Item 1. Business
Trust Overview
Osprey
Bitcoin Trust (the “Trust”) is a Delaware Statutory Trust that was formed on January 3, 2019 by the filing of the Certificate
of Trust with the Delaware Secretary of State in accordance with the provisions of the Delaware Statutory Trust Act (“DSTA”).
The Trust operates pursuant to the Second Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”).
The
Trust’s purpose is to hold Bitcoin, which are digital assets that are created and transmitted through the operations of the
peer-to-peer Bitcoin Network, a decentralized network of computers that operates on cryptographic protocols. The Trust issues common
units of fractional undivided beneficial interest (“Units”), which represent ownership in the Trust, on an ongoing
basis, but only to an accredited investor (“Accredited Investor”) (as defined in Rule 501 under the Securities Act).
The Units are quoted on OTC Markets Group Inc.’s OTCQX® Best Marketplace (“OTCQX”) under the ticker symbol
“OBTC.”
Osprey
Funds, LLC is the sponsor of the Trust, Delaware Trust Company is the trustee of the Trust (the “Trustee”), Continental
Stock Transfer & Trust Company is the transfer agent of the Trust (in such capacity, the “Transfer Agent”),
Theorem Fund Services is the administrator of the Trust (in such capacity, the “Administrator”), and Coinbase Custody
Trust Company, LLC (the “Custodian” or “Coinbase Custody”) is the digital asset custodian of the Trust.
Fidelity Digital Assets Services, LLC (“FDAS”) served as our digital asset custodian until April 10, 2022. On February
4, 2022, the Trust entered into a custodial services agreement (the “Custodial Services Agreement”) with Coinbase Custody.
On March 11, 2022, the Trust delivered to FDAS a notice of termination of its custodial services agreement, dated May 18, 2020.
On March 10, 2022, the Trust transferred its custodied digital assets from FDAS to Coinbase Custody. The notice of termination
became effective on April 10, 2022.
The
Trust is authorized under the Trust Agreement to create and issue an unlimited number of Units. The Trust issues Units only in
connection with purchase orders for a minimum of $25,000.00 for initial investments and $10,000.00 for subsequent investments.
Due
to the lack of an ongoing redemption program as well as price volatility, low trading volume and closings of Bitcoin exchanges
due to fraud, failure, security breaches or otherwise, there can be no assurance that the market value of the Units will reflect
the per Unit value of the Trust’s Bitcoin, less the Trust’s expenses and other liabilities (“NAV per Unit”),
and the Units may trade at a substantial premium over, or a substantial discount to, the NAV per Unit. The Units are neither interests
in nor obligations of the Sponsor or the Trustee. The Trust has from time to time halted creations of new Units, and most recently
did so on November 1, 2021 when the Trust suspended the November 2020 Offering (as defined herein).
Although
the redemption of Units is provided for in the Trust Agreement, Units may not be redeemed from the Trust currently. The current
legal framework has made it difficult for the Trust to permit redemptions of our Units because we are unable to conduct concurrent
offerings and redemptions of our Units. As of the date of this filing, the Trust has not accepted new purchases for over one year,
and we have no present intention of reopening sales of Units. We are considering a redemption program for investors in the Trust.
Any redemption program would likely involve limited periodic redemptions of Units, although we have not ruled out the possibility
of an open-ended redemption program.
The
Trust determines the current value of Bitcoin by reference to the market price of Bitcoin as listed on Coinbase Pro, a digital
asset exchange for the buying and selling of cryptocurrency and the Trust’s principal digital asset market, as determined
at 4:00 p.m., New York time on each day the New York Stock Exchange is open for trading (each, a “Business Day”) (the
“Bitcoin Market Price”). The Bitcoin Market Price is available at https://pro.coinbase.com/trade/BTC-USD.
The
Trust uses the Bitcoin Market Price to calculate its “Bitcoin Holdings,” which is the aggregate value, expressed in
U.S. dollars, of the Trust’s assets (other than U.S. dollars, other fiat currency and Additional Currency (as that term is
defined herein)), less the U.S. dollar value of the Trust’s expenses and other liabilities calculated in the manner set forth
below under the section “Valuation of Bitcoin and Determination of the Trust’s Bitcoin Holdings.” The per Unit
value of the Trust’s Bitcoin Holdings (the “Bitcoin Holdings per Unit”) is calculated by dividing Bitcoin Holdings
by the number of Units currently outstanding.
Bitcoin
pricing information is available on a 24-hour basis from various financial information service providers or Bitcoin Network information
sites such as Tradeblock.com or Bitcoincharts.com. The spot price and bid/ask spreads may also be available directly from various
Bitcoin exchanges. Market prices for the Units will be available from a variety of sources, including brokerage firms, information
websites and other information service providers. In addition, on each Business Day the Trust’s website will provide pricing
information for the Units based on the Bitcoin Market Price.
The
Trust is not registered as an investment company under the Investment Company Act of 1940 (“Investment Company Act”)
and the Sponsor believes that the Trust is not required to register under the Investment Company Act. The Trust will not hold or
trade in commodity
futures contracts or other derivative contracts regulated by the Commodity Exchange Act (“CEA”), as administered by
the Commodity Futures Trading Commission (“CFTC”). The Sponsor believes that the Trust is not a commodity pool for
purposes of the CEA, and that neither the Sponsor nor the Trustee is subject to regulation as a commodity pool operator or a commodity
trading adviser in connection with the operation of the Trust.
The
Trust has no fixed termination date.
The
Sponsor maintains an Internet website at www.ospreyfunds.io,
through which the registrant annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), are made available free of charge after they have been filed or furnished to the SEC. Additional
information regarding the Trust may also be found on the SEC’s EDGAR database at www.sec.gov.
Trust Objective and Key Operating
Metrics
The
investment objective of the Trust, which is a passive investment vehicle, is for the Units to reflect the performance of Bitcoin
as measured by reference to Coin Metrics CMBI Bitcoin Index (the “Index”) provided by Coin Metrics Inc. (the “Index
Provider”), less the Aggregate Trust Expenses (defined below) and other liabilities. The Units have been quoted on OTC Markets
since February 12, 2021, and on OTCQX under the symbol “OBTC” since February 26, 2021, and to date have not met their
investment objective.
While
an investment in the Units is not a direct investment in Bitcoin, the Units are intended to constitute a cost-effective and convenient
means of gaining investment exposure to Bitcoin. The logistics of accepting, transferring and safekeeping of Bitcoin are dealt
with by the Sponsor and the Custodian, and the related expenses are built into the price of the Units. Therefore, Unitholders do
not have additional tasks or costs over and above those generally associated with investing in any other privately placed security.
However, an investment in the Units may operate and perform differently over time, or at any specific point in time, than an investment
directly in Bitcoin due to such factors as Trust fees and expenses, the quantity of Units available for trading, the relative liquidity
of the Units and differences in the markets trading Bitcoin and Units (e.g., hours of operation, marketplace rules, clearance and
settlement and market participants).
The
Units are restricted securities that may not be resold except in transactions exempt from registration under the Securities Act
and state securities laws and any such transaction must be approved by the Sponsor. In determining whether to grant approval, the
Sponsor will specifically look at whether the conditions of Rule 144 under the Securities Act and any other applicable laws have
been met. Any attempt to sell Units without the approval of the Sponsor in its sole discretion will be void ab initio.
The
Trust’s assets consist solely of Bitcoins, Additional Currency (as defined below), proceeds from the sale of Bitcoins and
Additional Currency pending use of such cash for payment of Extraordinary Expenses or distribution to the Unitholders and any rights
of the Trust pursuant to any agreements, other than the Trust Agreement, to which the Trust is a party. Each Unit represents a
proportional interest, based on the total number of Units outstanding, in each of the Trust’s assets as determined in the
case of Bitcoin by reference to the Bitcoin Market Price, less the Trust’s expenses and other liabilities (which include
accrued but unpaid fees and expenses). The Sponsor expects that the market price of the Units will fluctuate over time in response
to the market price of Bitcoins. In addition, because the Units reflect the estimated accrued but unpaid expenses of the Trust,
the number of Bitcoins represented by a Unit will gradually decrease over time as the Trust’s Bitcoins are used to pay the
Trust’s expenses. The Trust does not expect to take any Additional Currency it may hold into account for purposes of determining
the Trust’s Bitcoin Holdings or the Bitcoin Holdings per Unit.
The
Trust’s Bitcoins are carried, for financial statement purposes, at fair value, as required by the U.S. generally accepted
accounting principles (“GAAP”). The Trust values its Bitcoin Holdings at the Bitcoin Market Price as of 4:00 p.m.,
New York time on each Business Day. The net asset value of the Trust determined on a GAAP basis is referred to in this Annual Report
as “NAV.” The Trust uses Coinbase Pro as its principal market. The Trust selected Coinbase Pro, among other Bitcoin
markets, because it provides the greatest liquidity, with approximately 75% of daily trading volume in the U.S. as of January 6,
2023. More information about the valuation of the Trust’s NAV and the use of the Bitcoin Market Price is located herein under
“Valuation of Bitcoin and Determination of NAV.”
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
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.
Activities of the
Trust
The
activities of the Trust are limited to (i) issuing Units in exchange for cash or Bitcoin transferred to the Trust as consideration
in connection with the issuance of the Units, (ii) transferring or selling Bitcoin [(including any Additional Currency obtained
as a result of forks in the Bitcoin Network or airdrops)] as necessary to pay the 0.49% Management Fee (as defined herein), as
well as any Excluded Expenses and any Extraordinary Expenses (as each is defined in the Trust Agreement, the “Aggregate Trust
Expenses”), (iii) transferring Bitcoin in exchange for Units surrendered for redemption (at such time as redemptions from
the Trust are permitted by the SEC and subject to the approval of the Sponsor), (iv) causing the Sponsor to sell Bitcoin upon the
termination of the Trust, (v) making distributions of Bitcoin (including any Additional Currency) or cash from the sale thereof
and (vi) engaging in all administrative and security procedures necessary to accomplish such activities in accordance with the
provisions of the Trust Agreement and the Custodial Services Agreement.
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 Bitcoin.
The
Sponsor calculates the Trust’s NAV per Unit as of 4:00 p.m., New York time on each Business Day, and publishes the NAV per
Unit on the Trust’s website (www.ospreyfunds.io) shortly thereafter.
Additional Currency
From
time to time, the Trust may come into possession of rights incident to its ownership of Bitcoins, which permit the Trust to acquire,
or otherwise establish dominion and control over, other virtual currencies. These rights are generally expected to arise in connection
with forks in the Bitcoin Network, airdrops offered to holders of Bitcoins and other similar events and arise without any action
of the Trust or of the Sponsor or Trustee on behalf of the Trust. We refer to these rights as “Incidental Rights” and
any such virtual currency acquired through Incidental Rights as “Additional Currency.” The Trust does not expect to
take any Additional Currency it may hold into account for purposes of determining the Trust’s Bitcoin Holdings or the Bitcoin
Holdings per Unit.
Section
3.6 of the Amendment to Trust Agreement, dated April 15, 2022, provides that if the Trust comes to own any airdropped cryptocurrency
(other than Bitcoin), the Sponsor shall distribute such airdropped cryptocurrency within forty-five days of receipt of such assets
(or such longer time as the Sponsor reasonably requires to effect such distribution) on a pro rata basis to Unitholders. If the
Trust comes to own any forked versions of Bitcoin, the Sponsor shall distribute such forked version or versions of Bitcoin, the
Sponsor shall distribute such forked version or versions within forty-five days of receipt (or such longer time as the Sponsor
reasonably requires to effect such distribution) on a pro rata basis to Unitholders if and to the extent that the Sponsor determines
in its reasonable discretion that such a distribution is necessary to preserve the federal tax treatment of the Trust set forth
in Section 1.6 of the Trust Agreement, and may distribute such forked version or versions within forty-five days of receipt (or
such longer time as the Sponsor reasonably requires to effect such distribution) on a pro rata basis to Unitholders if and to the
extent the Sponsor determines it is in the best interests of the Unitholders.
Trust Expenses
The
Trust will pay as an ordinary recurring charge the remuneration due to the Sponsor (the “Management Fee” or “Sponsor
Fee”). The Management Fee equals an annualized 0.49% of the average daily NAV of the Trust for each year. The Management
Fee will accrue daily in Bitcoin and will be payable, at the Sponsor’s sole discretion, in Bitcoin or in U.S. dollars at
the Bitcoin Market Price in effect at the time of such payment. The Sponsor expects that the Trust will pay the Management Fee
in monthly installments in arrears. If the Trust holds any Additional Currency, the Trust may pay the Management Fee, in whole
or in part, with such Additional Currency by entering into an agreement with the Sponsor and transferring such Additional Currency
to the Sponsor at a value to be determined in accordance with the terms of such agreement, but only if such agreement and transfer
do not conflict with the terms of the Trust Agreement.
The
Sponsor will bear the routine operational, administrative and other ordinary fees and expenses of the Trust (the “Assumed
Expenses”); provided, however, that the Trust shall be responsible for audit fees, index license fees, aggregate legal fees
in excess of $50,000 per annum and the fees of the Custodian (the “Excluded Expenses”) and certain extraordinary expenses
of the Trust, including but not limited to taxes and governmental charges, expenses and costs, expenses and indemnities related
to any extraordinary services performed by the Sponsor (or any other Service Provider, including the Trustee) on behalf of the
Trust to protect the Trust or the interest of Unitholders, indemnification expenses, fees and expenses related to public quotation
on OTCQX (the “Extraordinary Expenses”).
Although
the Sponsor can provide no assurance as to the frequency or magnitude of any Extraordinary Expenses, the Sponsor expects that they
may occur infrequently, if at all. The Trust has not incurred or paid any Extraordinary Expenses to date. If the Trust incurs any
Extraordinary Expenses, the Sponsor or its delegate (i) would instruct the Custodian to withdraw from the digital asset account
(the “Custodial Account”), on a monthly basis as needed, Bitcoins, Additional Currency in such quantity as necessary
to permit payment of such Extraordinary Expenses, and (ii) may either (x) cause the Trust (or its delegate) to convert such Bitcoins
or Additional Currency into U.S. dollars or other fiat currencies at the exchange rate at the time of conversion or (y) cause the
Trust (or its delegate) to deliver
such Bitcoins or Additional Currency in kind in satisfaction of such Extraordinary Expenses.
The
Administrator, on behalf of the Trust, accrues the custody, index and Management Fees on a daily basis. Custody fees are calculated
based on the total assets held in the Trust as of the end of the day and according to the agreed upon fee schedule with the Custodian.
Management Fees are calculated daily net of the current day-accrued Custody fees. All expenses are allocated pro rata based on
the number of Units issued and outstanding.
Secondary Market
Trading
While
the Trust’s investment objective is for the Units to reflect performance of Bitcoin measured by reference to the Index, less
the Aggregate Trust Expenses and other liabilities, the Units may trade in the secondary market on the OTCQX (or on another secondary
market in the future) at prices that are lower or higher than the NAV per Unit. The Units may trade at a substantial premium over,
or substantial discount to, the NAV per Unit due to such factors as Trust fees and expenses, the quantity of Units available for
trading, the relative liquidity of the Units, and differences in the markets trading Bitcoin and Units (e.g., hours of operation,
marketplace rules, clearance and settlement, and market participants).
Service Providers
of the Trust
The Sponsor
The
Trust’s Sponsor is Osprey Funds, LLC, a Delaware limited liability company formed on October 31, 2018. The Sponsor’s
principal place of business is 1241 Post Road, 2nd Floor, Fairfield, Connecticut 06824 and its telephone number is (914)
214-4697. Under the Delaware Limited Liability Company Act and the governing documents of the Sponsor, Gregory D. King is not responsible
for the debts, obligations and liabilities of the Sponsor solely by reason of being the sole member of the Sponsor.
The
Sponsor is neither an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”)
registered with the SEC nor a commodity pool operator registered with the CFTC and will not be acting in either such capacity with
respect to the Trust, and the Sponsor’s provision of services to the Trust will not be governed by the Advisers Act or the
CEA.
The
Sponsor arranged for the creation of the Trust and quotation of the Units on the OTCQX. The Management Fee is paid by the Trust
to the Sponsor for services performed under the Trust Agreement and as partial consideration for Sponsor’s agreement to pay
the Assumed Expenses. After payment of the Assumed Expenses for the Trust, the Sponsor may use the remaining portion of the Management
Fee received from the Trust at its discretion, which may include the payment of fees from time to time for the referral of new
investors in the Trust.
The
Sponsor is generally responsible for the day-to-day administration of the Trust under the provisions of the Trust Agreement. This
includes (i) preparing and providing periodic reports and financial statements on behalf of the Trust for investors, (ii) processing
orders to create (and, should the Trust commence a redemption program, redeem) Units and coordinating the processing of such orders
with the Custodian and the Transfer Agent, (iii) calculating and publishing the NAV per Unit and the Bitcoin Holdings per Unit
of the Trust each Business Day as of 4:00 p.m., New York time, or as soon thereafter as practicable, (iv) selecting and monitoring
the Trust’s service providers and from time to time engaging additional, successor or replacement service providers (including
without limitation the Administrator, Custodian, Cash Custodian, Transfer Agent and Index Provider), (v) instructing the Custodian
to withdraw the Trust’s Bitcoin as needed to pay the Management Fee and the other Aggregate Trust Expenses, (vi) upon dissolution
of the Trust, distributing the Trust’s remaining Bitcoin or the cash proceeds of the sale thereof to the owners of record
of the Units and (vii) when applicable, establishing the principal market for GAAP valuation. In addition, if there is a fork in
the Bitcoin Network after which there is a dispute as to which network resulting from the fork is the Bitcoin Network, the Sponsor
has the authority to select the network that it believes in good faith is the Bitcoin Network, unless such selection or authority
would otherwise conflict with the Trust Agreement.
The
Sponsor does not store, hold or maintain custody or control of the Trust’s Bitcoin but instead has entered into the Custodial
Services Agreement with the Custodian to facilitate the security of the Trust’s Bitcoin.
The
Sponsor may transfer all or substantially all of its assets to an entity that carries on the business of the Sponsor if at the
time of the transfer the successor assumes all of the obligations of the Sponsor under the Trust Agreement. In such an event, the
Sponsor will be
relieved of all further liability under the Trust Agreement.
