustee treat the Trust as a “grantor trust”
for U.S. federal income tax purposes. Although not free from doubt due to the lack of directly governing authority, the Trust should be
classified as a “grantor trust” for U.S. federal income tax purposes (and the following discussion assumes such classification).
As a result, the Trust itself should not be subject to U.S. federal income tax. Instead, the Trust’s income and expenses should
“flow through” to the Shareholders, and the Trustee reports the Trust’s income, gains, losses and deductions to the
IRS on that basis. It is possible that the IRS or another tax authority could assert a position contrary to one or all of those conclusions
and that a court could sustain that contrary position. Neither the Sponsor nor the Trustee will request a ruling from the IRS with respect
to the classification of the Trust for U.S. federal income tax purposes or with respect to any other matter. If the IRS were to assert
successfully that the Trust is not classified as a “grantor trust,” the Trust would likely be classified as a partnership
for U.S. federal income tax purposes, which may affect the timing and other tax consequences to the Shareholders, and might be classified
as a publicly traded partnership that would be taxable as a corporation for U.S. federal income tax purposes, in which case the Trust
would be taxed in the same manner as a regular corporation on its taxable income and distributions to Shareholders out of the earnings
and profits of the Trust would be taxed to Shareholders as ordinary dividend income. However, due to the uncertain treatment of digital
currency for U.S. federal income tax purposes, there can be no assurance in this regard. Except as otherwise indicated, the remainder
of this discussion assumes that the Trust is classified as a grantor trust for U.S. federal income tax purposes.
Taxation of
U.S. Shareholders
Shareholders are treated, for U.S. federal income tax purposes, as
if they directly owned a pro rata share of the underlying assets held in the Trust. Shareholders are also treated as if they directly
received their respective pro rata shares of the Trust’s income, if any, and as if they directly incurred their respective pro rata
shares of the Trust’s expenses. For purposes of this discussion, and unless stated otherwise, it is assumed that all of a Shareholder’s
Shares are acquired on the same date and at the same price per Share. Shareholders that hold multiple lots of Shares, or that are contemplating
acquiring multiple lots of Shares, should consult their own tax advisers as to the determination of the tax basis and holding period for
the underlying bitcoin related to such Shares.
Current IRS guidance on the treatment of convertible virtual currencies
classifies bitcoin as “property” that is not currency for U.S. federal income tax purposes and clarifies that bitcoin could
be held as a capital asset, but it does not address several other aspects of the U.S. federal income tax treatment of bitcoin. Because
bitcoin is a new technological innovation, the U.S. federal income tax treatment of bitcoin or transactions relating to investments in
bitcoin may evolve and change from those discussed below, possibly with retroactive effect. In this regard, the IRS indicated that it
has made it a priority to issue additional guidance related to the taxation of virtual currency transactions, such as transactions involving
bitcoin. While it has started to issue such additional guidance, whether any future guidance will adversely affect the U.S. federal income
tax treatment of an investment in bitcoin or in transactions relating to investments in bitcoin is unknown. Moreover, future developments
that may arise with respect to digital currencies may increase the uncertainty with respect to the treatment of digital currencies for
U.S. federal income tax purposes. This discussion assumes that any bitcoin the Trust may hold is properly treated for U.S. federal income
tax purposes as property that may be held as a capital asset and is not currency for purposes of the provisions of the Code relating to
foreign currency gain and loss.
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The Trust may use bitcoin to pay certain expenses of the Trust, which
under current IRS guidance would be treated as a sale of such bitcoin. Although the Trust generally does not intend to sell bitcoin for
other purposes, it may do so in connection with cash redemption transactions, or if necessary to pay certain expenses that must be paid
in cash. As and when the Trust sells bitcoin (for example to generate cash to pay fees or expenses) or is treated as selling bitcoin (for
example by using bitcoin to pay fees or expenses), a Shareholder will recognize a gain or loss in an amount equal to the difference between
(a) the Shareholder’s pro rata share of the amount realized by the Trust upon the sale and (b) the Shareholder’s tax basis
for its pro rata share of the bitcoin that was sold. A Shareholder’s tax basis for its share of any bitcoin sold by the Trust should
generally be determined by multiplying the Shareholder’s total basis for its share of all of the bitcoin held in the Trust immediately
prior to the sale, by a fraction the numerator of which is the amount of bitcoin sold, and the denominator of which is the total amount
of the bitcoin held in the Trust immediately prior to the sale. After any such sale, a Shareholder’s tax basis for its pro rata
share of the bitcoin remaining in the Trust should be equal to its tax basis for its share of the total amount of the bitcoin held in
the Trust immediately prior to the sale, less the portion of such basis allocable to its share of the bitcoin that was sold or treated
as sold.
