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Therefore, the Trust looks to the Authorized Participant when assessing entity specific and market-based volume and level of activity for Digital Asset Markets. The Authorized Participant, as a related party of the Sponsor, provides information about the Digital Asset Markets on which it transacts to the Trust.
The Trust or the Authorized Participant does not have access to Digital Asset Exchange Markets that do not have a BitLicense and has access only to non-Digital Asset Exchange Markets that the Authorized Participant reasonably believes are operating in compliance with applicable law, including federal and state licensing requirements, based upon information and assurances provided to it by each market.
Second, the Trust sorts the remaining Digital Asset Markets from high to low by entity-specific and market-based volume and level of activity of Bitcoin traded on each Digital Asset Market in the trailing twelve months. Third, the Trust then reviews intra-day pricing fluctuations and the degree of variances in price on Digital Asset Markets to identify any material notable variances that may impact the volume or price information of a particular Digital Asset Market.
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Fourth, the Trust then selects a Digital Asset Market as its principal market based on the highest market-based volume, level of activity and price stability in comparison to the other Digital Asset Markets on the list. Based on information reasonably available to the Trust, Exchange Markets have the greatest volume and level of activity for the asset. The cost basis of the investment in Bitcoin recorded by the Trust for financial reporting purposes is the fair value of Bitcoin at the time of transfer.
The cost basis recorded by the Trust may differ from proceeds collected by the Authorized Participant from the sale of the corresponding Shares to investors. Investment Transactions and Revenue Recognition. The Trust considers investment transactions to be the receipt of Bitcoin for Share creations and the delivery of Bitcoin for Share redemptions or for payment of expenses in Bitcoin.
The Trust records its investment transactions on a trade date basis and changes in fair value are reflected as net change in unrealized appreciation or depreciation on investments. Realized gains and losses are calculated using the specific identification method. Fair Value Measurement. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability i.
GAAP utilizes a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Trust. The fair value hierarchy is categorized into three levels based on the inputs as follows:.
Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Trust has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, these valuations do not entail a significant degree of judgment. Level 2 — Valuations based on quoted prices in markets that are not active or for which significant inputs are observable, either directly or indirectly. Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs can vary by investment. To the extent that valuations are based on sources that are less observable or unobservable in the market, the determination of fair value requires more judgment. Fair value estimates do not necessarily represent the amounts that may be ultimately realized by the Trust. Amount at.
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Fair Value Measurement Using. Level 1.
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Level 2. Level 3.
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Fair Value of Bitcoin. Bitcoin is held by the Custodian on behalf of the Trust and is carried at fair value. As of June 30, , and December 31, , the Trust held , The following represents the changes in quantity of Bitcoin and the respective fair value:. Balance at January 1, Bitcoin contributed. Bitcoin distributed for Sponsor's Fee, related party. Balance at December 31, Balance at June 30, Creations and Redemptions of Shares. At June 30, and December 31, , there were an unlimited number of Shares authorized by the Trust. The Trust creates and, should the Trust commence a redemption program, redeems Shares from time to time, but only in one or more Baskets.
The creation and redemption of Baskets on behalf of investors are made by the Authorized Participant in exchange for the delivery of Bitcoin to the Trust or the distribution of Bitcoin by the Trust. The number of Bitcoin required for each creation Basket or redemption Basket is determined by dividing x the number of Bitcoin owned by the Trust at p. Each Share represented approximately 0. The cost basis of investments in Bitcoin recorded by the Trust is the fair value of Bitcoin, as determined by the Trust, at p. The cost basis recorded by the Trust may differ from proceeds collected by the Authorized Participant from the sale of each Share to investors.
The Authorized Participant may realize significant profits buying, selling, creating, and, if permitted, redeeming Shares as a result of changes in the value of Shares or Bitcoin. At this time, the Trust is not operating a redemption program and is not accepting redemption requests.
Income Taxes. As of January 1, , an amendment to the Trust Agreement was made to ensure that the Trust Agreement was consistent with the treatment of the Trust as a grantor trust. On February 9, , the Court of Chancery of the State of Delaware ordered that the Original Trust Agreement be reformed so that the amendments made are retroactive to the original date of execution of the Trust Agreement. On September 11, , the Trust received a private letter ruling from the IRS in which the IRS concluded, based on the facts at that time, that the Trust qualified as a grantor trust for U.
Accordingly, the Sponsor takes the position that the Trust is properly treated as a grantor trust for U. Assuming that the Trust is a grantor trust, the Trust will not be subject to U. If the Trust were not properly classified as a grantor trust, the Trust might be classified as a partnership for U.
However, due to the uncertain treatment of digital currencies, including forks, airdrops and similar occurrences for U. If the Trust were classified as a partnership for U. In addition, tax information reports provided to beneficial owners of Shares would be made in a different form. If the Trust were not classified as either a grantor trust or a partnership for U. In that event, the Trust would be subject to entity-level U. As of and during the periods ended June 30, and December 31, , the Trust did not have a liability for any unrecognized tax amounts.
The Sponsor of the Trust has evaluated whether or not there are uncertain tax positions that require financial statement recognition and has determined that no reserves for uncertain tax positions related to federal, state and local income taxes existed as of June 30, or December 31, Related Parties. The Trust considers the following entities, their directors, and employees to be related parties of the Trust: DCG, Genesis, and Grayscale. As of June 30, and December 31, , 12,, and 12,, Shares of the Trust were held by related parties of the Trust, respectively.
In accordance with the Trust Agreement governing the Trust, the Trust pays a fee to the Sponsor, calculated as 2. The amount of Bitcoin payable in respect of each daily U. For purposes of these financial statements, the U. In such circumstances, the Sponsor or its delegate i will instruct the Custodian to. For the three and six months ended June 30, and , the Sponsor did not pay any Additional Trust Expenses on behalf of the Trust.
Risks and Uncertainties. The Trust is subject to various risks including market risk, liquidity risk, and other risks related to its concentration in a single asset, Bitcoin.
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Investing in Bitcoin is currently highly speculative and volatile. The net asset value of the Trust relates primarily to the value of Bitcoin held by the Trust, and fluctuations in the price of Bitcoin could materially and adversely affect an investment in the Shares of the Trust. The price of Bitcoin has a limited history. During such history, Bitcoin prices have been volatile and subject to influence by many factors, including the levels of liquidity.