Index
Provider Agreement
The
Index Provider and the Sponsor have entered into an index provider agreement (the “Index Provider Agreement”) governing
the Sponsor’s use of the Index. The Index Provider may adjust the calculation methodology for the Index without notice to,
or consent of, the Trust or its Unitholders. Under the Index Provider Agreement, the Sponsor pays a monthly fee and a fee based
on the Bitcoin Holdings of the Trust to the Index Provider in consideration of its license to the Sponsor of Index-related intellectual
property. The Trust reimburses the Sponsor the index license fees as part of the Excluded Expenses.
Under
the Index Provider Agreement, the Index Provider generally disclaims all warranties, including non-infringement and fitness for
a particular purpose. The Index is provided on an “as-is,” “as available,” and “with all faults”
basis. The Index Provider, however, agreed to indemnify the Sponsor and the Trust against any claim, demand suit, investigation
or proceeding made or brought by a third party, alleging that the use of the service permitted under the Index Provider Agreement
infringes or misappropriates a third-party copyright, trade secret, trademark or United States patent. The Index Provider will
pay all costs, including reasonable attorneys’ fees and any settlement amounts agreed to by the Index Provider or damages
award in connection with such third-party claim.
The
Trust will notify Unitholders of material changes to Index methodology or composition, upon being notified of such change by the
Index Provider, through a filing of a current report on Form 8-K with the SEC.
Pursuant
to the Trust Agreement, the Sponsor has general discretion to select a different index (or otherwise change the fund’s investment
objectives).
Under
the Index Provider Agreement, the Sponsor may use the Index, including without limitation, for use in internal fund administration
such as portfolio valuation and accounting and for display on Sponsor’s websites, social media, or mobile applications, as
well as inclusion in publications, reports, advertisements and other informational materials. The Trust currently uses the Index
solely as the basis for determining the Trust’s investment objective. It does not currently rely on the Index for determining
NAV or otherwise valuing Trust assets.
The
Sponsor is required to indemnify the Index Provider, including its officers, directors, employees, agents, contractors, representatives
and affiliates against any claims made or brought against the Index Provider arising from Sponsor’s breach, or alleged breach,
of the Index Provider Agreement.
The
Index Provider Agreement is governed by the laws of the Commonwealth of Massachusetts.
The Trustee
Delaware
Trust Company serves as our trustee under the Trust Agreement. The Trustee has its principal office at 251 Little Falls Drive,
Wilmington, Delaware 19808. The Trustee is unaffiliated with the Sponsor. A copy of the Trust Agreement is available for inspection
at the Sponsor’s principal office identified above.
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.
The duties of the Trustee will be limited to (i) accepting legal process served on the Trust in the State of Delaware and (ii)
the execution of any certificates required to be filed with the Delaware Secretary of State which the Trustee is required to execute
under the DSTA. To the extent that, at law or in equity, the Trustee has duties (including fiduciary duties) and liabilities relating
thereto to the Trust or the Unitholders, such duties and liabilities will be replaced by the duties and liabilities of the Trustee
expressly set forth in the Trust Agreement. The Trustee will have no obligation to supervise, nor will it be liable for, the acts
or omissions of the Sponsor, Transfer Agent, Custodian or any other person.
Neither
the Trustee, either in its capacity as trustee or in its individual capacity, nor any director, officer or controlling person of
the Trustee is, or has any liability as, the issuer, director, officer or controlling person of the issuer of Units. The Trustee’s
liability in connection with the issuance and sale of Units is limited solely to the express obligations of the Trustee as set
forth in the Trust Agreement.
The
Trustee has not prepared or verified, and will not be responsible or liable for, any information, disclosure or other statement
in this Annual Report or in any other document issued or delivered in connection with the sale or transfer of the Units. The Trust
Agreement provides that the Trustee will not be responsible or liable for the genuineness, enforceability, collectability, value,
sufficiency, location or existence of any of the Bitcoins or other assets of the Trust.
The
Trustee is permitted to resign upon at least 60 days’ notice to the Trust. The Trustee will be compensated by the Sponsor
and indemnified by the Sponsor and the Trust against any expenses it incurs relating to or arising out of the formation, operation
or termination of the Trust, or the performance of its duties pursuant to the Trust Agreement except to the extent that such expenses
result from gross negligence, willful misconduct or bad faith of the Trustee. The Sponsor has the discretion to replace the Trustee.
Fees
paid to the Trustee are an Assumed Expense.
For
a complete discussion of the Trust Agreement, please refer to Amendment No. 5 to Form 10 registration statement, which is incorporated
by reference herein.
The Transfer Agent
Continental
Stock Transfer & Trust Company, a Delaware corporation, serves as the Transfer Agent of the Trust pursuant to the terms
and provisions of the Transfer Agency and Registrar Service Agreement. The Transfer Agent has its principal office at 1 State Street,
30th Floor, New York, New York 10004. A copy of the Transfer Agency and Registrar Service Agreement is available for inspection
at the Sponsor’s principal office identified herein.
The
Transfer Agent holds the Units primarily in book-entry form. The Sponsor directs the Transfer Agent to credit the number of Units
to the investor in response to a creation order. The Transfer Agent will issue the Units. The Transfer Agent will also assist with
the preparation of Unitholders’ account and tax statements.
The
Sponsor will indemnify and hold harmless the Transfer Agent, and the Transfer Agent will incur no liability for the refusal, in
good faith, to make transfers which it, in its judgment, deems improper or unauthorized.
Fees
paid to the Transfer Agent are an Assumed Expense.
The Custodian
Coinbase
Custody serves as our qualified digital asset custodian for purposes of Section 206(4)-2(d)(6) under the Advisers Act. On February
4, 2022, the Trust entered into the Custodial Services Agreement with the Custodian. Prior to March 10, 2022, FDAS served as our
digital asset custodian until April 10, 2022. On March 10, 2022, the Trust transferred its custodied digital assets from FDAS to
Coinbase Custody.
Coinbase
Custody and Coinbase Pro are wholly-owned subsidiaries of Coinbase Global, Inc. (“Coinbase Global”). Coinbase Global
and its subsidiaries provide end-to-end financial infrastructure and technology for the crypto-economy. Coinbase Custody is an
independently capitalized New York State limited purpose trust company that was chartered in October 2018. Coinbase Custody is
a fiduciary under § 100 of the New York Banking Law and is add qualified custodian for purposes of Section 206(4)-2(d)(6)
of the Advisers Act. As a New York State limited purpose trust company, Coinbase Custody is subject regulation, examination and
supervision by the New York State Department of Financial Services (“NYDFS”). NYDFS’s regulations impose various
compliance requirements, including operational limitations related to the nature of crypto assets held under custody, capital requirements,
BSA and anti-money laundering program requirements, affiliate transaction limitations, and notice and reporting requirements. Coinbase
Custody offers its clients access to secure, institutional-grade offline digital asset storage. As of December 31, 2022, Coinbase
Global held approximately $86 billion in fiat and digital assets on its platform, the majority of which were comprised of Bitcoin,
Ethereum and other crypto assets. According to publicly available information, Bitcoin represented 43%, 40% and 70% of the assets
held or managed in digital wallets on Coinbase’s Global platform, including its custody services, for the years ended December
31, 2022, 2021 and 2020, respectively. The cold storage technology that Coinbase Custody uses to custody digital assets, such as
Bitcoin, shares the same framework of the technology that Coinbase Global, and its predecessor, Coinbase, Inc., have used since
2012, which is continuously improved to meet cyber and physical security best practices.
Coinbase Custody is authorized to
serve as the Trust’s custodian under the Trust Agreement and pursuant to the terms and provisions of the Custodial Services
Agreement. The Trust’s digital assets are held in segregated cold storage accounts with the Custodian, and as a result, the
digital assets are segregated from both (i) the proprietary property of Coinbase Custody and its affiliates, and (ii) the assets
of any other Coinbase Custody client.
Information
provided about Coinbase Custody and its parent company is primarily derived from Coinbase Global’s publicly available information,
including filings it makes with the SEC. Although the Trust believes this information is reliable, the Trust has not independently
verified the accuracy of this information.
The Administrator
Theorem
Fund Services serves as the Administrator. The Administrator has offices at 141 W. Jackson Blvd Suite 4120, Chicago, IL 60604.
The
Administrator is generally responsible for the day-to-day administration of the Trust, including keeping the Trust’s operational
records. The Administrator’s principal responsibilities include: (i) valuing the Trust’s Bitcoin and calculating the
NAV per Unit; (ii) supplying pricing information to the Sponsor for the Trust’s website; (iii) receiving and reviewing reports
on the custody of and transactions in cash and Bitcoin from the Cash Custodian and Trust, respectively, and taking such other actions
in connection with the custody of cash as the Sponsor instructs; and (iv) accounting and other fund administrative services. The
Administrator also provides know your customer, anti-money laundering, and Office of Foreign Assets Control (“OFAC”)
compliance check services to the Trust and Sponsor.
The
Administrator will liaise with the Trust’s legal, accounting and other professional service providers as needed.
The
Administrator will keep proper books of registration and transfer of Units at its office located in New York or such office as
it may subsequently designate. These books and records are open to inspection by any person who establishes to the Sponsor’s
satisfaction that
such person is a Unitholder at all reasonable times during the usual business hours of the Sponsor. The Sponsor will keep a copy
of the Trust Agreement on file in its office which will be available for inspection on reasonable advance notice at all reasonable
times during its usual business hours by any Unitholder.
Overview of The Bitcoin Industry and Market
Introduction to Bitcoin and the Bitcoin Network
“Bitcoin”
is a digital asset and the first so-called cryptocurrency. It uses peer-to-peer technology and cryptographic security features
to decentralize control of the overall Bitcoin computer network (the “Bitcoin Network”), and blockchain technology
to ensure the secure transfer and authenticity of each Bitcoin. Bitcoin are stored in digital wallets and can be used to pay for
goods and services. They can also be purchased, sold and traded on websites that facilitate the transfer of Bitcoin in exchange
for government-issued currencies or other cryptocurrencies, traded on cryptocurrency exchanges and transferred in individual end-user-to-end-user
transactions under a barter system. Bitcoin benefits include security, decentralization, low transaction costs compared to many
other payment systems, the potential for universal use and the ability to divide a single Bitcoin by up to eight decimal places.
A
blockchain is a decentralized, distributed ledger that records the provenance of digital assets. The ledger is public and accessible
to all, and portions and copies of it are stored in a decentralized manner on the several thousand computers comprising the Bitcoin
Network. Transaction data is permanently recorded in data files called “blocks,” which reflect transactions that have
been recorded and authenticated by Bitcoin Network participants known as “miners.” Each newly recorded block of transactions
refers back to and “connects” with the immediately preceding recorded block in the ledger. Each new block records outstanding
Bitcoin transactions, and outstanding transactions are settled and validated through such recording. The Blockchain is designed
to represent a complete, transparent, secure and unbroken history of all the transactions that have occurred on the Bitcoin Network.
The Bitcoin Network software source code includes the protocols that govern the creation, or “mining,” of new Bitcoin
and the cryptographic system that secures and verifies Bitcoin transactions. New Bitcoin are allocated by the Bitcoin Network protocol
through the mining process, subject to a well-known issuance schedule contained within the protocol.
The
Blockchain constitutes a record of every Bitcoin, every Bitcoin transaction (including the mining of new Bitcoin) and every Bitcoin
address associated with a quantity of Bitcoin. The Bitcoin Network and Bitcoin Network software programs can interpret the Blockchain
to determine the exact Bitcoin balance, if any, of any public Bitcoin address listed in the Blockchain as having taken part in
a transaction on the Bitcoin Network. Bitcoin Network miners engage in a set of prescribed, complex mathematical calculations in
order to add a block to the Blockchain and thereby confirm Bitcoin transactions included in that block’s data. In addition
to confirming the authenticity of recent transactions and referencing the preceding block, each block also contains an answer to
a mathematical problem. Miners generate potential answers to this mathematical problem at a rapid rate, effectively searching for
a correct answer via computational trial-and-error. New blocks cannot be submitted to the network without a correct answer to the
mathematical problem. The mathematical problem in each block is extremely difficult to solve, but once a valid solution is found,
it is very easy for the rest of the network to confirm that the solution is correct. Once the mathematical problem has been solved,
the miner may then transmit a copy of the newly-formed block to peers on the Bitcoin Network, which then update their respective
copies of the Blockchain by appending the new block. A new block that is added to the Blockchain serves to take recent, but as
yet unconfirmed, transactions and verify that none are fraudulent, and the miner that first solves such block receives a reward
of a fixed number of Bitcoin for the miner’s effort. In addition to the block reward, end users pay fees as an incentive
for a miner to confirm their transactions in newly created blocks.
History of Bitcoin
The
Bitcoin Network was initially contemplated in a white paper that also described Bitcoin and the operating software to govern the
Bitcoin Network. The white paper was purportedly authored by Satoshi Nakamoto; however, no individual with that name has been reliably
identified as Bitcoin’s creator, and the general consensus is that the name is a pseudonym for the actual inventor or inventors.
The first Bitcoin was created in 2009 after Nakamoto released the Bitcoin Network source code (the software and protocol that created
and launched the Bitcoin Network).
Overview of the Bitcoin
Network’s Operations
In
order to own, transfer or use Bitcoin directly on the Bitcoin Network (as opposed to through an intermediary, such as a custodian),
a person generally must have internet access to connect to the Bitcoin Network. Bitcoin transactions may be made directly between
end-users without the need for a third-party intermediary. To prevent the possibility of double-spending Bitcoin, a user must notify
the Bitcoin Network of the transaction by broadcasting the transaction data to its network peers. The Bitcoin Network provides
confirmation against double-spending by memorializing every transaction in the Blockchain, which is publicly accessible and transparent.
This memorialization and verification against double-spending is accomplished through the Bitcoin Network mining process, which
adds “blocks” of data, including recent transaction information, to the Blockchain.
Description of Bitcoin
Transfers
Prior
to engaging in Bitcoin transactions directly on the Bitcoin Network, a user generally must first install on its computer or mobile
device a Bitcoin Network software program that will allow the user to generate a private and public key pair associated with a
Bitcoin address commonly referred to as a “digital wallet.” The Bitcoin Network software program and the Bitcoin address
also enable the user to connect to the Bitcoin Network and transfer Bitcoin to, and receive Bitcoin from, other users.
Each
Bitcoin Network address, or digital wallet, is associated with a unique “public key” and “private key”
pair. To receive Bitcoin, the Bitcoin recipient must provide its public key to the party initiating the transfer. This activity
is analogous to a recipient for a transaction in U.S. dollars providing a routing address in wire instructions to the payor so
that cash may be wired to the recipient’s account. The payor approves the transfer to the address provided by the recipient
by “signing” a transaction that consists of the recipient’s public key with the private key of the address from
where the payor is transferring the Bitcoin. The recipient, however, does not make public or provide to the sender its related
private key.
Neither
the recipient nor the sender reveal their private keys in a transaction, because the private key authorizes transfer of the funds
in that address to other users. Therefore, if a user loses his private key, the user may permanently lose access to the Bitcoin
contained in the associated address. Likewise, Bitcoins are irretrievably lost if the private key associated with them is deleted
and no backup has been made. When sending Bitcoin, a user’s Bitcoin Network software program must validate the transaction
with the associated private key. The resulting digitally validated transaction is sent by the user’s Bitcoin Network software
program to the Bitcoin Network to allow transaction confirmation.
Some
Bitcoin transactions are conducted “off-blockchain” and are therefore not recorded in the Blockchain. Some “off-blockchain
transactions” involve the transfer of control over, or ownership of, a specific digital wallet holding Bitcoin or the reallocation
of ownership of certain Bitcoin in a pooled-ownership digital wallet, such as a digital wallet owned by a Bitcoin exchange. In
contrast to on-blockchain transactions, which are publicly recorded on the Blockchain, information and data regarding off-blockchain
transactions are generally not publicly available. Therefore, off-blockchain transactions are not truly Bitcoin transactions in
that they do not involve the transfer of transaction data on the Bitcoin Network and do not reflect a movement of Bitcoin between
addresses recorded in the Blockchain. For these reasons, off-blockchain transactions are subject to risks as any such transfer
of Bitcoin ownership is not protected by the protocol behind the Bitcoin Network or recorded in, and validated through, the blockchain
mechanism.
Summary of a Bitcoin Transaction
In
an on-chain transaction, the following circumstances must initially be in place: (i) the party seeking to send Bitcoin must have
a Bitcoin Network public key, and the Bitcoin Network must recognize that public key as having sufficient Bitcoin for the transaction;
(ii) the receiving party must have a Bitcoin Network public key; and (iii) the spending party must have internet access with which
to send its spending transaction.
The
receiving party must provide the spending party with its public key and allow the Blockchain to record the sending of Bitcoin to
that public key. After the provision of a recipient’s Bitcoin Network public key, the spending party must enter the address
into its Bitcoin Network software program along with the number of Bitcoin to be sent. The number of Bitcoin to be sent will typically
be agreed upon between the two parties based on a set number of Bitcoin or an agreed upon conversion of the value of fiat currency
to Bitcoin. Since every
computation on the Bitcoin Network requires the payment of Bitcoin, including verification and memorialization
of Bitcoin transfers, there is a transaction fee involved with the transfer, which is based on computation complexity and not on
the value of the transfer and is paid by the payor with a fractional number of Bitcoin.
After
the entry of the Bitcoin Network address, the number of Bitcoin to be sent and the transaction fees, if any, to be paid, will be
transmitted by the spending party. The transmission of the spending transaction results in the creation of a data packet by the
spending party’s Bitcoin Network software program, which is transmitted onto the decentralized Bitcoin Network, resulting
in the distribution of the information among the software programs of users across the Bitcoin Network for eventual inclusion in
the Blockchain.
As
discussed in greater detail below in “—Creation of New Bitcoin,” Bitcoin Network miners record transactions when
they solve for and add blocks of information to the Blockchain. When a miner solves for a block, it creates that block, which includes
data relating to (i) the solution to the block, (ii) a reference to the prior block in the Blockchain to which the new block is
being added and (iii) transactions that have occurred but have not yet been added to the Blockchain. The miner becomes aware of
outstanding, unrecorded transactions through the data packet transmission and distribution discussed above.
Upon
the addition of a block included in the Blockchain, the Bitcoin Network software program of both the spending party and the receiving
party will show confirmation of the transaction on the Blockchain and reflect an adjustment to the Bitcoin balance in each party’s
Bitcoin Network public key, completing the Bitcoin transaction. Once a transaction is confirmed on the Blockchain, it is irreversible.