Upon a Shareholder’s sale of some or all of its Shares, the Shareholder
will be treated as having sold the portion or all, respectively, of its pro rata share of the bitcoin held in the Trust at the time of
the sale that is attributable to the Shares sold. Accordingly, the Shareholder generally will recognize gain or loss on the sale in an
amount equal to the difference between (a) the amount realized pursuant to the sale of the Shares, and (b) the Shareholder’s tax
basis for the portion of its pro rata share of the bitcoin held in the Trust at the time of sale that is attributable to the Shares sold,
as determined in the manner described in the preceding paragraph. Based on current IRS guidance, such gain or loss (as well as any gain
or loss realized by a Shareholder on account of the Trust selling bitcoin) will generally be long-term or short-term capital gain or loss,
depending upon whether the Shareholder has a holding period of greater than one year in its pro rata share of the bitcoin that was sold.
In the event the In-Kind Regulatory Approval is received, an in-kind
redemption of some or all of a Shareholder’s Shares in exchange for the underlying bitcoin represented by the Shares redeemed generally
will not be a taxable event to the Shareholder. The Shareholder’s tax basis for the bitcoin received in the in-kind redemption generally
will be the same as the Shareholder’s tax basis for the portion of its pro rata share of the bitcoin held in the Trust immediately
prior to the in-kind redemption that is attributable to the Shares redeemed. The Shareholder’s holding period with respect to the
bitcoin received generally should include the period during which the Shareholder held the Shares redeemed in-kind. A subsequent sale
of the bitcoin received by the Shareholder generally will be a taxable event, unless a nonrecognition provision of the Code or Treasury
Regulations applies to such sale.
After any sale or redemption of less than all of a Shareholder’s
Shares, the Shareholder’s tax basis for its pro rata share of the bitcoin held in the Trust immediately after such sale or redemption
generally will be equal to its tax basis for its share of the total amount of the bitcoin held in the Trust immediately prior to the sale
or redemption, less the portion of such basis that is taken into account in determining the amount of gain or loss recognized by the Shareholder
upon such sale or redemption for cash or, in the case of an in-kind redemption, that is treated as the basis of the bitcoin received by
the Shareholder in the in-kind redemption.
If a hard fork occurs in the Bitcoin blockchain, Incidental Rights
or IR Virtual Currency may become available to the Trust. The IRS has held that a hard fork resulting in the creation of new units of
cryptocurrency is a taxable event giving rise to ordinary income. If such a transaction occurs, the Trust, at the direction of the Sponsor,
will as soon as possible direct the Bitcoin Custodian to irrevocably and permanently abandon, for no consideration, such Incidental Rights
or IR Virtual Currency.
3.8% Tax on
Net Investment Income
Certain U.S. Shareholders who are individuals are required to pay a
3.8% tax on the lesser of the excess of their modified adjusted gross income over a threshold amount ($250,000 for married persons filing
jointly and $200,000 for single taxpayers) or their “net investment income,” which generally includes capital gains from the
disposition of property. This tax is in addition to any capital gains taxes due on such investment income. A similar tax applies to estates
and trusts. U.S. Shareholders should consult their own tax advisers regarding the effect, if any, this tax may have on their investment
in the Shares.
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Brokerage Fees
and Trust Expenses
Any brokerage or other transaction fee incurred by a Shareholder in
purchasing Shares is treated as part of the Shareholder’s tax basis in the underlying assets of the Trust. Similarly, any brokerage
fee incurred by a Shareholder in selling Shares will reduce the amount realized by the Shareholder with respect to the sale.
Shareholders are required to recognize the full amount of gain or loss
upon a sale or deemed sale of bitcoin by the Trust (as discussed above), even though some or all of the proceeds of such sale are used
by the Trustee to pay Trust expenses. Shareholders may deduct their respective pro rata shares of each expense incurred by the Trust to
the same extent as if they directly incurred the expense. Shareholders who are individuals, estates or trusts, however, may be required
to treat some or all of the expenses of the Trust as miscellaneous itemized deductions. An individual may not deduct miscellaneous itemized
deductions for tax years beginning after December 31, 2017, and before January 1, 2026. For tax years beginning after December 31, 2025,
individuals may deduct certain miscellaneous itemized deductions only to the extent they exceed in the aggregate 2% of the individual’s
adjusted gross income. Similar rules apply to certain miscellaneous itemized deductions of estates and trusts. In addition, such deductions
may be subject to phase outs and other limitations under applicable provisions of the Code.
Investment by
Certain Retirement Plans
Individual retirement accounts (“IRAs”) and participant-directed
accounts under tax-qualified retirement plans are limited in the types of investments they may make under the Code. Potential purchasers
of Shares that are IRAs or participant-directed accounts under a Code section 401(a) plan should consult with their own tax advisors as
to the tax consequences of a purchase of Shares.
