Osprey Bitcoin Trust 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read together with our audited financial statements and related notes included elsewhere in this Annual Report, which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The following discussion may contain forward-looking statements based on assumptions we believe to be reasonable. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those set forth under Part I, Item 1A. Risk Factors in this Annual Report. Trust Overview The Trust is a passive investment vehicle and its assets will not be actively managed. As a result, it will not engage in any activities designed to obtain a profit from, or to ameliorate losses caused by, changes in the market prices of Bitcoins. The investment objective of the Trust is for the Units to reflect the performance of Bitcoin as measured by reference to the Index, less the aggregate Trust expenses and other liabilities. To date, the Trust has not met its investment objective. The Units are intended to constitute a cost-effective and convenient means of gaining investment exposure to Bitcoin. However, an investment in the Units may operate and perform differently over time, and at any given time, than an investment directly in Bitcoin due to such factors as Trust fees and expenses, the quantity of Units available for trading, and the relative liquidity, and differences in the markets trading Bitcoin from the markets trading the Units (e.g., hours of operation, marketplace rules, clearance and settlement, market participants). Although the Units will not be the exact equivalent of a direct investment in Bitcoin, they provide investors with an alternative that constitutes a relatively cost-effective way to participate in Bitcoin markets through the securities market. Critical Accounting Policies and Estimates 50 Investment Transactions and Revenue Recognition The Trust considers investment transactions to be the receipt of Bitcoin for Units creations and the delivery of Bitcoin for Units redemptions or for payment of expenses in Bitcoin. At this time, the Trust is not accepting redemption requests from unitholders. The Trust records its investment transactions on a trade date basis and changes in fair value are reflected as net change in unrealized appreciation or depreciation on investments. Realized gains and losses are calculated using a first in first out method. Realized gains and losses are recognized in connection with transactions including settling obligations for the Management Fee in Bitcoin. Principal Market and Fair Value Determination To determine which Bitcoin market will serve as the Trust’s principal market (or in the absence of a principal market, the most advantageous market) for purposes of calculating the Trust’s NAV, the Trust follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820-10, which outlines the application of fair value accounting. ASC 820-10 determines fair value to be the price that would be received for Bitcoin in a current sale, which assumes an orderly transaction between market participants on the measurement date. ASC 820-10 requires the Trust to assume that Bitcoin is sold in its principal market to market participants or, in the absence of a principal market, the most advantageous market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable and willing and able to transact. The Trust purchases Bitcoin directly from various counterparties, such as Galaxy Digital, Jane Street and Cumberland DRW LLC, and does not itself transact in any Bitcoin markets. Therefore, the Trust looks to these counterparties when assessing entity-specific and market-based volume and the level of activity in the Bitcoin markets. The Trust utilizes the Bitcoin Market Price to determine the value of Bitcoin at any given time. The Trust evaluates its principal market selection (or in the absence of a principal market the most advantageous market) at least annually and conducts a quarterly analysis to determine (i) if there have been recent changes to each Bitcoin market’s trading volume and level of activity in the trailing twelve months, (ii) if any Bitcoin markets have developed that the Trust has access to, or (iii) if recent changes to a Bitcoin market’s price stability have occurred that would materially impact the selection of the principal market and necessitate a change in the Trust’s determination of its principal market. The Trust does not anticipate changing its principal market more frequently than annually, in connection with its annual evaluation