Creation of New Bitcoin
New
Bitcoins are created through the mining process as discussed below.
The
Bitcoin Network is kept running by computers all over the world. In order to incentivize those who incur the computational costs
of securing the network by validating transactions, there is a reward that is given to the computer that was able to create the
latest block on the chain. Every 10 minutes, on average, a new block is added to the Blockchain with the latest transactions processed
by the network, and the computer that generated this block is currently awarded 6.25 Bitcoin. Due to the nature of the algorithm
for block generation, this process (generating a “proof-of-work”) is guaranteed to be random. Over time, rewards are
expected to be proportionate to the computational power of each machine.
The
process by which Bitcoin is “mined” results in new blocks being added to the Blockchain and new Bitcoin tokens being
issued to the miners. Computers on the Bitcoin Network engage in a set of prescribed complex mathematical calculations in order
to add a block to the Blockchain and thereby confirm Bitcoin transactions included in that block’s data.
To
begin mining, a user can download and run Bitcoin Network mining software, which turns the user’s computer into a “node”
on the Bitcoin Network that validates blocks. Each block contains the details of some or all of the most recent transactions that
are not memorialized in prior blocks, as well as a record of the award of Bitcoin to the miner who added the new block. Each unique
block can be solved and added to the Blockchain by only one miner. Therefore, all individual miners and mining pools on the Bitcoin
Network are engaged in a competitive process of constantly increasing their computing power to improve their likelihood of solving
for new blocks. As more miners join the Bitcoin Network and its processing power increases, the Bitcoin Network adjusts the complexity
of the block-solving equation to maintain a predetermined pace of adding a new block to the Blockchain approximately every ten
minutes. A miner’s proposed block is added to the Blockchain once a majority of the nodes on the Bitcoin Network confirms
the miner’s work. Miners that are successful in adding a block to the Blockchain are automatically awarded Bitcoin for their
effort and may also receive transaction fees paid by transferors whose transactions are recorded in the block. This reward system
is the method by which new Bitcoin enter into circulation to the public.
The
Bitcoin Network is designed in such a way that the reward for adding new blocks to the Blockchain decreases over time. Once new
Bitcoin tokens are no longer awarded for adding a new block, miners will only have transaction fees to incentivize them, and as
a result, it is expected that miners will need to be better compensated with higher transaction fees to ensure that there is adequate
incentive for them to continue mining.
Limits on Bitcoin Supply
The
supply of new Bitcoin is mathematically controlled so that the number of Bitcoin grows at a limited rate pursuant to a pre-set
schedule. The number of Bitcoin awarded for solving a new block is automatically halved after every 210,000 blocks are added to
the blockchain. The initial block reward when the Bitcoin Network was introduced in 2009 was 50 Bitcoin per block. That number
has and will continue to halve approximately every four years until approximately the year 2140, when it is estimated that block
rewards will go to zero. The most recent halving occurred on May 11, 2020, which reduced the block reward from 12.5 to 6.25 Bitcoin.
This deliberately controlled rate of Bitcoin creation means that the number of Bitcoin in existence will increase at a controlled
rate until the number of
Bitcoin in existence reaches the pre-determined 21 million Bitcoin. As of the date of this Annual Report,
approximately 19.3 million Bitcoins are outstanding and the date when the 21 million Bitcoin limitation will be reached is estimated
to be the year 2140.
Modifications to the Bitcoin
Protocol
Because
the Bitcoin Network has no central authority, the implementation of a change in Bitcoin Network is achieved by users and miners
downloading and running updated versions of the Bitcoin Network software. The Bitcoin Network protocol is built using open source
software, allowing for any developer to review the underlying code and suggest changes. There is no official company or group that
is responsible for making modifications to the Bitcoin Network, however, there are a number of individual developers that regularly
contribute to a specific distribution of Bitcoin Network software dubbed “Bitcoin Core.” Significant changes to the
Bitcoin Network protocol are typically accomplished through a so-called Bitcoin Improvement Proposal or BIP. Such proposals are
generally posted on websites, and the proposals explain technical requirements for the protocol changes as well as reasons why
the change should be accepted. If a significant proportion of Bitcoin Network users and miners decide to adopt a change to the
Bitcoin Network that is not compatible with previous software, then this software will recognize and process transactions differently
on a going-forward basis. If another significant proportion of Bitcoin Network users and miners decide not to adopt such change,
then these two Bitcoin Network groups would not process transactions in the same way on a going-forward basis. In this scenario,
the blocks recognized as valid by one group of users will be different from the blocks recognized as valid by the other group of
users, which will cause transaction records to diverge, or “fork,” on a going-forward basis. If this were to occur,
two separate Bitcoin Networks could result, one running the pre-modification software program and the other running the modified
version (i.e., a second “Bitcoin” network). In the event of a permanent fork with two separate and incompatible Bitcoin
Networks, the price movements of different versions of Bitcoin on different Bitcoin Networks may deviate. In such a case, the Sponsor
will evaluate the characteristics of each Bitcoin Network to determine in its sole discretion which Bitcoin Network will provide
exposure that best comports with the Trust’s investment objective. On August 1, 2017, the Bitcoin Network was forked by a
group of developers and miners accepting changes to the Bitcoin Network software intended to increase transaction capacity. On
October 25, 2017, the Bitcoin Network was forked by a group of developers accepting changes to the Bitcoin Network software intended
to reduce the use of specialized hardware in the Bitcoin mining process. Blocks mined on these networks now diverge from blocks
mined on the Bitcoin Network, which has resulted in the creation of new blockchains whose digital assets are referred to as “Bitcoin
Cash” and “Bitcoin Gold,” respectively. The Bitcoin Network, the Bitcoin Cash network and the Bitcoin
Gold network now operate as separate, independent networks. In mid-November of 2017, an additional protocol change labeled “Segwit2x,”
which had substantial support from large numbers of Bitcoin users, was cancelled by its proponents shortly before it was due to
be implemented. Multiple proposals for increasing the capacity of the Bitcoin Network still exist, and it is possible that one
or more of these proposals could result in further network forks, which may become increasingly frequent.
Bitcoin Value
Bitcoin Exchange Valuation
The
value of Bitcoin, as with most assets, is influenced by several factors, including the supply of and demand for Bitcoin, costs
associated with mining Bitcoin, rewards issued to miners for verifying transactions, the number of competing cryptocurrencies,
how Bitcoin trades, regulations governing its sale and trade and the protocol itself. Due to the dynamic nature of these factors
as well as others, the value of a Bitcoin is difficult to determine, and the price of a Bitcoin can fluctuate significantly and
over short periods of time. In all events, benefits of transacting in Bitcoin typically include low transaction costs, near-zero
transportation costs and low-to-zero storage costs.
Bitcoin Exchange Public
Market Data
On
each online Bitcoin exchange, 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 the Euro. Over-the-counter dealers or market makers do not typically disclose their
trade data.
Currently,
there are several Bitcoin exchanges operating worldwide and online Bitcoin exchanges represent a substantial percentage of Bitcoin
buying and selling activity and provide the most data with respect to prevailing valuations of Bitcoins. These exchanges include
established exchanges such as BitStamp, Coinbase Pro and itBit, which provide a number of options for buying and selling Bitcoins.
The below table reflects the trading volume (in Bitcoin) and market share of the BTC-U.S. dollar trading pair of each of the Bitcoin
exchanges included in the Index as of January 8, 2023, using data reported by the Index Provider as of January 8, 2023 (Source:
Coin Metrics Bletchley Indexes (CMBI) and CM Market Data Feed):
Major Worldwide Bitcoin Exchanges included in
the Index as of January 8, 2023 |
|
Volume
(U.S. Dollars) |
|
Market
Share |
| Binance.us |
|
$ |
51,467,858 |
|
|
17.63 |
% |
| BitStamp USA, Inc. |
|
|
18,076,459 |
|
|
6.19 |
% |
| Bittrex, Inc. |
|
|
2,919,505 |
|
|
1.00 |
% |
| Coinbase Global, Inc. |
|
|
177,083,900 |
|
|
60.65 |
% |
| Gemini Trust Company, LLC |
|
|
4,171,275 |
|
|
1.43 |
% |
| itBit |
|
|
2,328,710 |
|
|
0.80 |
% |
| Kraken |
|
|
35,906,771 |
|
|
12.30 |
% |
| Total BTC-U.S. dollar trading pair |
|
$ |
291,954,478 |
|
|
100.00 |
% |
The
domicile, regulation and legal compliance of the Bitcoin exchanges included in the Index varies. The Trust is not in a position
to determine the extent to which the Bitcoin exchanges included in the Index are in compliance with the regulatory requirements,
as those exchanges are not affiliated with or managed by the Trust or the Sponsor. Information regarding each Bitcoin exchange
may be found, where available, on the websites for such Bitcoin exchanges, among other places. BAM Trading Services Inc., d/b/a,
“Binance U.S.,” based in San Francisco, California, is registered as a money services business with the Financial Crimes
Enforcement Network (“FinCEN”) and has obtained licenses to engage in money transmission, or the state equivalent,
in the majority of U.S. states (see https://www.binance.us/en/home). BitStamp USA, Inc. (“BitStamp”) based in New York,
New York, is a wholly-owned subsidiary of BitStamp Ltd., a Luxembourg-based exchange. BitStamp is registered as a money services
business with FinCEN and, has obtained licenses to engage in money transmission, or the state equivalent, in applicable U.S. states
(see https://www.bitstamp.net/). Bittrex, Inc. (“Bittrex”) based in Seattle, Washington, is registered as a money services
business with FinCEN and has obtained licenses to engage in money transmission, or the state equivalent, in applicable U.S. states
(see https://bittrex.com/). Coinbase Global is a U.S.-based exchange headquartered in Wilmington, Delaware, and is registered as
a money services business with FinCEN and has obtained licenses to engage in money transmission, or the state equivalent, in the
majority of U.S. states (see https://www.coinbase.com/). Gemini Trust Company, LLC is a New York limited purpose trust charter
regulated by the NYDFS (see https://www.gemini.com/). itBit is a digital asset exchange and wholly-owned subsidiary of Paxos Trust
Company, LLC, a New York limited purpose trust company regulated by the NYDFS (see https://www.paxos.com/). Payward, Inc., d/b/a
“Kraken,” is a San Francisco, California-based exchange that is registered as a money services business with FinCEN
and has obtained licenses to engage in money transmission, or the state equivalent, in the majority of U.S. states.
Under
the Bank Secrecy Act, as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism (“USA PATRIOT”) Act, Bitcoin exchanges that are registered as money services businesses with
the FinCEN, a bureau of the U.S. Department of the Treasury that is responsible for anti-money laundering and counter-terrorism
financing (“AML”) regulation and administration, are required to adopt and implement an AML program that is reasonably
designed to prevent the money services business from being used to facilitate money laundering and the financing of terrorist activities.
The AML program must be commensurate with the risks posed by the location and size of, and the nature in volume of, the financial
services provided by the money services business. The AML program, which must be in writing, at a minimum must incorporate policies
and procedures and internal controls reasonably designed to ensure compliance with applicable AML regulations. These policies and
procedures must, among other things, include requirements for (i) verifying customer identification, (ii) filing reports, (iii)
creating and retaining records and (iv) responding to law enforcement requests. In addition, the AML program must designate a compliance
official to ensure day-to-day compliance with the program and FinCEN regulations. Further, the AML program must provide for education
and/or training of appropriate personnel concerning their responsibilities under the AML program, including training in the detection
of suspicious transactions to the extent that these transactions are required to be reported. The AML program must also provide
for independent review to monitor and maintain an adequate risk-based program. Money services businesses must also file specified
reports with FinCEN, including currency transaction reports and suspicious activity transaction reports. In addition, state agencies
that license and regulate money transmitter businesses may have their own separate AML compliance requirements.
The Index
Provider relies on its Market Selection Framework (https://coinmetrics.io/reference-rates-market-selection-framework/) to select
constituent markets for the Index. The Market Selection Framework consists of 36 features which represent individual measurable
properties that provide an indication of the suitability for a market to serve as an input data source, which are combined to form
a market rating. The Index Provider’s Oversight Committee evaluates a number of qualitative and quantitative features, including
features related to
the exchange’s technology, legal and compliance, business model, data availability, price, and volume.
For each asset, the Committee selects the highest quality markets using a selection algorithm. Detailed information about all of
the 36 features is contained in the full text of the Market Selection Framework.
Since the Index Provider
began calculating the index, the Index Provider has made one change to the constituent markets for the CMBI Bitcoin Index. On July
31, 2020, BitFlyer’s BTC-USD market was removed and Binance’s BTC-USD market was added. The decision was made based
on the results of the Index Provider’s Market Selection Framework, volume analysis and empirical testing of data. According
to the Index Provider, in determining to replace BitFlyer’s BTC-USD with Binance’s BTC-USD, the Index Provider ran
the output from its Market Selection Framework, which scored all eligible markets in its coverage universe according to a total
of 36 qualitative and quantitative features. The Index Committee of the Index Provider evaluated the output. Binance’s USD=BTC
scored a market score of 27.99 as compared with BitFlyer’s BTC-USD, which scored a market score of 24.07. The Index Committee
also reviewed the relative BTC-USD volumes on each of BitFlyer and Binance (along with the other market in its coverage universe)
from March 1, 2021 through July 31, 2021. Binance’s BTC-USD volumes were consistently higher during that time period. Based
on these results, the Index Committee determined to replace BitFlyer’s BTC-USD with Binance’s BTC-USD in the Index.
The resulting changes were deemed to improve the robustness, accuracy and quality of the market data that supports the determination
of index levels. The Index Provider backfilled historical values for the CMBI Bitcoin Index back to July 2011.
The
Trust’s principal market, and the most liquid Bitcoin exchange is Coinbase Pro. Coinbase Pro, a wholly-owned subsidiary of
Coinbase Global, Inc. (“Coinbase Global”), is Coinbase Global’s market for active, professional traders. Started
in 2012 (and known until 2016 as Coinbase Exchange and from 2016-2018 as Coinbase Digital Asset Exchange), Coinbase Pro is the
most liquid U.S. market for Bitcoin, with approximately 46% of daily trading volume as of September 8, 2021.
Historically,
a large percentage of the global Bitcoin trading volume occurred on self-reported, unregulated Bitcoin exchanges located in China.
Throughout 2017, however, the Chinese government took several steps to tighten controls on Bitcoin exchanges, culminating in a
ban on domestic cryptocurrency exchanges in November 2017, which forced such exchanges to cease their operations or relocate. As
a result, reported Bitcoin trading volume on Chinese exchanges is now substantially lower, representing a de minimis share of the
global trade volume.
From
time to time, there may be intra-day price fluctuations across Bitcoin exchanges. However, they are generally relatively immaterial.
For example, the variance of prices on Bitcoin exchanges with the highest transaction volumes on average is less than 2%. These
variances usually stem from small changes in the fee structures on different Bitcoin exchanges or differences in administrative
procedures required to deposit and withdraw fiat currency in exchange for Bitcoins and vice versa. The greatest variances are found
at (i) smaller exchanges with relatively low transaction volumes where even small trades can be large relative to an exchange’s
transaction volume and as a result impact the trading price on those exchanges and (ii) exchanges that are inaccessible to the
Trust because they do not meet the Trust’s regulatory requirements, and as a result are accessed and used by a captured market
or by parties that do not have regulatory or compliance requirements. Historically, the Trust has not needed to make any changes
in the determination of its principal market due to variances in pricing, although it changed its principal market to Coinbase
Pro on May 18, 2021 to facilitate its compliance with GAAP. The Trust selected Coinbase Pro, among other Bitcoin markets, because
it provides the greatest liquidity, with approximately 50% of daily trading volume as of February 27, 2023.
The Index
The
Index is a U.S. dollar-denominated composite reference rate for the price of Bitcoin. The Index is designed to (1) mitigate instances
of fraud, manipulation and other anomalous trading activity, (2) provide a real-time, trade-weighted fair value of Bitcoin and
(3) appropriately handle and adjust for non-market related events.
The
Index was launched on January 1, 2020, with a first value date and base date of July 18, 2010. The constituent market closing prices
are not materially different from the Index prices.
Constituent Exchange Selection
The method by which
the Index Provider selects constituent markets for its indexes is contained in Section 3.1 Constituent Market Eligibility Criteria
in the Index Provider’s CMBI Single Asset Series Methodology, available at https://cmbi-indexes.coinmetrics.io/cmbibtc.
The constituent markets for CMBI indexes are derived from the constituent markets for the CM Reference Rates, available at https://coinmetrics.io/wp-content/uploads/2021/05/reference-rates-methodology.pdf,
which in turn evaluates markets traded on digital asset exchanges as potential input data sources using CMBI’s Market Selection
Framework. The framework consists of a fully systematized process for evaluating markets. In this framework, a market refers to
a specific traded asset pair on a specific exchange. Although the Trust believes that the information provided by the Index Provider
is reliable, the Trust has not independently verified the accuracy of this information.
The Market Selection
Framework consists of 36 features which represent individual measurable properties that provide an indication of the suitability
for a market to serve as an input data source, which are combined to form a market rating. The Market Selection Framework evaluates
markets based on the following criteria:
| |
● |
Technology: An assessment of whether the technology infrastructure of the market’s exchange
provides sufficient availability and reliability for input data collection. Evaluates whether the exchange offers a REST API,
Websocket feed, or FIX API suitable for data collection. Evaluates the performance of the API in terms of reliability and
latency. |
| |
|
|
| |
● |
Legal and Compliance: An assessment of whether the market’s exchange complies with laws
and regulations. Evaluates the exchange’s legal risk exposure, and whether it adheres to regulatory best practices.
Evaluates whether the exchange has publicly disclosed trading policies, uses market surveillance technology, and complies
with national regulatory organizations, and enforces KYC and AML requirements. Evaluates whether the exchange has functioning
fiat and cryptocurrency withdrawals processed within a normal timeframe. Evaluates whether a data sharing license can be executed
with the exchange. |
| |
|
|
| |
● |
Business Model: An assessment of the market’s exchange with respect to its business
model, including its fee structure and asset listing standards. |
| |
|
|
| |
● |
Data Availability: An assessment of the available data the market’s exchange offers
for the given asset, including the number of markets where the given asset is the base currency, whether the markets are quoted
in fiat currencies or other cryptocurrencies, and the type of markets offered. |
| |
|
|
| |
● |
Price: An assessment of the quality of the market’s price data, including testing for
the occurrence of price outliers and impactful price deviations from other markets, and implementing tests that determine
whether the market functions as an active market in the underlying asset and are anchored by observable transactions entered
into at arm’s length between buyers and sellers. |
| |
|
|
| |
● |
Volume: An assessment of the quality of the market’s volume data, including testing
for manipulated volume figures, and implementing tests that determine whether the market functions as an active market in
the underlying asset and are anchored by observable transactions entered into at arm’s length between buyers and sellers.