United States
Information Reporting and Backup Withholding
The Trustee files certain information returns with the IRS, and provides
certain tax-related information to Shareholders, in connection with the Trust. To the extent required by applicable regulations, each
Shareholder will be provided with information regarding its allocable portion of the Trust’s annual income, expenses, gains and
losses (if any). A U.S. Shareholder may be subject to United States backup withholding tax in certain circumstances unless it provides
its taxpayer identification number and complies with certain certification procedures. Non-U.S. Shareholders may have to comply with certification
procedures to establish that they are not a United States person, and some Non-U.S. Shareholders may be required to meet certain information
reporting or certification requirements imposed by the Foreign Account Tax Compliance Act, in order to avoid certain information reporting
and withholding tax requirements.
The amount of any backup withholding will be allowed as a credit against
a Shareholder’s U.S. federal income tax liability and may entitle the Shareholder to a refund, provided that the required information
is furnished to the IRS in a timely manner.
Taxation in
Jurisdictions Other Than the United States
Prospective purchasers of Shares that are based in or acting out of
a jurisdiction other than the United States are advised to consult their own tax advisers as to the tax consequences under the laws of
such jurisdiction (or any other jurisdiction other than the United States to which they are subject) of their purchase, holding, sale
and redemption of or any other dealing in Shares and, in particular, as to whether any value added tax, other consumption tax or transfer
tax is payable in relation to such purchase, holding, sale, redemption or other dealing.
ERISA and Related Considerations
The Employee Retirement Income Security Act of 1974 (“ERISA”)
and/or Section 4975 of the Code impose certain requirements on: (i) employee benefit plans and certain other plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and certain collective investment funds or insurance company general or separate
accounts in which such plans or arrangements are invested, that are subject to Title I of ERISA and/or Section 4975 of the Code (collectively,
“Plans”); and (ii) persons who are fiduciaries with respect to the investment of assets treated as “plan assets”
within the meaning of U.S. Department of Labor (the “DOL”) regulation 29 C.F.R. § 2510.3-101, as modified by Section
3(42) of ERISA (the “Plan Assets Regulation”), of a Plan. Investments by Plans are subject to the fiduciary requirements and
the applicability of prohibited transaction restrictions under ERISA and the Code.
37
“Governmental plans” within the meaning of Section 3(32)
of ERISA, certain “church plans” within the meaning of Section 3(33) of ERISA and “non-U.S. plans” described in
Section 4(b)(4) of ERISA, while not subject to the fiduciary responsibility and prohibited transaction provisions of Title I of ERISA
or Section 4975 of the Code, may be subject to any federal, state, local, non-U.S. or other law or regulation that is substantially similar
to the foregoing provisions of ERISA and the Code. Fiduciaries of any such plans are advised to consult with their counsel prior to an
investment in the Shares.
In contemplating an investment of a portion of Plan assets in the Shares,
the Plan fiduciary responsible for making such investment should carefully consider, taking into account the facts and circumstances of
the Plan, the “Risk Factors” discussed below and whether such investment is consistent with its fiduciary responsibilities.
The Plan fiduciary should consider, among other issues, whether: (1) the fiduciary has the authority to make the investment under the
appropriate governing plan instrument; (2) the investment would constitute a direct or indirect non-exempt prohibited transaction with
a “party in interest” or “disqualified person” within the meaning of ERISA and Section 4975 of the Code respectively;
(3) the investment is in accordance with the Plan’s funding objectives; and (4) such investment is appropriate for the Plan under
the general fiduciary standards of investment prudence and diversification, taking into account the overall investment policy of the Plan,
the composition of the Plan’s investment portfolio and the Plan’s need for sufficient liquidity to pay benefits when due.
When evaluating the prudence of an investment in the Shares, the Plan fiduciary should consider the DOL’s regulation on investment
duties, which can be found at 29 C.F.R. § 2550.404a-1.
It is intended that: (a) none of the Sponsor, the Trustee, the Bitcoin
Custodian, the Cash Custodian or any of their respective affiliates (the “Transaction Parties”) has through this report and
related materials provided any investment advice within the meaning of Section 3(21) of ERISA to the Plan in connection with the decision
to purchase or acquire such Shares; and (b) the information provided in this report and related materials will not make a Transaction
Party a fiduciary to the Plan.
Intellectual Property
WisdomTree,
Inc. is the licensor of certain trademarks, service marks and trade names of the Trust. WisdomTree, Inc. also owns trademark registrations
for the Sponsor. The Sponsor relies upon these trademarks through which it markets its services and strives to build and maintain brand
recognition in the market and among current and potential investors. WisdomTree, Inc. is not responsible for, and has not participated
in, the determination of the timing, prices, or quantities of Shares of the Trust to be issued or in the determination or calculation
of the equation by which the Shares of the Trust are redeemable.
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.