of its principal market selection and annual financial audit. Each annual evaluation will take into account the findings from the Trust’s quarterly reviews. The cost basis of a Trust investment in Bitcoin recorded by the Trust for financial reporting purposes is the fair value of the Bitcoin at the time of contribution to the Trust. The Bitcoin cost basis recorded by the Trust may differ from the value of the proceeds collected by the Sponsor from the sale of the corresponding Units to investors. Investment Company Considerations The Trust is an investment company for GAAP purposes and follows accounting and reporting guidance in accordance with the FASB ASC Topic 946, Financial Services – Investment Companies . The Trust uses fair value as its method of accounting for Bitcoin in accordance with its classification as an investment company for accounting purposes. The Trust is not a registered investment company under the Investment Company Act of 1940. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates and these differences could be material. Review of Financial Results (audited) Financial Highlights for Year Ended December 31, 2021 and 2020 For the Year Ended December 31, 2021 2020 Net realized and unrealized (loss) gain on investment in Bitcoin $ 16,870,167 $ 32,062,851 Net (decrease) increase in net assets resulting from operations $ 15,939,190 $ 31,893,722 Net assets $ 129,673,168 $ 44,906,682 Net realized and unrealized gain on investment in Bitcoin for the year ended December 31, 2021 was $16,870,167 which includes a realized gain of $12,335 on the transfer of Bitcoins to pay the Management Fee and other expenses and net change in unrealized appreciation on investment in Bitcoin of $16,857,832. Net realized and unrealized gain on investment in Bitcoin for the period was driven by Bitcoin price appreciation from $29,026.66 per Bitcoin as of December 31, 2020 to $45,867.86 per Bitcoin as of December 31, 2021. Net increase in net assets resulting from operations was $15,939,190 for the year ended December 31, 2021, which consisted of the net realized and unrealized gain on investment in Bitcoin, less the Management Fee of $605,731 and other expenses of $325,246, net of 51 waivers. Net assets increased to $129,673,168 at December 31, 2021, a 189% increase for the year. The increase in net assets resulted from the aforementioned Bitcoin price appreciation and capital contribution of approximately 1,299.49 Bitcoin with a value of $68,827,296 to the Trust in connection with Units issuance during the period, which was partially offset by the Trust’s Net expenses of $930,977 for the year. Net realized and unrealized gain on investment in Bitcoin for year ended December 31, 2020 was $32,062,851 which includes a realized gain of $18,466 on the transfer of Bitcoins to pay the Management Fee and other expenses to the Sponsor and net change in unrealized appreciation on investment in Bitcoin of $32,044,385. Net realized and unrealized gain on investment in Bitcoin for the year was driven by Bitcoin price appreciation from $7,153.37 per Bitcoin as of December 31, 2019 to $29,026.66 per Bitcoin as of the year ended December 31, 2020. Net increase in net assets resulting from operations was $31,893,722 for the year ended December 31, 2020, which consisted of the net realized and unrealized gain on investment in Bitcoin, less the Management Fee of $132,210 and Other expenses of $36,919. Net assets increased to $44,906,682 at December 31, 2020, a 357% increase for the year. The increase in net assets resulted from the aforementioned Bitcoin price appreciation and the contribution of approximately 187.84 Bitcoin with a value of $3,175,825 to the Trust in connection with Units issuance during the period, which was partially offset by the Trust’s Net expenses of $169,129 for the year. Cash Resources and Liquidity When selling Bitcoins and/or Additional Currency to pay Extraordinary Expenses, the Sponsor endeavors to sell the exact number of Bitcoins and/or Additional Currency needed to pay expenses in order to minimize the Trust’s holdings of assets other than Bitcoin. As a consequence, the Sponsor expects that the Trust will not record any cash flow from its operations and that its cash balance will be zero at the end of each reporting period. In exchange for the Management Fee, the Sponsor has agreed to assume most of the expenses incurred by the Trust. As a result, the only ordinary expense of the Trust during the periods covered by this Annual Report was the Management Fee. The Trust