The size of the exchange’s markets is also considered. |
| |
|
|
| |
● |
Order Book: An assessment of the quality of the market’s order book data, including
tests for manipulated orders, and implementing tests that determine whether the market functions as an active market in the
underlying asset and are anchored by observable transactions entered into at arm’s length between buyers and sellers.
The liquidity of the market is also considered. |
For each asset, the
Index Provider selects the highest quality markets using a rating algorithm and a selection algorithm. Detailed information is
contained in the full text of the Market Selection Framework, available at https://coinmetrics.io/wp-content/uploads/2021/04/reference-rates-market-selection-framework.pdf.
The Coin Metrics Index
Committee reviews the constituent markets from the CM Reference Rates to determine the constituent markets for CMBI’s indexes.
This review applies considerations surrounding the investability of each of the markets and takes into consideration all the available
data. The Coin Metrics Oversight Committee reviews these decisions. In the case of the CMBI Bitcoin Index, the constituent markets
are identical to the constituent markets for CMBI’s Bitcoin reference rate.
Determination of the Index Price
Index levels and returns
are determined using transacted crypto asset prices from the Index Provider’s vetted markets as determined by the Market
Selection Framework. No quote data, derivative data or estimations are used as an estimation of constituent price levels. Real-time
index pricing is not streaming but conducted at fixed intervals (e.g., every 15 seconds) as defined in the Index’s methodology.
An Intraday index level means the level of an index observed by a calculation agent at any time during the regular trading session
hours of the relevant exchange, without regard to after hours or any other trading outside of the regular trading session hours.
Intraday Index level and return calculations leverage the real-time reference rates. Real-time reference rates are a collection
of reference rates quoted in U.S. dollars published once per second, every day of the year for a set of cryptocurrencies and fiat
currencies. As such, the real-time reference rates represent the reference rate of one unit of the asset quoted in U.S. dollars.
The collection of reference rates is derived from the most recent trade data available from markets traded on cryptocurrency exchanges
that are approved to serve as pricing sources (“whitelisted markets”) by the Coin Metrics Oversight Committee (“Index
Provider Oversight Committee”) and by applying an exchange volume-weighted median as calculated within the CoinMetrics Real-Time
Reference Rate Methodology, version 0.10, last revised May 27, 2021 (the “Reference Rate Methodology”).
The Reference Rate Methodology
and Coin Metrics Market Selection Framework, version 1.0.2, last revised April 25, 2021 (the
“Market Selection Framework”)
lays out the criteria for the whitelisted market selection framework. The Index Provider Oversight Committee is responsible for
evaluating new markets for inclusion as a selected whitelisted markets and reassessing current whitelisted markets on a quarterly
basis and during interim periods if market conditions warrant. The evaluation of whitelisted markets is based on the following
criteria:
| |
● |
Technology: An assessment of whether the technology infrastructure of the market’s exchange
provides sufficient availability and reliability for input data collection. |
| |
|
|
| |
● |
Legal and Compliance: An assessment of whether the market’s exchange complies with laws
and regulations. Evaluates the exchange’s legal risk exposure, and whether it adheres to regulatory best practices.
Evaluates whether the exchange has publicly disclosed trading policies, uses market surveillance technology, and complies
with national regulatory organizations, and enforces KYC and AML requirements. Evaluates whether the exchange has functioning
fiat and cryptocurrency withdrawals processed within a normal timeframe. Evaluates whether a data sharing license can be executed
with the exchange. |
| |
|
|
| |
● |
Business Model: An assessment of the market’s exchange with respect to its business
model, including its fee structure and asset listing standards. |
| |
|
|
| |
● |
Data Availability: An assessment of the available data the market’s exchange offers
for the given asset, including the number of markets where the given asset is based on currency, whether the markets are quoted
in fiat currencies or other cryptocurrencies, and the type of markets offered. |
| |
|
|
| |
● |
Price: An assessment of the quality of the market’s price data, including testing for
the occurrence of price outliers and impactful price deviations from other markets, and implementing tests that determine
whether the market functions as an active market in the underlying asset and are anchored by observable transactions entered
into at arm’s length between buyers and sellers. |
| |
|
|
| |
● |
Volume: An assessment of the quality of the market’s volume data, including testing
for manipulated volume figures, and implementing tests that determine whether the market functions as an active market in
the underlying asset and are anchored by observable transactions entered into at arm’s length between buyers and sellers.
The size of the exchange’s markets are also considered. |
| |
|
|
| |
● |
Order Book: An assessment of the quality of the market’s order book data, including
tests for manipulated orders, and implementing tests that determine whether the market functions as an active market in the
underlying asset and are anchored by observable transactions entered into at arm’s length between buyers and sellers.
The liquidity of the market is also considered. |
The following is a description
of the calculation algorithm of the CM Reference Rates, showing how price data from each separate market is combined:
| |
1. |
Calculate the volume denominated in units of the given asset from observable transactions
that occurred over the trailing 60 minutes for each of the constituent markets. Calculate the volume weight for each of the
constituent markets by dividing the volume figure for each of the constituent markets by the total volume across all constituent
markets. The resulting figure is referred to as the volume weight. |
| |
|
|
| |
2. |
Convert the trade price of all observable transactions over the trailing 60 minutes for each
of the constituent markets to U.S. dollars, if necessary, using the Reference Rate calculated for Bitcoin (BTC). Calculate
the inverse variance of the trade price converted to U.S. dollars for each of the constituent markets using the population
mean in the calculation of variance, where the population mean is defined as the mean price of all trades from constituent
markets over the trailing 60 minutes. If a constituent market has an infinite or undefined inverse price variance, the inverse
price variance for that constituent market is set to zero. Calculate the inverse price variance weight for each of the constituent
markets by dividing the inverse price variance by the total inverse price variance across all constituent markets. The resulting
figure is referred to as the inverse price variance weight. |
| |
|
|
| |
3. |
Calculate the final weight for each of the constituent markets by taking a mean of the volume
weight and the inverse price variance weight. |
| |
|
|
| |
4. |
Extract the most recent observable transaction from each of the constituent markets. Convert
the trade price of the most recent observable transactions to U.S. dollars, if necessary, using the Reference Rate calculated
for Bitcoin (BTC). |
| |
|
|
| |
5. |
Calculate the weighted median price of the most recent observable transactions using the price
calculated in step 4 and the final weight calculated in step 3. The weighted median price is calculated by ordering the transactions
from lowest to highest price, and identifying the price associated with the trades at the 50th percentile of final weight.
The resulting figure is the Reference Rate for the given asset. |
Adjustments to the pricing
data are made (1) if observable transactions from a constituent market are unable to be collected due to technical problems specific
to the constituent market’s exchange during the calculation of a Reference rate, the observable transactions from the constituent
market are not included in the calculation of the specific instance of the given Refence Rate and (2) if no observable transactions
from constituent markets exist during the trailing 60 minutes, the value of the Reference Rate will be determined to equal the
value calculated during the previous second. If potential errors or anomalies in the data are detected, the exercise of expert
judgment will be applied by Coin Metrics to determine if the potentially erroneous data is included in the calculation of the Reference
Rate. If errors are discovered in the calculation process subsequent to the publication of the Reference Rate, a recalculated reference
rate may be published.
Official Index levels
are produced daily at 4:00 pm, New York time. End-of-day Index level and return calculations leverage the hourly reference rates,
which are derived by applying a volume-weighted median price to trade data that has been collected over a 61-minute interval.
Determination of Index
levels is dependent on the availability of data from CM Reference Rates. To the extent that there are not enough markets to inform
a CM Reference Rate, the Index Provider will act as follows:
| |
● |
In the case of a market’s closure, temporary suspension of trading or an outage, the
Index Provider will reference the latest available hourly reference rate. |
| |
|
|
| |
● |
In the case of on-chain events, such as a fork, that result in a market’s trading suspension,
the Index Provider will reference the latest available hourly reference rate. |
All decisions relating to
unavailability of data for the determination of the Index level will be made by the Coin Metrics Index Committee who may exercise
expert judgment in exceptional circumstances or in the event of prolonged data unavailability. The Trust is not affiliated with,
sponsored, promoted, sold or supported in any other manner with Coin Metrics, Inc., the Index Provider.
Forms of Attack Against
the Bitcoin Network
All
networked systems are vulnerable to various kinds of attacks. As with any computer network, the Bitcoin Network contains certain
flaws. For example, the Bitcoin Network is currently vulnerable to a “51% attack” where, if a mining pool were to gain
control of more than 50% of the hash rate for a digital asset, a malicious actor would be able to gain full control of the network
and the ability to manipulate the Blockchain.
In
addition, many digital asset networks have been subjected to a number of denial-of-service attacks, which has led to temporary
delays in block creation and in the transfer of Bitcoin. Any similar attacks on the Bitcoin Network that impact the ability to
transfer Bitcoin could have a material adverse effect on the price of Bitcoin and the value of the Units.
Market Participants
Miners
Miners
range from Bitcoin enthusiasts to professional mining operations that design and build dedicated machines and data centers, including
mining pools, which are groups of miners that act cohesively and combine their processing to solve blocks. When a pool solves a
new block, the pool operator receives the Bitcoin and, after taking a nominal fee, splits the resulting reward among the pool participants
based on the processing power each of them contributed to solve for such block. Mining pools provide participants with access to
smaller, but steadier and more frequent, Bitcoin payouts. See “—Creation of New Bitcoin” above.
Investment and Speculative
Sector
This
sector includes the investment and trading activities of both private and professional investors and speculators. Historically,
larger financial services institutions are publicly reported to have limited involvement in investment and trading in digital assets,
although the participation landscape is beginning to change.
Retail Sector
The
retail sector includes users transacting in direct peer-to-peer Bitcoin transactions through the direct sending of Bitcoin over
the Bitcoin Network. The retail sector also includes transactions in which consumers pay for goods or services from commercial
or service businesses through direct transactions or third-party service providers.
Service Sector
This
sector includes companies that provide a variety of services including the buying, selling, payment processing and storing of Bitcoin.
Bittrex, BitStamp, Coinbase Pro, Kraken and itBit are some of the largest Bitcoin exchanges by volume traded. Coinbase Custody
serves as the Trust’s custodian providing hot and cold digital wallet storage for the Trust’s Bitcoin. As the Bitcoin
Network continues to grow in acceptance, it is anticipated that service providers will expand the currently available range of
services and that additional parties will enter the service sector for the Bitcoin Network.
Competition
Bitcoin
is not the only available decentralized digital asset. Other digital assets have been developed since the inception of the Bitcoin,
including, but not limited to, Ethereum, Litecoin, Monero and Zcash. Although a competitive digital asset could displace the market
share Bitcoin currently occupies, it would face significant headwinds due to the network effect and financial and intellectual
investments currently enjoyed by the market leader. As of January 6, 2023, the Bitcoin network market share of the total digital
market capitalization was estimated to be approximately 40%. Further, many Bitcoin exchanges use Bitcoin as the exchange comparison
for other cryptocurrencies. For example, to purchase certain cryptocurrencies you first need to purchase Bitcoin on an exchange
and then use the Bitcoin to purchase other cryptocurrencies.
Government Oversight –
Regulation of Bitcoin
U.S.
regulators, at both the state and federal level, and foreign regulators and legislatures have taken action against digital asset
businesses or enacted restrictive regimes in response to adverse publicity arising from cybersecurity risks, potential consumer
harm or digital assets used in connection with criminal activity. The value of Bitcoin could be impacted by such adverse publicity.
For
example, concerns have been raised about the electricity required to secure and maintain the Bitcoin Network. On January 3, 2023,
in connection with the mining process, an all-time high of over 271 million tera hashing operations were performed every second,
non-stop on the Bitcoin Network. Although measuring the electricity consumed by this process is difficult because these operations
are performed by various machines with varying levels of efficiency, the process consumes a significant amount of energy. Further,
in addition to the direct energy costs of performing these calculations, there are indirect costs that impact the Bitcoin Network’s
total energy consumption, including the costs of cooling the machines that perform these calculations. In recent months, due to
these concerns around energy consumption, particularly as such concerns relate to public utilities companies, various states and
cities have implemented, or are considering implementing, moratoriums on Bitcoin mining in their jurisdictions. A significant reduction
in mining activity as a result of such actions could adversely affect the security of the Bitcoin Network by making it easier for
a malicious actor or botnet to manipulate the Blockchain. See “Risk Factors—Risk Factors Related to Digital Assets—If
a malicious actor or botnet obtains control of more than 50% of the processing power on the Bitcoin Network, or otherwise obtains
control over the Bitcoin Network through its influence over core developers or otherwise, such actor or botnet could manipulate
the Blockchain to adversely affect an investment in the Shares or the ability of the Trust to operate.”
U.S. Legal and Regulatory
Treatment of Bitcoin
As
digital assets have grown in both popularity and market size, the U.S. Congress and a number of U.S. federal and state agencies
(including FinCEN, SEC, CFTC, the Financial Industry Regulatory Authority (“FINRA”), the Consumer Financial Protection
Bureau (“CFPB”), 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 spot 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 spot markets or other
service-providers that hold digital assets for users. Many of these state and federal agencies have issued consumer advisories
regarding the risks posed by digital assets to investors. In addition, federal and state agencies, and other countries have issued
rules or guidance about the treatment of digital asset transactions or requirements for businesses engaged in digital asset activity.
As noted previously, the SEC has not asserted regulatory authority over Bitcoin or trading or ownership of Bitcoin and has not
expressed the view that Bitcoin should be classified or treated as a security for purposes of U.S. federal securities laws. However,
the SEC has asserted that certain investment activities involving Bitcoin, including offering investments related to the mining
of Bitcoin or offering participation in pools lending Bitcoin may implicate the investment contract definition of security and
therefore be within the jurisdiction of the SEC. In addition, there have been a number of SEC enforcement actions brought that
involve crypto assets and related activities.
The
CFTC has regulatory jurisdiction over transactions in Bitcoin futures and the Bitcoin futures markets. In addition, because the
CFTC has determined that Bitcoin is a “commodity” under the CEA and the rules thereunder, it has jurisdiction to prosecute
fraud and manipulation in the cash, or spot, market for Bitcoin. The CFTC has pursued enforcement actions relating to fraud and
manipulation involving Bitcoin and Bitcoin markets. Beyond instances of fraud or manipulation, the CFTC generally does not oversee
cash or spot
market exchanges or transactions involving Bitcoin that do not use margin, leverage, or financing with respect to
retail market participants.
On
December 1, 2017, two designated contract markets (“DCMs”) registered with the CFTC self-certified new contracts for
Bitcoin futures products. DCMs are boards of trades (or futures exchanges) that operate under the regulatory oversight of the CFTC,
pursuant to Section 5 of the CEA. To obtain and maintain designation as a DCM, an exchange must comply on an initial and ongoing
basis, with twenty-three Core Principles established in Section 5(d) of the CEA. Among other things, DCMs are required to establish
self-regulatory programs designed to enforce the DCM’s rules, prevent market manipulation and customer and market abuses
and ensure the recording and safe storage of trade information. The CFTC engaged in a “heightened review” of the self-certification
of Bitcoin futures, which required DCMs to enter direct information sharing agreements with spot market platforms to (i) allow
access to trade and trader data, (ii) monitor data from cash markets with respect to price settlements and other Bitcoin prices
more broadly and identify anomalies and disproportionate moves in the cash markets compared to the futures markets, (iii) engage
in inquiries, including at the trade settlement level when necessary and (iv) agree to regular coordination with CFTC surveillance
staff on trade activities, including providing the CFTC surveillance team with trade settlement data upon request.
On March 9,
2022, President Biden signed an Executive Order on Ensuring Responsible Development of Digital Assets (the “Executive Order”),
which outlined a unified federal regulatory approach to addressing the risks and benefits of digital assets. The Executive Order
articulated various policy objectives related to digital assets, including investor protections and financial and national security.
On June 7, 2022, U.S. Senators Kirsten Gillibrand and Cynthia Lummis introduced the “Responsible Financial Innovation Act,”
a bipartisan proposed legislation that would create a regulatory framework for digital assets, including a standard for determining
which digital assets are commodities and what are securities, and would assign regulatory authority over digital asset spot markets
to the CFTC.
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 Units.
Foreign Legal and Regulatory
Treatment of Bitcoin
Various
foreign jurisdictions have, and may continue to, in the near future, adopt laws, regulations or directives that affect the Bitcoin
Network, the Bitcoin markets and their users, particularly Bitcoin spot markets and service providers that fall within such jurisdictions’
regulatory scope. 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 globally, or otherwise negatively affect the value of Bitcoin. The regulatory uncertainty
surrounding the treatment of Bitcoin creates risks for the Trust.
On
March 5, 2020, South Korea voted to amend its Financial Information Act to require virtual asset service providers to register
and comply with its AML and Combating the Financing of Terrorism (“CFT”) framework. These measures also provide the
government with the authority to close digital asset exchanges that do not comply with specified processes. The Chinese and South
Korean governments have also banned initial coin offerings (“ICOs”) and there are reports that Chinese regulators have
taken action to shut down a number of China-based digital asset exchanges. Further, on January 19, 2018, a Chinese news organization
reported that the People’s Bank of China had ordered financial institutions to stop providing banking or funding to “any
activity related to cryptocurrencies.” Similarly, in April 2018, the Reserve Bank of India banned the entities it regulates
from providing services to any individuals or business entities dealing with or settling digital assets. On March 5, 2020, this
ban was overturned in the Indian Supreme Court, although the Reserve Bank of India is currently challenging this ruling and, in
December 2021, reportedly informed its central board of directors that it favors a complete ban on cryptocurrencies. There remains
significant uncertainty regarding the South Korean, Indian and Chinese governments’ future actions with respect to the regulation
of digital assets and digital asset exchanges. 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 European Union, China, Japan, Russia and the United
States and globally, or otherwise negatively affect the value of Bitcoin. Other foreign jurisdictions including Canada, Germany
and Sweden have also approved exchange-traded Bitcoin products.
In
July 2019, the United Kingdom’s Financial Conduct Authority proposed rules to address harm to retail consumers deriving from
the sale of derivatives and exchange traded notes (“ETNs”) that reference certain types of digital assets, contending
that they are “ill-suited” to retail investors citing extreme volatility, valuation challenges and association with
financial crime. In addition to ETNs, the proposed ban would affect financial products including contracts for differences, options
and futures. Public consultation on the proposed restriction closed in October 2019. A determination that Bitcoin is a security
under U.S. or foreign law could adversely affect an investment in the Units.
Not a Regulated Commodity Pool
The Trust will
not trade, buy, sell or hold Bitcoin derivatives, including Bitcoin futures contracts, swaps or options. The Trust is
authorized
solely to take immediate delivery of actual Bitcoin. The Sponsor does not believe the Trust’s activities are required to
be regulated by the CFTC under the CEA as a “commodity pool” under current law, regulation and interpretation. The
Trust will not be operated by a CFTC-regulated commodity pool operator because it will not trade, buy, sell or hold Bitcoin derivatives,
including Bitcoin futures contracts, swaps or options. Unitholders of the Trust will not receive the regulatory protections afforded
to investors in regulated commodity pools, nor may any futures exchange enforce its rules with respect to the Trust’s activities.
In addition, Unitholders of the Trust will not benefit from the protections afforded to investors in Bitcoin futures contracts
on regulated futures exchanges.
Custody of The Trust’s
Bitcoins
Digital
assets and digital asset transactions are recorded and validated on blockchains, the public transaction ledgers of a digital asset
network. Each digital asset blockchain serves as a record of ownership for all of the units of such digital asset, even in the
case of certain privacy-focused digital assets, where the transactions themselves are not publicly viewable. All digital assets
recorded on a blockchain are associated with a public blockchain address, also referred to as a digital wallet. Digital assets
held at a particular public blockchain address may be accessed and transferred using a corresponding private key.
Key Generation
Public
addresses and their corresponding private keys are generated by the Custodian in a proprietary key generation protocol that generates
cold storage addresses for Coinbase Custody digital wallets. This key generation architecture is performed completely offline,
affording maximum protection against malicious attacks and illicit actors.
Once
generated, private keys are encrypted, separated into “shards” and then further encrypted. After the key generation,
all materials used to generate private keys are generally destroyed. All key generation ceremonies are performed offline. No party
other than the Custodian has access to the private key shards of the Trust.
Key Storage
Private
key shards are distributed geographically in secure vaults around the world, including in the United States. The locations of the
secure vaults may change regularly and are kept confidential by the Custodian for security purposes.
The
Custodial Account uses offline storage, or “cold storage,” mechanisms to secure the Trust’s private keys. The
term cold storage refers to a safeguarding method by which the private keys corresponding to digital assets are disconnected and/or
deleted entirely from the internet. Cold storage of private keys may involve keeping such keys on a non-networked (or “airgapped”)
computer or electronic device or storing the private keys on a storage device (for example, a USB thumb drive) or printed medium
(for example, papyrus, paper or a metallic object). A digital wallet may receive deposits of digital assets but may not send digital
assets without use of the digital assets’ corresponding private keys. In order to send digital assets from a digital wallet
in which the private keys are kept in cold storage, either the private keys must be retrieved from cold storage and entered into
an online, or “hot,” digital asset software program to sign the transaction, or the unsigned transaction must be transferred
to the cold server in which the private keys are held for signature by the private keys and then transferred back to the online
digital asset software program. At that point, the user of the digital wallet can transfer its digital assets.
Under
the Custodial Services Agreement, the Custodian holds Bitcoin for the Trust in a segregated account. The Custodian stores all private
keys in cold storage and requires up to 24 hours between any request to withdraw Bitcoin from the Custodial Account and submission
of the withdrawal to the Bitcoin Network. As of the date of this filing, the Trust holds one (1) cold storage wallet with the Custodian.
The Custodial Services Agreement states that the Custodian’s maximum liability for each cold storage wallet shall be limited
to $100,000,000. Our trading department, which monitors the value within each cold storage wallet on a daily basis, will engage
the Custodian for the creation of an additional cold storage wallet once the value exceeds $75,000,000. The Custodian recommends
that, as a best practice, each cold storage wallet should not exceed $80,000,000 notwithstanding the Custodian’s maximum
liability of $100,000,000 for each cold storage wallet.
Security Procedures
The
Custodian is the custodian of the Trust’s private keys in accordance with the terms and provisions of the Custodial Services
Agreement. Transfers from the Custodial Account requires certain security procedures, including but not limited to, multiple encrypted
private key shards, usernames, passwords and two-step verification. Multiple private key shards held by the Custodian must be combined
to reconstitute the private key to sign any transaction in order to transfer the Trust’s assets. Private key shards are distributed
geographically in secure vaults around the world, including in the United States.
As
a result, if any one secure vault is ever compromised, this event will have no impact on the ability of the Trust to access its
assets,
other than a possible delay in operations, while one or more of the other secure vaults is used instead. These security
procedures are intended to remove single points of failure in the protection of the Trust’s assets.
Transfers
of Bitcoins to the Custodial Account will be available to the Trust once processed on the Blockchain.
Subject
to obtaining regulatory approval to operate a redemption program and authorization of the Sponsor, the process of accessing and
withdrawing Bitcoins from the Trust to redeem a Unit by a Unitholder will follow the same general procedure as transferring Bitcoins
to the Trust to create a Unit by a Unitholder, only in reverse. See “Description of Issuance of Units.”
Description of Issuance of
Units
The
following is a description of the material terms of the Trust documents as they relate to the issuance of the Trust’s Units
on an ongoing basis from time to time through sales in private placement transactions exempt from the registration requirements
of the Securities Act.
The
Units are offered directly by the Trust and the Sponsor and its officers, in reliance upon the exemption from broker registration
contained in Rule 3a4-1 of the Exchange Act. Currently, the Trust does not expect to use intermediaries such as underwriters, finders
or other such intermediaries to offer or sell Units, but it may choose to do so, and in any such case pay the fees of such intermediaries
itself or pass some or all of such fees on to purchasers (in which case the Trust will make advanced disclosure of
such fee arrangements to such purchasers).
The
current legal framework has made it difficult for the Trust to permit redemptions of our Units because we are unable to conduct
concurrent offerings and redemptions of our Units. As of the date of this filing, the Trust has not accepted new purchases for
over one year, and we have no present intention of reopening sales of Units. We are considering a redemption program for investors
in the Trust. Any redemption program would likely involve limited periodic redemptions of Units, although we have not ruled out
the possibility of an open-ended redemption program.
The
Trust is authorized under the Trust Agreement to issue an unlimited number of Units. The Trust issues Units only in connection
with purchase orders for a minimum of $25,000 initial investment ($10,000 minimum for additional investments). The Units represent
common units of fractional undivided beneficial interest in and ownership of the Trust and have no par value.
The
Units may be purchased from the Trust on an ongoing basis, but only upon the order of an Accredited Investor to purchase a minimum
of $25,000 of Units initial investment ($10,000 minimum for additional investments). As of January 6, 2023, each Unit represented
0.00033 of a Bitcoin.
Accredited
Investors are the only persons that may place orders to purchase Units (the “Purchasers”). Each Purchaser must (i)
enter into a subscription agreement with the Sponsor and the Trust, and (ii) if purchasing in-kind, have access to a Bitcoin digital
wallet address previously
known to the Custodian as belonging to the Purchaser (the “Purchaser Self-Administered Account”).
The
creation of Units requires the delivery to the Trust of the Bitcoin Purchase Amount.
The
subscription agreement provides the procedures for the creation of Units and for the delivery of the whole and fractional Bitcoins
required for such creations. The subscription agreement and the related procedures attached thereto may be amended by the Sponsor
and the relevant Purchaser. Under the subscription agreement, the Sponsor has agreed to indemnify each Purchaser against certain
liabilities, including liabilities under the Securities Act. If and when the Trust has an active offering of Units and the Trust
determines an announcement of a halting of subscription agreement offerings is necessary for the best interest of the Trust and
the investors, such as when the Units are trading at a discount to the NAV, it will post such information on its website at https://ospreyfunds.io/onboarding/.
Purchasers
do not pay a transaction fee to the Trust in connection with the creation of Units, but there may be transaction fees associated
with the validation of the transfer of Bitcoins by the Bitcoin Network. Purchasers who deposit Bitcoins with the Trust in exchange
for Units will receive no fees, commissions or other form of compensation or inducement of any kind from either the Sponsor or
the Trust, and no such person has any obligation or responsibility to the Sponsor or the Trust to effect any sale or resale of
Units. The following description of the procedures for the creation of Units is only a summary and Unitholders should refer to
the relevant provisions of the Trust Agreement and the form of subscription agreement for more detail.
Purchase Procedures
On any Business Day,
a Purchaser may deposit the amount of cash to purchase Units (the “Bitcoin Purchase Amount”) with the Trust’s
bank (i.e., the bank providing the Trust with banking services) and submit an order to create Units (a “Purchase Order”)
from the Trust via notification to the Sponsor or its delegate in the manner provided in the subscription agreement. An investor’s
cash for a Purchase
Order must be cleared in the Trust’s bank account by 1:00 p.m., Eastern time on a Business Day for the
investor to obtain that day’s Bitcoin Market Price. The Sponsor or its delegate will process Purchase Orders only from Purchasers
with respect to whom a subscription agreement is in full force and effect.
Once the Sponsor or
its delegate confirms the total amount of purchase funds for a Purchase Order, it will choose a counterparty to purchase Bitcoin
on agreed upon terms. The Sponsor has full discretion to determine the Trust’s counterparties for Bitcoin transactions. The
Sponsor considers various counterparties for trades, including Cumberland DRW, LLC; Jane Street; Galaxy Digital; and Wintermute
Trading Ltd., based on various factors including, but not limited to, price quoted, ease of liquidity, marketplace slippage (i.e.,
price certainty) and ease and certainty of settlement. Upon receiving a trade confirmation from the counterparty, the Sponsor will
instruct the Trust’s bank to wire funds to the trading counterparty and confirm the digital wallet address for the Trust
to receive Bitcoin at the Custodian.
Completed Purchase Orders
are generally accepted (or rejected) by the Sponsor within one Business Day of the day on which the relevant Purchase Order is
placed. If a Purchase Order is accepted, the Sponsor generally will fill the Purchaser’s Purchase Order within five Business
Days immediately following the day on which the relevant Purchase Order is placed. The expense and risk of delivery, ownership
and safekeeping of Bitcoins will be borne solely by the Purchaser until such Bitcoin have been received by the Trust.
In-Kind Subscriber Subscriptions
Units may be purchased
through in-kind contributions of Bitcoin, at the sole discretion of the Sponsor. The minimum initial subscription amount is $25,000
and an existing Unitholder may make additional subscriptions in a minimum amount of $10,000, subject in all cases to increase,
decrease and waiver of such requirements by the Sponsor, in its sole discretion.
Our calculation surrounding
the number of Units issued upon each purchase through in-kind contributions is described and demonstrated below, which illustrates
a hypothetical transaction taking place on January 5, 2023:
| 1. | Use 4:00 pm, New York time price of the principal market to determine
USD value of in-kind subscription received. For example, 2 Bitcoins received on January 5, 2023 (2*$16,854.30 = $33,708.60); |
| 2. | Use 4:00 pm, New York time, NAV per Unit price: $5.6138 NAV per Unit
on January 5, 2023; |
| 3. | Calculate the maximum number of whole Units that can be purchased
at the price determined in step 2 with the proceeds determined in step 1: ($33,708.60/$5.6138
= 6,004 whole Units); |
| 4. | Calculate the total value of those Units: 6,004 whole Units * $5.6138
NAV per Unit = $33,705.26; |
| 5. | Calculate the difference between the proceeds received in step 1
and the value of the Units in Step 4: $33,708.60 - $33,705.26 = $3.34; |
| 6. | The unapplied USD amount for purchase of new Units (rounding difference)
is allocated to the Trust as “Other Earnings”: $3.34. |
Pursuant to the representations and
warranties made in the Subscription Agreement, investors are not permitted to withdraw either the cash subscriptions or in-kind
subscriptions after the Bitcoin has been valued.
Suspension or Rejection of Purchase
Orders and Bitcoin Purchase Amount
The delivery of the
Units against deposit of the Bitcoin Purchase Amount may be suspended generally, or refused with respect to particular requested
creations, during any period when the transfer books of the Sponsor or its delegate are closed or if any such action is deemed
necessary or advisable by the Sponsor or its delegate or for any reason at any time or from time to time. None of the Sponsor,
its delegates, or the Custodian shall be liable for the rejection or acceptance of any Purchase Order or Bitcoin Purchase Amount.
Tax Responsibility
Purchasers 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 of Units, regardless of whether such tax or charge is imposed directly on the Purchasers, and agree to indemnify
the Sponsor and the Trust if the Sponsor or the Trust is required by law to pay any such tax or charge, together with any applicable
penalties, additions to tax or interest thereon.
Certain U.S. Federal Income
Tax Consequences
The
following discussion addresses the material U.S. federal income tax consequences of the ownership of Units. This discussion does
not describe all of the tax consequences that may be relevant to a beneficial owner of Units in light of the beneficial owner’s
particular circumstances, including tax consequences applicable to beneficial owners subject to special rules, such as:
| • | dealers in securities or commodities; |
| • | traders in securities or commodities that have elected to apply
a mark-to-market method of tax accounting in respect thereof; |
| • | persons holding Units as part of a hedge, “straddle,”
integrated transaction or similar transaction; |
| • | U.S. Holders (as defined below) whose functional currency is
not the U.S. dollar; |
| • | entities or arrangements classified as partnerships for U.S.
federal income tax purposes; |
| • | persons receiving Units as compensation; |
| • | persons that are expatriates or former citizens or long-term
residents of the United States; |
| • | a “controlled foreign corporation” or a person who
is treated as a “United States shareholder” thereof, a “passive foreign investment company” or a shareholder
thereof, or a corporation that accumulates earnings to avoid U.S. federal income tax; |
| • | real estate investment trusts; |
| • | regulated investment companies; and |
| • | tax-exempt entities, including individual retirement accounts. |
This
discussion applies only to Units that are held as capital assets and does not address alternative minimum tax consequences or consequences
of the tax on net investment income.
If
an entity or arrangement that is classified as a partnership for U.S. federal income tax purposes holds Units, the U.S. federal
income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships
holding Units and partners in those partnerships are urged to consult their tax advisers about the particular U.S. federal income
tax consequences of owning Units.
This
discussion is based on the Internal Revenue Code of 1986, as amended (the “IRC”), administrative pronouncements, judicial
decisions, and final, temporary and proposed Treasury regulations as of the date hereof. Changes in U.S. federal income tax law,
Treasury regulations and future published rulings and administrative procedures of the Internal Revenue Service (“IRS”)
in response to these changes in U.S. federal income tax laws, could materially affect the tax consequences of an investor’s
investment in the Units, and the tax treatment of the Trust’s investments. While some of these changes may be beneficial,
others could negatively affect the after-tax returns of the Trust and its investors. Accordingly, no assurance can be given that
the currently anticipated tax treatment of an investment in the Trust, or of investments made by the Trust, will not be modified
by legislative, judicial, or administrative changes, possibly with retroactive effect, to the detriment of the investors. For the
avoidance of doubt, this summary does not discuss any tax consequences arising under the laws of any state, local or foreign taxing
jurisdiction. Unitholders are urged to consult their tax advisers about the application of the U.S. federal income tax laws to
their particular situations, as well as any tax consequences arising under the laws of any state, local or foreign taxing jurisdiction.
Tax Treatment of the Trust
The
Sponsor intends to take the position that the Trust is properly treated as a grantor trust for U.S. federal income tax purposes.
The Trust has not obtained a ruling from the IRS or an opinion of counsel as to the status of the Trust, and there cannot be any
assurances
as to the federal income tax classification of the Trust. Assuming that the Trust is a grantor trust, the Trust will
not be subject to U.S. federal income tax. Rather, each beneficial owner of Units will be treated as directly owning its pro rata
share of the Trust’s assets and a pro rata portion of the Trust’s income, gain, losses and deductions will “flow
through” to each beneficial owner of Units.
The Trust expects
to take certain positions with respect to the tax consequences of Incidental Rights and its receipt of Additional Currency. The
Trust does not expect to take into account any Additional Currency it may hold for purposes of determining the Trust’s Bitcoin
Holdings or the Bitcoin Holdings per Unit. With respect to any fork, airdrop or similar event, the Sponsor may, in its discretion,
accept the assets and distribute the Additional Currency on a pro rata basis to Unitholders pursuant to the Trust Agreement. If
the IRS were to disagree with, and successfully challenge, any of these positions, the Trust might not qualify as a grantor trust
for U.S. federal income tax purposes. If the Trust were treated as owning any asset other than Bitcoins as of any date on which
it creates Units, it would likely cease to qualify as a grantor trust for U.S. federal income tax purposes.
Because
of the evolving nature of digital currencies, it is not possible to predict potential future developments that may arise with respect
to digital currencies, including forks, airdrops and other similar occurrences. Assuming that the Trust is currently a grantor
trust for U.S. federal income tax purposes, certain future developments could render it impossible, or impracticable, for the Trust
to continue to be treated as a grantor trust for such purposes.
If
the Trust is not properly classified as a grantor trust, the Trust might be classified as a partnership for U.S. federal income
tax purposes. However, due to the uncertain treatment of digital currency for U.S. federal income tax purposes, there can be no
assurance in this regard. If the Trust were classified as a partnership for U.S. federal income tax purposes, the tax consequences
of owning Units generally would not be materially different from the tax consequences described herein, although there might be
certain differences, including with respect to timing of the recognition of taxable income or loss. In addition, tax information
reports provided to beneficial owners of Units would be made in a different form. If the Trust were not classified as either a
grantor trust or a partnership for U.S. federal income tax purposes, it would be classified as a corporation for such purposes.
In that event, the Trust would be subject to entity-level U.S. federal income tax (currently at the rate of 21%) on its net taxable
income and certain distributions made by the Trust to Unitholders would be treated as taxable dividends to the extent of the Trust’s
current and accumulated earnings and profits (as calculated for U.S. federal income tax purposes). Any such dividend distributed
to a beneficial owner of Units that is a non-U.S. person for U.S. federal income tax purposes would be subject to U.S. federal
withholding tax at a rate of 30% (or such lower rate as provided in an applicable tax treaty).