is not aware of any trends, demands, conditions or events that are reasonably likely to result in material changes to its liquidity needs. Selected Operating Data For the Year Ended December 31, 2021 2020 Bitcoins: Opening balance 1,548.46 1,376.48 Purchases 1,299.49 187.84 Management Fee, related party (12.12 ) (13.41 ) Custody and Index Fee (6.90 ) (2.45 ) Closing balance 2,828.93 1,548.46 Accrued but unpaid Management Fee, related party (1.18 ) (0.64 ) Accrued but unpaid Custody and Index Fee (0.65 ) (0.74 ) Net closing balance 2,827.10 1,547.08 Number of Units: Opening balance 4,529,312 * 3,980,128 * Issuance 3,811,224 549,184 * Closing balance 8,340,536 4,529,312 * 52 As of December 31, 2021 2020 NAV per Unit $ 15.55 $ 9.91 Bitcoin Market Price $ 45,867.86 $ 29,026.66 Bitcoin Holdings per Unit 0.00034 0.00034 * Units have been adjusted retroactively to reflect the 4:1 stock split effective January 5, 2021. Historical Digital Asset Holdings and Bitcoin Prices As movements in the price of Bitcoins will directly affect the price of the Units, investors should understand recent movements in the price of Bitcoin. Investors, however, should also be aware that past movements in the Bitcoin price are not indicators of future movements. Movements may be influenced by various factors, including, but not limited to, government regulation, security breaches experienced by service providers, as well as political and economic uncertainties around the world. The following chart illustrates the movements in the NAV and the Bitcoin Market Price (referred to in the chart as “Market Price”) from the beginning of the Trust’s operations on January 3, 2019 to December 31, 2021. The table below illustrates the movements in the Bitcoin Market Price since the beginning of the Trust’s operations on January 3, 2019. Since the beginning of the Trust’s operations to December 31, 2021 the Bitcoin Market Price has ranged from $3,358.67 to $67,371.70, with the straight average being $22,016.21. The Sponsor has not observed a material difference between the Bitcoin Market Price and average prices from the constituent Bitcoin exchanges individually or as a group. Period Average High Date Low Date End of period From January 3, 2019 to December 31, 2019 $ 7,379.15 $ 13,724.33 6/26/2019 $ 3,358.67 2/7/2019 $ 7,153.38 Year ended December 31, 2020 $ 11,131.27 $ 29,026.66 12/31/2020 $ 4,956.92 3/16/2020 $ 29,026.66 Year ended December 31, 2021 $ 47,524.08 $ 67,371.70 11/9/2021 $ 29,785.71 7/20/2021 $ 45,867.86 January 3, 2019 (the inception of the Trust’s operations) to December 31, 2021 $ 22,016.47 $ 67,371.70 11/9/2021 $ 3,358.67 2/7/2019 $ 45,867.86 53 Secondary Market Trading The Trust’s Units have been quoted on OTC Markets since February 12, 2021, and on OTCQX under the symbol OBTC since February 26, 2021. The price of the Units as quoted on OTCQX (and OTC Markets) has varied significantly from the NAV per Unit. From February 12, 2021 to December 31, 2021, the maximum premium of the closing price of the Units quoted on OTCQX (and OTC Markets) over the value of the Trust’s NAV per Unit was approximately 240% and the average daily premium since the Units were first traded on OTC Markets on February 12, 2021 was approximately 10%. As of December 31, 2021, the Trust’s Units were quoted on OTCQX at a discount of approximately 19% to the Trust’s NAV per Unit. The historical premium of the closing price of the Units quoted on OTCQX and OTC Markets as compared with the NAV per Unit has varied, from a high of 240% on February 16, 2021 (closing price $56.39 per Unit on OTCQX (and OTC Markets) and NAV per Unit $16.58) to a low (i.e., discount) of -23% on October 19, 2021 (closing price $16.71 per Unit on OTCQX (and OTC Markets) and NAV per Unit $21.79). The historical premiums and discounts at times reflect a material deviation from the Bitcoin Market Price. The following table sets out the range of high and low closing prices for the Units as reported by OTCQX (or OTC Markets) and the Trust’s NAV per Unit for the period from February 12, 2021 to December 31, 2021. The Trust’s Bitcoin Holdings per Unit for the period was 0.00034. High Low OTC Markets NAV per Unit OTC Markets NAV per Unit 2/16/2021 11/9/2021 5/21/2021 7/20/2021 $ 56.39 $ 22.86 $ 12.29 $ 10.13 Item 7A. Quantitative and Qualitative Disclosures about Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data See Index to Financial Statements on page F-1 for a list of the financial statements filed herein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.