The
remainder of this discussion assumes the Trust will be treated as a grantor trust for U.S. federal income tax purposes.
Uncertainty Regarding the
U.S. Federal Income Tax Treatment of Digital Currency
Each
beneficial owner of Units will be treated for U.S. federal income tax purposes as the owner of an undivided interest in the Bitcoins
(and any Additional Currency) held in the Trust. Due to the new and evolving nature of digital currencies and the absence of comprehensive
guidance with respect to digital currencies, many significant aspects of the U.S. federal income tax treatment of digital currency
are uncertain.
In
2014, the IRS released Notice 2014-21, 2014-16 I.R.B. 938 (the “Notice”) discussing certain aspects of the treatment
of “convertible virtual currency” (that is, digital currency that has an equivalent value in fiat currency or that
acts as a substitute for fiat currency) for U.S. federal income tax purposes. The IRS stated in the Notice that such digital currency
(i) is “property” (ii) is “not treated as currency” for purposes of the IRC rules relating to foreign currency
gain or loss and (iii) may be held as a capital asset. In 2019, the IRS released Revenue Ruling 2019-24, 2019-44 I.R.B. 1004 (the
“Revenue Ruling”) that supplements the Notice, in which the IRS concluded that a hard fork on a digital currency blockchain
(i) does not create taxable income if the taxpayer does not subsequently receive new units of digital currency and (ii) creates
taxable ordinary income if the taxpayer receives new units of cryptocurrency by airdrop following the hard fork. Simultaneously
with the release of the Revenue Ruling, the IRS also published a set of “Frequently Asked Questions” (the “FAQs”),
which address, among other issues, how to determine the fair market value of digital currencies and the proper method of determining
a holder’s holding period and tax basis for units of digital currency (including those acquired at different times or at
varying prices). However, the Notice, Revenue Ruling and FAQs do not address other significant aspects of the U.S. federal income
tax treatment of digital currencies, including: (i) whether convertible virtual currencies are properly treated as “commodities”
for U.S. federal income tax purposes; (ii) whether convertible virtual currencies are properly treated as “collectibles”
for U.S. federal income tax purposes; (iii) the proper method of determining a holder’s holding period and tax basis for
convertible virtual currencies acquired at different times or at varying prices; and (iv) whether and how a holder of convertible
virtual currencies acquired at different times or at varying prices may designate, for U.S. federal income tax purposes, which
of the convertible virtual currencies is transferred in a subsequent sale, exchange or other disposition. The uncertainty surrounding
the U.S. federal income tax treatment of digital currencies and other digital assets could affect the performance of the Trust.
Moreover, although the Revenue Ruling and FAQs address the treatment of hard forks, there continues to be uncertainty with respect
to the timing and amount of the income inclusions.
There
can be no assurance that the IRS will not alter its position with respect to digital currencies in the future or that a court would
uphold the treatment set forth in the Notice, Revenue Ruling and FAQs. It is also unclear what additional guidance on the treatment
of digital currencies for U.S. federal income tax purposes may be issued in the future. Any such alteration of the current IRS
positions or additional guidance could result in adverse tax consequences for Unitholders and could have an adverse effect on the
prices of digital currencies, including the price of Bitcoin in the Bitcoin markets, and therefore could have an adverse effect
on the value of Units. 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.
The
remainder of this discussion assumes that Bitcoin, and any Additional Currency that 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 that is not currency for purposes of the provisions
of the IRC relating to foreign currency gain and loss.
Unitholders
are urged to consult their tax advisers regarding the tax consequences of an investment in the Trust and in digital currencies
in general, including, in the case of Unitholders that are generally exempt from U.S. federal income taxation, whether such Unitholders
may recognize “unrelated business taxable income” (“UBTI”) within the meaning of IRC Section 512 as a consequence
of a fork, airdrop or similar occurrence.
Uncertainty Regarding the State Tax
Treatment of Digital Currency
A number of states have
issued their own guidance regarding the tax treatment of certain digital assets for state income and sales tax purposes. For example,
on December 5, 2014, the New York State Department of Taxation and Finance issued guidance regarding the application of New York
State tax law to virtual currencies such as Bitcoin. The Department determined that New York State would follow the Notice with
respect to the treatment of virtual currencies such as Bitcoin for state income tax purposes. Furthermore, the agency took the
position that virtual currencies such as Bitcoin are a form of “intangible property,” with the result that the purchase
and sale of Bitcoin for fiat currency is not subject to state sales tax (although transactions of Bitcoin for other goods and services
may be subject to sales tax under barter transaction treatment). It is unclear if other states will follow the guidance of the
New York State Department of Taxation and Finance with respect to the treatment of virtual currencies such as Bitcoin for income
tax and sales tax purposes. If a state adopts a different treatment, such treatment may have negative consequences, including the
imposition of a greater tax burden on investors in Bitcoin or the imposition of a greater cost on the acquisition and disposition
of Bitcoin generally. Any such treatment may have a negative effect on prices of Bitcoin in the digital asset exchange market and
a negative impact on the Units.
The treatment of virtual
currencies such as Bitcoin for tax purposes by foreign jurisdictions may differ from the treatment of virtual currencies by the
IRS or the New York State Department of Taxation and Finance. If a foreign jurisdiction with a significant share of the market
of Bitcoin users imposes onerous tax burdens on Bitcoin users or imposes sales or value-added tax on purchases and sales of Bitcoin
for fiat currency, such actions could result in decreased demand for Bitcoin in such jurisdiction, which could affect the price
of Bitcoin and negatively affect an investment in the Units.
Additional Currency
It is possible that,
in the future, the Trust will hold Additional Currency that it receives in connection with its investment in Bitcoins. The uncertainties
with respect to the treatment of digital currency for U.S. federal income tax purposes, described above, apply to Additional Currency,
as well as to Bitcoins. As described above, the Notice addressed only digital currency that is “convertible virtual currency,”
defined as digital currency that has an equivalent value in fiat currency or that acts as a substitute for fiat currency. It is conceivable that certain Additional Currency
the Trust may receive in the future would not be within the scope of the Notice.
In general, it is expected
that the Trust would receive Additional Currency as a consequence of a fork, an airdrop or a similar occurrence related to its
ownership of Bitcoins. As described above, the Revenue Ruling and FAQs include guidance to the effect that, under certain circumstances,
forks (and, presumably, airdrops) of digital currencies are taxable events giving rise to ordinary income, but there continues
to be uncertainty with respect to the timing and amount of the income inclusions. The Trust’s receipt of Additional Currency
may give rise to other tax issues. The possibility that the Trust will receive Additional Currency thus increases the uncertainties
and risks with respect to the U.S. federal income tax consequences of an investment in Units.
The Trust may distribute
Additional Currency to the Unitholders. Alternatively, the Trust may form a liquidating trust to which it contributes Additional
Currency and distributes interests in the liquidating trust to the Unitholders. Any such distribution will not be a taxable event
for a U.S. Holder (as defined below). A U.S. Holder’s tax basis in the Additional Currency distributed, whether directly
or through the medium of a liquidating trust, will be the same as the U.S. Holder’s tax basis in the distributed assets immediately
prior to the distribution, and the U.S. Holder’s tax basis in its pro rata share of the Trust’s remaining assets will
not include the amount of such basis. Immediately after any such distribution, the U.S. Holder’s holding period with respect
to the distributed Additional Currency will be the same as the U.S. Holder’s holding period with respect to the distributed
assets immediately prior to the distribution. A subsequent sale of the distributed Additional Currency will generally be a taxable
event for a U.S. Holder.
For simplicity of presentation,
the remainder of this discussion assumes that the Trust will hold only Bitcoins. However, the
principles set forth in the discussion
below apply to all of the assets that the Trust may hold at any time, including Additional Currency, as well as Bitcoins. Without
limiting the generality of the foregoing, each beneficial owner of Units generally will be treated for U.S. federal income tax
purposes as owning an undivided interest in any Additional Currency held in the Trust, and any transfers or sales of Additional
Currency by the Trust (other than distributions by the Trust, as described in the preceding paragraph) will be taxable events to
Unitholders with respect to which Unitholders will generally recognize gain or loss in a manner similar to the recognition of gain
or loss on a taxable disposition of Bitcoins, as described below.
Tax Consequences to U.S. Holders
As used herein, the
term “U.S. Holder” means a beneficial owner of a Unit for U.S. federal income tax purposes that is:
| ● | an individual who is a citizen or resident of the United States for U.S. federal income tax purposes; |
| ● | a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created
or organized in or under the laws of the United States or of any political subdivision thereof; or |
| ● | an estate the income of which is subject to U.S. federal income taxation regardless of its source;
or |
| ● | a trust if (a) a court within the United States is able to exercise primary supervision over the
administration of the trust and one (1) or more U.S. persons have the authority to control all substantial decisions of the trust,
or (b) it has in effect a valid election to be treated as a U.S. person for U.S. federal income tax purposes. |
Except as specifically
noted, the discussion below assumes that each U.S. Holder will acquire all of its Units on the same date for the same price per
Unit and either solely for cash or solely for Bitcoins that were originally acquired by the U.S. Holder for cash on the same date.
As discussed in the
section titled “Description of Issuance of Units,” a U.S. Holder may be able to acquire Units of the Trust by contributing
Bitcoins in-kind to the Trust. Assuming that the Trust is properly treated as a grantor trust for U.S. federal income tax purposes,
such a contribution should not be a taxable event to the U.S. Holder.
For U.S. federal income
tax purposes, each U.S. Holder will be treated as owning an undivided interest in the Bitcoins held in the Trust and will be treated
as directly realizing its pro rata share of the Trust’s income, gains, losses and deductions. When a U.S. Holder purchases
Units solely for cash, (i) the U.S. Holder’s initial tax basis in its pro rata share of the Bitcoins held in the Trust will
be equal to the amount paid for the Units and (ii) the U.S. Holder’s holding period for its pro rata share of such Bitcoins
will begin on the date of such purchase. When a U.S. Holder acquires Units in exchange for Bitcoins, (i) the U.S. Holder’s
initial tax basis in its pro rata share of the Bitcoins held in the Trust will be equal to the U.S. Holder’s tax basis in
the Bitcoins that the U.S. Holder transferred to the Trust and (ii) the U.S. Holder’s holding period for its pro rata share
of such Bitcoins generally will include the period during which the U.S. Holder held the Bitcoins that the U.S. Holder transferred
to the Trust. The Revenue Ruling and FAQs confirm that if a taxpayer acquires tokens of a digital currency at different times and
for different prices, the taxpayer has a separate tax basis in each lot of such tokens. Under the Revenue Ruling and FAQs, if a
U.S. Holder that owns more than one lot of Bitcoins contributes a portion of its Bitcoins to the Trust in exchange for Units, the
U.S. Holder may designate the lot(s) from which such contribution will be made, provided that the U.S. Holder is able to identify
specifically which Bitcoins it is contributing and to substantiate its tax basis in those Bitcoins. In general, if a U.S. Holder
acquires Units (i) solely for cash at different prices, (ii) partly for cash and partly in exchange for a contribution of Bitcoins
or (iii) in exchange for a contribution of Bitcoins with different tax bases, the U.S. Holder’s share of the Trust’s
Bitcoins will consist of separate lots with separate tax bases. In addition, in this situation, the U.S. Holder’s holding
period for the separate lots may be different. In addition, the Additional Currency that the Trust acquires in a hard fork or airdrop
that is treated as a taxable event will constitute a separate lot with a separate tax basis and holding period.
When the Trust transfers
Bitcoins to the Sponsor as payment of the Management Fee, or sells Bitcoins to fund payment of any Extraordinary Expenses, each
U.S. Holder will be treated as having sold its pro rata share of those Bitcoins for their fair market value at that time (which,
in the case of Bitcoins sold by the Trust, generally will be equal to the cash proceeds received by the Trust in respect thereof).
As a result, each U.S. Holder will recognize gain or loss in an amount equal to the difference between (i) the fair market value
of the U.S. Holder’s pro rata share of the Bitcoins transferred and (ii) the U.S. Holder’s tax basis for its pro rata
share of the Bitcoins transferred. Any such gain or loss will be short-term capital gain or loss if the U.S. Holder’s holding
period for its pro rata share of the Bitcoins is one year or less and long-term capital gain or loss if the U.S. Holder’s
holding period for its pro rata share of the Bitcoins is more than one year. Although unclear due to lack of guidance, a U.S. Holder’s
tax basis in its pro rata share of any Bitcoins transferred by the Trust generally will be determined by multiplying the tax basis
of the U.S. Holder’s pro rata share of all of the Bitcoins held in the Trust immediately prior to the transfer by a fraction
the numerator of which is the amount of Bitcoins transferred and the denominator of which is the total amount of Bitcoins held
in the Trust immediately prior to the transfer. Immediately after the transfer, the U.S. Holder’s tax basis in its pro rata
share of the Bitcoins remaining in the Trust will be equal to the tax basis of its pro rata share of the Bitcoins held in the Trust
immediately prior to the transfer, less the portion of that tax basis allocable to its pro rata share of the Bitcoins transferred.
As noted above, the
IRS has taken the position in the Revenue Ruling and FAQs that, under certain circumstances, a hard fork of a
digital currency
constitutes a taxable event giving rise to ordinary income, and it is clear from the reasoning of the Revenue Ruling and FAQs that
the IRS generally would treat an airdrop as a taxable event giving rise to ordinary income. Under the Revenue Ruling and FAQs,
a U.S. Holder will have a basis in any Additional Currency received in a fork or airdrop equal to the amount of income the U.S.
Holder recognizes as a result of such fork or airdrop and the U.S. Holder’s holding period for such Additional Currency will
begin as of the time it recognizes such income.
U.S. Holders’
pro rata shares of the expenses incurred by the Trust will be treated as “miscellaneous itemized deductions” for U.S.
federal income tax purposes. As a result, for taxable years beginning before January 1, 2026, a non-corporate U.S. Holder’s
share of these expenses will not be deductible for U.S. federal income tax purposes. For taxable years beginning on or after January
1, 2026, a non-corporate U.S. Holder’s share of these expenses will be deductible for regular U.S. federal income tax purposes
only to the extent that the U.S. Holder’s share of the expenses, when combined with other “miscellaneous itemized deductions,”
exceeds 2% of the U.S. Holder’s adjusted gross income for the particular year, will not be deductible for U.S. federal alternative
minimum tax purposes and will be subject to certain other limitations on deductibility.
On a sale or other disposition
of Units and although unclear due to lack of guidance, a U.S. Holder will be treated as having sold the Bitcoins underlying such
Units. Accordingly, the U.S. Holder generally will recognize gain or loss in an amount equal to the difference between (i) the
amount realized on the sale of the Units and (ii) the portion of the U.S. Holder’s tax basis in its pro rata share of the
Bitcoins held in the Trust that is attributable to the Units that were sold or otherwise subject to a disposition. Such tax basis
generally will be determined by multiplying the tax basis of the U.S. Holder’s pro rata share of all of the Bitcoins held
in the Trust immediately prior to such sale or other disposition by a fraction the numerator of which is the number of Units disposed
of and the denominator of which is the total number of Units held by such U.S. Holder immediately prior to such sale or other disposition
(such fraction, expressed as a percentage, the “Unit Percentage”). If the U.S. Holder’s share of the Trust’s
Bitcoins consists of separate lots with separate tax bases and/or holding periods, the U.S. Holder should be treated as having
sold the Unit Percentage of each such lot. Gain or loss recognized by a U.S. Holder on a sale or other disposition of Units will
generally be short-term capital gain or loss if the U.S. Holder’s holding period for the Bitcoins underlying such Units is
one year or less and long-term capital gain or loss if the U.S. Holder’s holding period for the Bitcoins underlying such
Units is more than one year. The deductibility of capital losses is subject to significant limitations.
After any sale or other
disposition of fewer than all of a U.S. Holder’s Units, the U.S. Holder’s tax basis in its pro rata share of the Bitcoins
held in the Trust immediately after the disposition will equal the tax basis in its pro rata share of the total amount of the Bitcoins
held in the Trust immediately prior to the disposition, less the portion of that tax basis that is taken into account in determining
the amount of gain or loss recognized by the U.S. Holder on the disposition.
Any brokerage or other
transaction fee incurred by a U.S. Holder in purchasing Units generally will be added to the U.S. Holder’s tax basis in the
underlying assets of the Trust. Similarly, any brokerage fee or other transaction fee incurred by a U.S. Holder in selling Units
generally will reduce the amount realized by the U.S. Holder with respect to the sale.
In the absence of guidance
to the contrary, it is possible that any income recognized by a U.S. tax-exempt Unitholder as a consequence of a hard fork, airdrop
or similar occurrence would constitute UBTI. A tax-exempt Unitholder should consult its tax advisor regarding whether such Unitholder
may recognize some UBTI as a consequence of an investment in Units.
Tax Consequences to Non-U.S. Holders
As used herein, the
term “non-U.S. Holder” means a beneficial owner of a Unit for U.S. federal income tax purposes that is not a U.S. Holder.
The term “non-U.S. Holder” does not include (i) a nonresident alien individual who is present in the United States
for 183 days or more in a taxable year, (ii) a former U.S. citizen or U.S. resident or an entity that has expatriated from the
United States; (iii) a person whose income in respect of Units is effectively connected with the conduct of a trade or business
in the United States; or (iv) an entity that is treated as a partnership for U.S. federal income tax purposes. Unitholders described
in the preceding sentence should consult their tax advisers regarding the U.S. federal income tax consequences of owning Units.
A non-U.S. Holder generally
will not be subject to U.S. federal income or withholding tax with respect to its share of any gain recognized on the Trust’s
transfer of Bitcoins in payment of the Management Fee or any additional Trust expenses or on the Trust’s sale or other disposition
of Bitcoins, subject to compliance with certification as a non-U.S. Holder. In addition, assuming that the Trust holds no asset
other than Bitcoins, a non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax with respect to
any gain it recognizes on a sale or other disposition of Units. A non-U.S. Holder also will generally not be subject to U.S. federal
income or withholding tax with respect to any distribution received from the Trust, whether in cash or in-kind.
Provided that it does
not constitute income that is treated as “effectively connected” with the conduct of a trade or business in the United
States, U.S.-source “fixed or determinable annual or periodical” (“FDAP”) income received, or treated as
received, by a non-U.S. Holder will generally be subject to U.S. withholding tax at the rate of 30% (subject to possible reduction
or elimination pursuant to an applicable tax treaty and to statutory exemptions such as the portfolio interest exemption). Although
there is no guidance on point, it is likely
that any ordinary income recognized by a non-U.S. Holder as a result of a fork, airdrop
or similar occurrence may constitute FDAP income. It is unclear, however, whether any such FDAP income would be properly treated
as U.S.-source or foreign-source FDAP income. Non-U.S. Holders in the Trust should assume that, in the absence of guidance, a withholding
agent (including the Sponsor) is likely to withhold 30% from a non-U.S. Holder’s pro rata share of any such income, including
by deducting such withheld amounts from proceeds that such non-U.S. Holder would otherwise be entitled to receive in connection
with a distribution of Additional Currency or proceeds from the disposition of Additional Currency. A non-U.S. Holder that is a
resident of a country that maintains an income tax treaty with the United States may be eligible to claim the benefits of that
treaty to reduce or eliminate, or to obtain a partial or full refund of, the 30% U.S. withholding tax on its share of any such
income, but only if the non-U.S. Holder’s home country treats the Trust as “fiscally transparent,” as defined
in applicable Treasury regulations.
Although the nature
of the Additional Currency that the Trust may hold in the future is uncertain, it is unlikely that any such asset would give rise
to income that is treated as “effectively connected” with the conduct of a trade or business in the United States or
that any income derived by a non-U.S. Holder from any such asset would otherwise be subject to U.S. income or withholding tax,
except as discussed above in connection with the fork, airdrop or similar occurrence giving rise to Additional Currency. There
can, however, be no complete assurance in this regard.
In order to prevent
the possible imposition of U.S. “backup” withholding and (if applicable) to qualify for a reduced rate of withholding
tax at source under a treaty, a non-U.S. Holder must comply with certain certification requirements (generally, by delivering a
properly executed IRS Form W-8BEN or W-8BEN-E to the relevant withholding agent).
U.S. Information Reporting and Backup
Withholding
The Trust or the appropriate
broker will file certain information returns with the IRS and provide Unitholders with information regarding their annual income
(if any) and expenses with respect to the Trust in accordance with applicable Treasury regulations.
A U.S. Holder will generally
be subject to information reporting requirements and backup withholding unless (i) the U.S. Holder is a corporation or other exempt
recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies
that it is not subject to backup withholding. In order to avoid the information reporting and backup withholding requirements,
a non-U.S. Holder may have to comply with certification procedures to establish that it is not a U.S. person. The amount of any
backup withholding will be allowed as a credit against the Unitholder’s U.S. federal income tax liability and may entitle
the holder to a refund, provided that the required information is furnished to the IRS.
FATCA
As discussed above,
it is unclear whether any ordinary income recognized by a non-U.S. Holder as a result of a fork, airdrop or similar occurrence
would constitute U.S.-source FDAP income. Pursuant to IRC Sections 1471-1474 (commonly referred to as “FATCA”), accompanying
Treasury regulations, and other guidance from the U.S. Department of Treasury and IRS, the United States imposes a withholding
tax of 30% on “withholdable payments” (generally, U.S.-source FDAP income) to “foreign financial institutions”
(which is broadly defined to generally include investment vehicles) and certain non-U.S. entities unless various U.S. information
reporting and due diligence requirements (generally relating to ownership by U.S. persons of interests in or accounts with those
entities) have been satisfied, or an exception otherwise applies. An intergovernmental agreement between the United States and
an applicable foreign country may modify these requirements. While such withholding would have applied also to payments of gross
proceeds from the sale or other disposition on or after January 1, 2019, of property of a type which can produce US-source dividends
and interest, recently proposed Treasury Regulations eliminate such withholding on payments of gross proceeds entirely. Taxpayers
generally may rely on these proposed Treasury Regulations until final Treasury Regulations are issued.
If FATCA withholding
is imposed, a beneficial owner that is not a foreign financial institution generally may obtain a refund of any amounts withheld
by filing a U.S. federal income tax return (which may entail significant administrative burden).
Since the enactment
of FATCA, other jurisdictions have instituted similar regimes. The Trust may incur taxes or may be required to withhold tax pursuant
to such regimes. Unitholders should consult their tax advisors regarding the effects of FACTA and similar information reporting
regimes on an investment in the Trust.
ERISA and Related Considerations
General
The following
section sets forth certain consequences under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”)
and the IRC which a fiduciary of an “employee benefit plan” as defined in and subject to the fiduciary responsibility
provisions of ERISA, or of a “plan” as defined in and subject to Section 4975 of the IRC, who has investment discretion
should consider before
deciding to acquire Units with plan assets (such “employee benefit plans” and “plans”
being referred to herein as “Plans,” and such fiduciaries with investment discretion being referred to herein as “Plan
Fiduciaries”). The following summary is not intended to be complete, but only to address certain questions under ERISA and
the IRC that are likely to be raised by the Plan Fiduciary’s own counsel.
In general,
the terms “employee benefit plan” as defined in ERISA and “plan” as defined in Section 4975 of the IRC
together refer to any plan or account of various types which provides retirement benefits or welfare benefits to an individual
or to an employer’s employees and their beneficiaries. Such plans and accounts include, but are not limited to, corporate
pension and profit sharing plans, “simplified employee pension plans,” Keogh plans for self-employed individuals (including
partners), individual retirement accounts described in Section 408 or 408A of the IRC and medical benefit plans.
Each Plan
Fiduciary must give appropriate consideration to the facts and circumstances that are relevant to an investment in the Trust, including
the role an investment in the Trust plays in the Plan’s investment portfolio. To the extent required by applicable law, each
Plan Fiduciary must be satisfied that investment in the Trust is a prudent investment for the Plan, that the investments of the
Plan, including the investment in the Trust, are diversified so as to minimize the risks of large losses, that an investment in
the Trust complies with the documents and instruments of the Plan and related trust and that an investment in the Trust does not
give rise to a transaction prohibited by Section 406 of ERISA or Section 4975 of the IRC for which no exemption is available.
EACH PLAN FIDUCIARY CONSIDERING ACQUIRING
UNITS SHOULD CONSULT ITS OWN LEGAL AND TAX ADVISERS BEFORE DOING SO.
Restrictions on Investments by Benefit Plan Investors
ERISA and a regulation
issued thereunder contain rules for determining when an investment by a Plan in an entity will result in the underlying assets
of the entity being deemed assets of the Plan for purposes of ERISA and Section 4975 of the IRC (i.e., “plan assets”).
Those rules provide that assets of an entity will not be plan assets of a Plan that purchases an interest therein if the investment
in the entity by all “benefit plan investors” is not “significant” or certain other exceptions apply. The
term “benefit plan investors” includes all Plans (i.e., all “employee benefit plans” as defined in and
subject to the fiduciary responsibility provisions of ERISA and all “plans” as defined in and subject to Section 4975
of the IRC) and all entities that hold “plan assets” (each, a “Plan Assets Entity”) due to investments
made in such entities by already described benefit plan investors. ERISA provides that a Plan Assets Entity is considered to hold
plan assets only to the extent of the percentage of the Plan Assets Entity’s equity interests held by benefit plan investors.
In addition, all or part of an investment made by an insurance company using assets from its general account may be treated as
a benefit plan investor. Investments by benefit plan investors will be deemed not significant if benefit plan investors own, in
the aggregate, less than 25% of the total value of each class of equity interests of the entity (determined by not including the
investments of persons with discretionary authority or control over the assets of such entity, of any person who provides investment
advice for a fee (direct or indirect) with respect to such assets, and “affiliates” (as defined in the regulations
issued under ERISA) of such persons; provided, however, that under no circumstances are investments by benefit plan investors excluded
from such calculation).
In order to avoid causing
assets of the Trust to be “plan assets,” the Sponsor intends to restrict the aggregate investment by “benefit
plan investors” to under 25% of the total value of the Units of the Trust (not including the investments of the Trustee,
the Sponsor, any other person who provides investment advice for a fee (direct or indirect) with respect to the assets of the Trust,
any other person who has discretionary authority or control over the assets of the Trust, and any entity (other than a benefit
plan investor) that is directly or indirectly through one or more intermediaries controlling, controlled by or under common control
with any of such entities (including a partnership or other entity for which the Sponsor is the general partner, managing member,
investment adviser or provides investment advice), and each of the principals, officers, and employees of any of the foregoing
entities who has the power to exercise a controlling influence over the management or policies of such entity or the Trust). Furthermore,
because the 25% test is ongoing, it not only restricts additional investments by benefit plan investors, but also can cause the
Sponsor to require that existing benefit plan investors redeem from the Trust in the event that other investors redeem their Units.
If rejection of subscriptions or such compulsory redemptions are necessary, as determined by the Sponsor, to avoid causing the
assets of the Trust to be “plan assets,” the Sponsor will effect such rejections or redemptions in such manner as the
Sponsor, in its sole discretion, determines.
However, there is no
assurance that the Sponsor will succeed in avoiding the assets of the Trust being treated as “plan assets.” If the
assets of the Trust were to constitute “plan assets” for purposes of ERISA and/or Section 4975 of the IRC, the fiduciary
responsibility rules of ERISA and the prohibited transaction rules of ERISA and Section 4975 of the IRC, as applicable, could potentially
limit the investments and operations of the Trust, which could result in a lower return than might otherwise be the case. In addition,
if ERISA were to apply, the fiduciary who made the decision to invest an ERISA Plan’s or Plan Asset Entity’s assets
in the Trust could, under certain circumstances, be liable under ERISA as
a co-fiduciary for actions taken by the Trustee or Sponsor on behalf of the Trust.
Ineligible Purchasers
In general, Units may
not be purchased with the assets of a Plan if the Trustee, the Sponsor, any of their respective affiliates or any of their respective
employees either: (i) has investment discretion with respect to the investment of such Plan assets; (ii) has authority or
responsibility
to give or regularly gives investment advice with respect to such Plan assets, for a fee, and pursuant to an agreement or understanding
that such advice will serve as a primary basis for investment decisions with respect to such Plan assets and that such advice will
be based on the particular investment needs of the Plan; or (iii) is an employer maintaining or contributing to such Plan. A party
that is described in clause (i) or (ii) of the preceding sentence is a fiduciary under ERISA and the IRC with respect to the Plan,
and any such purchase might result in a “prohibited transaction” under ERISA and the IRC, resulting in possible liabilities
and penalties for the responsible Plan fiduciaries and the parties engaging in the transaction with the Plan in the absence of
an available exemption. A non-exempt prohibited transaction involving an individual retirement account (“IRA”) and
the individual who established the IRA, or his or her beneficiaries, could result in loss of the IRA’s tax-exempt status
and assessment of taxes and penalties.
Reporting Requirements
Plans are required to
determine the fair market value of their assets as of the close of each Plan’s fiscal year. ERISA Plans and IRAs are also
required to file annual reports (Form 5500 series and Form 5498) with the U.S. Department of Labor or the IRS. To facilitate fair
market value determinations, and to enable fiduciaries of Plans to satisfy their annual reporting requirements as they relate to
an investment in the Trust, Unitholders will be furnished annually with audited financial statements as described in this Annual
Report. There can be no assurance (i) that any value established on the basis of such statements could or will actually be realized
by investors upon the liquidation of Units, (ii) that investors could realize such value if they were able to, and were to sell
their Units, or (iii) that such value will in all circumstances satisfy the applicable ERISA or IRC reporting requirements.
In addition, the fiduciaries
of an ERISA Plan investing in the Trust are notified that the information in this Annual Report in relation to (i) the compensation
or other amounts received by the Trustee, the Sponsor, and other parties in connection with their services rendered to the Trust
or their position with the Trust; (ii) the services provided by them to the Trust for such compensation or in connection with such
other amounts received, and the purpose therefor; (iii) a description of the formula or other bases used to calculate the compensation
or other amounts received; and (iv) the identity of the parties paying and receiving the compensation or other amounts is intended
to satisfy the alternative reporting option with respect to payments to such parties that are reportable on Schedule C of the Plan’s
Form 5500.
Non-ERISA Plans
Governmental plans,
certain church plans (those that have not elected to become subject to ERISA), and non-U.S. plans, while not subject to the fiduciary
responsibility provisions of ERISA or the prohibited transaction rules of Section 4975 of the IRC, may nevertheless be subject
to state, local, or other federal laws, or foreign laws, that are substantially similar to some or all of the foregoing provisions
of ERISA and the IRC. Thus, while the above-described prohibited transaction provisions of ERISA and the IRC may not apply to such
plans, those responsible for the investment of the assets of such plans should consider other potentially applicable similar restrictions
under other laws. Such potential restrictions may include prohibitions against certain related-party transactions under Section
503 of the IRC, applicable state, local, federal, or non-U.S. laws, and the restrictions and duties of common law.
Except as otherwise
set forth, the foregoing statements regarding the consequences under ERISA and the IRC of an investment in the Trust are based
on the provisions of the IRC and ERISA as currently in effect, and the existing administrative and judicial interpretations thereunder.
No assurance can be given that administrative, judicial or legislative changes will not occur that may make the foregoing statements
incorrect or incomplete.
Employees
The
Trust has no employees.
Item 1A. Risk Factors
An investment in the Units involves
material risks as described below. These risks should also be read in conjunction with the other information included in this Annual
Report, including the Trust’s financial statements and related notes thereto.
Summary Risk Factors
The following is a summary
of some of the risks and uncertainties that could materially adversely affect our business, financial condition and results of
operations. You should read this summary together with the more detailed description of each risk factor contained below.
Risk Factors Related to Digital Assets
| |
● |
Digital assets such as Bitcoin were only introduced within the past decade, and the medium-to-long term value of the Units is subject to a number of factors relating to the capabilities and development of blockchain technologies and to the fundamental investment characteristics of digital assets. |
| |
● |
Digital asset networks are developed by a diverse set of contributors and the perception that certain high-profile contributors will no longer contribute to the network could have an adverse effect on the market price of the related digital asset. |
| |
● |
The Bitcoin Network is part of a new and rapidly evolving industry, and the value of the Units depends on the development and acceptance of the Bitcoin Network. |
| |
● |
A determination that Bitcoin or any other digital asset is a “security” may adversely affect the value of Bitcoin and the value of the Units, and result in potentially extraordinary, non-recurring expenses to, or termination of the Trust. |
| |
● |
Changes in the governance of a digital asset network may not receive sufficient support from users and miners, which may negatively affect that digital asset network’s ability to grow and respond to challenges. |
| |
● |
Digital asset networks face significant scaling challenges and efforts to increase the volume of transactions may not be successful. |
| |
● |
A temporary or permanent fork or a “clone” could adversely affect the value of the Units. |
| |
● |
Unitholders may not receive the benefits of any forks or “airdrops.” |
| |
● |
In the event of a hard fork of the Bitcoin Network, the Sponsor will, if permitted by the terms of the Trust Agreement, use its discretion to determine which network should be considered the appropriate network for the Trust’s purposes, and in doing so may adversely affect the value of the Units. |
| |
● |
If the digital asset award for solving blocks and transaction fees for recording transactions on the Bitcoin Network are not sufficiently high to incentivize miners, miners may cease expanding processing power or demand high transaction fees, which could negatively impact the value of Bitcoin and the value of the Units. |
| |
● |
The failure of several prominent crypto trading venues and lending platforms has impacted and may continue to impact the broader crypto economy, which could have an adverse impact on the Trust. |
Risk Factors Related to the Bitcoin
Markets
| |
● |
The value of the Units relates directly
to the value of Bitcoins, the value of which may be highly volatile and subject to fluctuations due to a number of factors. |
| |
● |
Due to the unregulated nature and lack of transparency surrounding the operations of Bitcoin exchanges, they may experience fraud, business failures, security failures or operational problems, which may adversely affect the value of Bitcoin and, consequently, the value of the Units. |
| |
●
|
Recent developments in the digital asset
economy have led to extreme volatility and disruption in digital asset markets, a loss of confidence in participants of the digital
asset ecosystem, significant negative publicity surrounding digital assets broadly and market-wide declines in liquidity. |
| |
● |
Competition from the emergence or growth of other digital assets or methods of investing in Bitcoin could have a negative impact on the price of Bitcoin and adversely affect the value of the Units. |
| |
● |
Failure of funds that hold digital assets or that have exposure to digital assets through derivatives to receive SEC approval to list their shares on exchanges could adversely affect the value of the Units. |
| |
● |
NAV may not always correspond to the weighted-average market price of Bitcoin and, as a result, Units may be purchased (or redeemed, if ever permitted) at a value that differs from the secondary market price of the Units. |
| |
● |
Suspension or disruptions of market trading may adversely affect the value of units. |
| |
● |
The lack of active trading markets for the Units may result in losses on an investment in the Trust at the time of disposition of Units. |
| |
● |
A possible “short squeeze” due to a sudden increase in demand for the Units that largely exceeds supply may lead to price volatility in the Units. |
| |
● |
Difficulties or limitations in the processes of issuance and redemption (if any) of Units may interfere with opportunities for arbitrage transactions intended to keep the price of the Units closely linked to the price of Bitcoin, which may adversely affect an investment in the Units. |
| |
● |
Disruptions at OTC trading desks and potential consequences of an OTC trading desk’s failure could adversely affect an investment in the Units. |
| |
● |
Disruptions at Bitcoin exchanges and potential consequences of a Bitcoin exchange’s failure could adversely affect an investment in the Units. |
| |
● |
Momentum pricing of Bitcoin may subject the Bitcoin price to greater volatility and adversely affect an investment in the Units. |
Risk Factors
Related to the Trust and the Units
| |
● |
The Trust has only a limited performance history. |
| |
● |
Unitholders are bound by the fee-shifting provision contained in the subscription agreement,
which may discourage actions against us. |
| |
● |
Substantial sales or dispositions by a large Unitholder could negatively impact the price
of our Units in the secondary market. |
| |
● |
Fees and expenses are charged regardless of profitability and may result in depletion of assets. |
| |
● |
The security of our Bitcoin Holdings cannot be assured by the Trust, the Custodian or any
other person. |
| |
● |
The Custodian is not liable for any lost profits or any special, incidental, indirect, intangible,
or consequential damages arising out of or in connection with authorized or unauthorized use of the Coinbase Custody site
or the custodial services. |
| |
● |
The Trust does not maintain audit or inspection rights under the Custodial Services Agreement,
and as such our Bitcoin Holdings held in the custodial account cannot be independently verified. |
| |
● |
Possibility of termination of the Trust may adversely affect a Unitholder’s portfolio. |
| |
● |
Any errors, discontinuance or changes in determining the value of the Bitcoin held by the
Trust may have an adverse effect on the value of the Units. |
| |
● |
The value of the Units will be adversely affected if the Trust is required to indemnify the
Sponsor or the Custodian as contemplated in the Trust Agreement or the Custodial Services Agreement. |
| |
● |
The Trust’s Bitcoin trading may subject the Trust to the risk of counterparty non-performance,
potentially negatively affecting the market price of the Units. |
| |
● |
The Trust’s Bitcoin Holdings could become illiquid, which could cause large losses to
Unitholders at any time or from time to time. |
| |
● |
Transactions in Bitcoin are irreversible, and the Trust may be unable to
recover improperly transferred Bitcoin. |
| |
● |
The Trust’s Bitcoin may be lost, stolen, or subject to other inaccessibility. |
| |
● |
Any disruptions to the computer technology used by the Trust or its service
providers could adversely affect the Trust’s ability to function and an investment in the Units. |
| |
● |
The Sponsor’s computer infrastructure may be vulnerable to security
breaches. Any such problems could cause interruptions in the Trust’s operations and adversely affect an investment in
the Units. |
| |
● |
Technology system failures could cause interruptions in the Trust’s
ability to operate. |
| |
● |
Because the Units reflect the estimated accrued but unpaid expenses of the
Trust, the number of Bitcoins represented by a Unit will gradually decrease over time as the Trust’s Bitcoins are used
to pay the Trust’s expenses. |
| |
● |
Unitholders may not be able to withdraw or value his/her units upon death,
legal disability, bankruptcy, insolvency, dissolution or withdrawal from the Trust. |
| |
● |
The Trust’s Bitcoin Holdings may be considered property of a bankruptcy
estate should our Custodian initiate bankruptcy proceedings and the Trust could be considered an unsecured creditor, and the
Custodian’s assets may not be adequate to satisfy a claim by the Trust. |
| |
● |
Risks associated with the Index. |
| |
● |
We concluded that certain of our previously issued financial statements should
not be relied upon and restated certain of our previously issued financial statements, which was time-consuming and expensive
and could expose us to additional risks that could have a negative effect on our Company. |
| |
● |
If we fail to maintain an effective system of internal controls, we may not
be able to accurately report financial results or prevent fraud. |
| |
● |
Any dispute regarding the subscription agreement will be resolved by arbitration,
which follows different procedures than in-court litigation and may be more restrictive to Unitholders asserting claims than
in-court litigation. |
| |
● |
Pandemics, epidemics and other natural and man-made disasters could negatively
impact the value of the Trust’s holdings and/or significantly disrupt its affairs. |
Risk Factors
Related to the Regulation of the Trust and the Units
| |
● |
Regulation of the Bitcoin industry continues to evolve and is subject to
change; future regulatory developments are impossible to predict but may significantly and adversely affect the Trust. |
| |
● |
The sale of the Units could be subject to SEC or state securities registration. |
| |
● |
The Trust is not a registered investment company. |
| |
● |
The Trust could be, or could become, subject to the Commodity Exchange Act
(the “CEA”). |
| |
● |
Future U.S. and foreign regulation of the Bitcoin market may impose other
regulatory burdens, which could harm the Trust or even cause the Trust to liquidate. |
| |
● |
Banks may not provide banking services, or may cut off banking services,
to businesses that provide Bitcoin-related services or that accept Bitcoin as payment, which could directly impact the Trust’s
operations, damage the public perception of Bitcoin and the utility of Bitcoin as a payment system and could decrease the
price of Bitcoin and adversely affect an investment in the Units. |
| |
● |
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 Units may also be considered illegal and subject to sanctions. |
| |
● |
If the Bitcoin Network is used to facilitate illicit activities, businesses that facilitate
transactions in Bitcoin could be at increased risk of criminal and civil lawsuits, or of having services cut off, which could
negatively affect the price of Bitcoin and the value of the Units. |
| |
● |
If regulatory changes or interpretations of the Trust’s or Sponsor’s
activities require registration as money services businesses under the regulations promulgated by FinCEN under the authority
of the U.S. Bank Secrecy Act or as money transmitters or digital currency businesses under state regimes for the licensing
of such businesses, the Trust and/or Sponsor could suffer reputational harm and also extraordinary, recurring and/or non-recurring
expenses, which would adversely impact an investment in the Units. |
| |
● |
The treatment of the Trust for U.S. federal income tax purposes is uncertain. |
| |
● |
Unitholders could incur a tax liability without an associated distribution. |
| |
● |
The treatment of Bitcoin for U.S. federal income tax purposes is uncertain. |
| |
● |
Future developments regarding the treatment of digital currency for U.S.
federal income tax purposes could adversely affect the value of the Units. |
| |
● |
Future developments in the treatment of digital currency for tax purposes
other than U.S. federal income tax purposes could adversely affect the value of the Units. |
| |
● |
A U.S. tax-exempt Unitholder may recognize UBTI a consequence of an investment
in Units. |
| |
● |
Non-U.S. Holders may be subject to U.S. federal withholding tax on income
derived from forks, airdrops and similar occurrences. |
Risk Factors Related to Potential Conflicts
of Interest
| |
● |
Potential conflicts of interest may arise among the Sponsor or its affiliates
and the Trust. The Sponsor and its affiliates have no fiduciary duties to the Trust and its Unitholders other than as provided
in the Trust Agreement, which may permit them to favor their own interests to the detriment of the Trust and its Unitholders. |
| |
● |
Unitholders cannot be assured of the Sponsor’s continued services,
the discontinuance of which may be detrimental to the Trust. |
| |
● |
If the Custodian resigns or is removed by the Sponsor or otherwise, without
replacement, it could trigger early termination of the Trust, or the Sponsor would need to find and appoint a replacement
custodian, which could pose a challenge to the safekeeping of the Trust’s Bitcoin. |
| |
● |
Unitholders may be adversely affected by the lack of independent advisers
representing investors in the Trust. |
Risk Factors Related to Digital Assets
Digital assets such as Bitcoin were
only introduced within the past decade, and the medium-to-long term value of the Units is subject to a number of factors relating
to the capabilities and development of blockchain technologies and to the fundamental investment characteristics of digital assets.
Digital assets such
as Bitcoin were only introduced within the past decade, and the medium-to-long term value of the Units is subject to a number of
factors relating to the capabilities and development of blockchain technologies, such as the infancy of their development, their
dependence on the internet and other technologies, their dependence on the role played by miners and developers and the potential
for malicious activity. For example, the realization of one or more of the following risks could materially adversely affect the
value of the Units:
| |
● |
The trading prices of many digital assets, including Bitcoin, have experienced extreme volatility in recent periods and may continue to do so. For instance, there were steep increases in the value of certain digital assets, including Bitcoin, over the course of 2017, followed by steep drawdowns throughout 2018 in digital asset trading prices, including for Bitcoin. These drawdowns notwithstanding, Bitcoin prices increased significantly again during 2019, decreased significantly again in the first quarter of 2020 amidst broader market declines as a result of the novel coronavirus outbreak and increased significantly again over the remainder of 2020 and the first quarter of 2021. The price of Bitcoin continued to experience significant and sudden changes throughout 2021 followed by steep drawdowns in the fourth quarter of 2021 and throughout 2022. The price of Bitcoin has continued to fluctuate to date in 2023. In particular, digital asset prices have experienced extreme volatility since November 2022 when FTX Trading Ltd. (“FTX”) halted customer withdrawals. See “—Recent developments in the digital asset economy have led to extreme volatility and disruption in digital asset markets, a loss of confidence in participants of the digital asset ecosystem, significant negative publicity surrounding digital assets broadly and market-wide decline in liquidity.” Extreme volatility in the future, including further declines in the trading prices of Bitcoin, could have a material adverse effect on the value of the Units and the Units could lose all or substantially all of their value. Furthermore, negative perception, a lack of stability and standardized regulation in the digital asset economy may reduce confidence in the digital asset economy and may result in greater volatility in the price of Bitcoin and other digital assets, including a depreciation in value. |
| |
● |
Digital asset networks and the software used to operate them are in the early stages of development. Digital assets have experienced, and we expect will experience in the future, sharp fluctuations in value. Given the infancy of the development of digital asset networks, parties may be unwilling to transact in digital assets, which would dampen the growth, if any, of digital asset networks. |
| |
● |
Digital asset networks are dependent upon the internet. A disruption of the internet or a digital asset network, such as the Bitcoin Network, would affect the ability to transfer digital assets, including Bitcoin, and, consequently, their value. |
| |
● |
The acceptance of software patches or upgrades by a significant, but not overwhelming, percentage of the users and miners in a digital asset network, such as the Bitcoin Network, could result in a fork in such network’s blockchain, resulting in the operation of multiple separate networks. |
| |
● |
Governance of the Bitcoin Network is by voluntary consensus and open competition. As a result, there may be a lack of consensus or clarity on the governance of the Bitcoin Network, which may stymie the Bitcoin Network’s utility and ability to grow and face challenges. In particular, it may be difficult to find solutions or marshal sufficient effort to overcome any future problems on the Bitcoin Network, especially long-term problems. |
| |
● |
The foregoing notwithstanding, the Bitcoin Network’s protocol is informally managed by a group of core developers that propose amendments to the Bitcoin Network’s source code. The core developers evolve over time, largely based on self-determined participation. To the extent that a significant majority of users and miners adopt amendments to the Bitcoin Network, the Bitcoin Network will be subject to new protocols that may adversely affect the value of Bitcoin. |
| |
● |
The loss or destruction of a private key required to access a digital asset such as Bitcoin may be irreversible. If a private key is lost, destroyed or otherwise compromised and no backup of the private key is accessible, the Trust will be unable to access the Bitcoin held in the Custodial Account corresponding to that private key and the private key will not be capable of being restored by the Bitcoin Network. |
| |
● |
Bitcoin is only selectively accepted as a means of payment by retail and commercial outlets, and use of Bitcoins by consumers to pay such retail and commercial outlets remains limited. Banks and other established financial institutions may refuse to process funds for Bitcoin transactions; process wire transfers to or from Bitcoin exchanges, Bitcoin-related companies or service providers; or maintain accounts for persons or entities transacting in Bitcoin. As a result, the prices of Bitcoins are largely determined by speculators and miners, thus contributing to price volatility that makes retailers less likely to accept it as a form of payment in the future. |
| |
● |
Miners, developers and users may switch to or adopt certain digital assets at the expense of their engagement with other digital asset networks, which may negatively impact those networks, including the Bitcoin Network. |
| |
● |
Over the past several years, digital asset mining operations have evolved from individual users mining with computer processors, graphics processing units and first-generation application specific integrated circuit machines to “professionalized” mining operations using proprietary hardware or sophisticated machines. If the profit margins of digital asset mining operations are not sufficiently high, digital asset miners are more likely to immediately sell tokens earned by mining, resulting in an increase in liquid supply of that digital asset, which would generally tend to reduce that digital asset’s market price. |
| |
● |
To the extent that any miners cease to record transactions that do not include the payment of a transaction fee in solved blocks or do not record a transaction because the transaction fee is too low, such transactions will not be recorded on the Blockchain until a block is solved by a miner who does not require the payment of transaction fees or is willing to accept a lower fee. Any widespread delays in the recording of transactions could result in a loss of confidence in the digital asset network. |
| |
● |
Many digital asset networks face significant scaling challenges and are being upgraded with various features to increase the speed and throughput of digital asset transactions. These attempts to increase the volume of transactions may not be effective. |
| |
● |
The open-source structure of many digital asset network protocols, such as the protocol for the Bitcoin Network, means that developers and other contributors are generally not directly compensated for their contributions in maintaining and developing such protocols. As a result, the developers and other contributors of a particular digital asset may lack a financial incentive to maintain or develop the network, or may lack the resources to adequately address emerging issues. Alternatively, some developers may be funded by companies whose interests are at odds with other participants in a particular digital asset network. A failure to properly monitor and upgrade the protocol of the Bitcoin Network could damage that network. |
| |
● |
Banks may not provide banking services, or may cut off banking services, to businesses that provide digital asset-related services or that accept digital assets as payment, which could dampen liquidity in the market and damage the public perception of digital assets generally or any one digital asset in particular, such as Bitcoin, and their or its utility as a payment system, which could decrease the price of digital assets generally or individually. |
Moreover, because digital
assets, including Bitcoin, have been in existence for a short period of time and are continuing to develop, there may be additional
risks in the future that are impossible to predict as of the date of this Annual Report.
The Bitcoin Network
is part of a new and rapidly evolving industry, and the value of the Units depends on the development and acceptance of the Bitcoin
Network.
The Bitcoin Network
was first launched in 2009 and Bitcoins were the first cryptographic digital assets created to gain global adoption and critical
mass. Although the Bitcoin Network is the most established digital asset network, the Bitcoin Network and other
cryptographic and
algorithmic protocols governing the issuance of digital assets represent a new and rapidly evolving industry that is subject to
a variety of factors that are difficult to evaluate. For example, the realization of one or more of the following risks could materially
adversely affect the value of the Units:
| |
● |
As the Bitcoin Network continues to develop and grow, certain technical issues
might be uncovered, and the troubleshooting and resolution of such issues requires the attention and efforts of Bitcoin’s
global development community. |
| |
● |
In August 2017, the Bitcoin Network underwent a hard fork that resulted in
the creation of a new digital asset network called Bitcoin Cash. This hard fork was contentious, and as a result some users
of the Bitcoin Cash network may harbor ill will toward the Bitcoin Network. These users may attempt to negatively impact the
use or adoption of the Bitcoin Network. |
| |
● |
Also in August 2017, the Bitcoin Network was upgraded with a technical feature
known as “Segregated Witness” that, among other things, potentially doubles the transactions per second that can
be handled on-chain and enables so-called second layer solutions, such as the Lightning Network or payment channels, that
have the potential to substantially increase transaction throughput (i.e., millions of transactions per second). As of the
date of this Annual Report, digital wallets and intermediaries that support Segregated Witness or Lightning Network-like technologies
do not yet have material adoption. This upgrade may fail to work as expected leading to a decline in support and price of
Bitcoin. |
| |
●
|
In 2021, the Bitcoin protocol implemented the Taproot upgrade to add enhanced support for complex transactions on the
network such as multi-signature transactions, which require two or more parties to execute a transaction on the Bitcoin Network.
Prior to the upgrade, multi-signature transactions were historically slow, expensive, and easily identifiable. Taproot is
intended to reduce the amount of data written to a block and makes multi-signature transactions indistinguishable from regular
transactions, adding an enhanced layer of privacy. This upgrade may fail to work as expected, which could lead to a decline
in support and price of Bitcoin. |
Moreover, in the past,
flaws in the source code for digital assets have been exposed and exploited, including flaws that disabled some functionality for
users, exposed users’ personal information and/or resulted in the theft of users’ digital assets. The cryptography
underlying Bitcoin could prove to be flawed or ineffective, or developments in mathematics and/or technology, including advances
in digital computing, algebraic geometry and quantum computing, could result in such cryptography becoming ineffective. In any
of these circumstances, a malicious actor may be able to take the Trust’s Bitcoin, which would adversely affect the value
of the Units. Moreover, functionality of the Bitcoin Network may be negatively affected such that it is no longer attractive to
users, thereby dampening demand for Bitcoin. Even if another digital asset other than Bitcoin were affected by similar circumstances,
any reduction in confidence in the source code or cryptography underlying digital assets generally could negatively affect the
demand for digital assets and therefore adversely affect the value of the Units.
The Trust is not actively
managed and will not have any formal strategy relating to the development of the Bitcoin Network.
Digital asset networks are
developed by a diverse set of contributors and the perception that certain high-profile contributors will no longer contribute
to the network could have an adverse effect on the market price of the related digital asset.
Digital asset
networks are often developed by a diverse set of contributors and the perception that high-profile contributors may no longer contribute
to the networks may have an adverse effect on the market price of any related digital assets. For example, in June 2017, an unfounded
rumor circulated that Ethereum protocol developer Vitalik Buterin had died. Following the rumor, the price of Ethereum decreased
approximately 20% before recovering after Buterin himself dispelled the rumor. Some have speculated that the rumor led to the decrease
in the price of Ethereum. In the event a high-profile contributor to the Bitcoin Network is perceived as no longer able to contribute
to the Bitcoin Network due to death, retirement, withdrawal, incapacity, or otherwise, whether or not such perception is valid,
it could negatively affect the price of Bitcoin, which could adversely impact the value of the Units.
Digital assets may have concentrated
ownership and large sales or distributions by holders of such digital assets could have an adverse effect on the market price of
such digital asset.
As of January
28, 2022, the largest 100 Bitcoin digital wallets held approximately 13.49% of the Bitcoins in circulation and it is possible that
some of these digital wallets are controlled by the same person or entity. Moreover, it is possible that other persons or entities
control multiple digital wallets that collectively hold a significant number of Bitcoin, even if they individually only hold a
small amount. As a result of this concentration of ownership, large sales by such holders could have an adverse effect on the market
price of Bitcoin.
A determination that Bitcoin or any
other digital asset is a “security” may adversely affect the value of Bitcoin and the value of the Units, and result
in potentially extraordinary, non-recurring expenses to, or termination of the Trust
The SEC has stated that
certain digital assets may be considered “securities” under the federal securities laws. The test for determining whether
a particular digital asset is a “security” is complex and the outcome is difficult to predict. Further, if any other
digital
asset is determined to be a “security” under federal or state securities laws by the SEC or any other agency,
or in a proceeding in a court of law or otherwise, it may have material adverse consequences for Bitcoin as a digital asset due
to negative publicity or a decline in the general acceptance of digital assets. As such, any determination that Bitcoin or any
other digital asset is a security under federal or state securities laws may adversely affect the value of Bitcoin and, as a result,
the value of the Units.
To the extent that Bitcoin
is determined to be a security, the Trust and the Sponsor may also be subject to additional regulatory requirements, including
under the Investment Company Act of 1940 (the “Investment Company Act”), and the Sponsor may be required to register
as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). If the Sponsor
determines not to comply with such additional regulatory and registration requirements, the Sponsor will terminate the Trust. Any
such termination could result in the liquidation of the Trust’s Bitcoin at a time that is disadvantageous to Unitholders.
Changes in the governance of a digital
asset network may not receive sufficient support from users and miners, which may negatively affect that digital asset network’s
ability to grow and respond to challenges.
The governance of decentralized
networks, such as the Bitcoin and Ethereum networks, is by voluntary consensus and open competition. As a result, there may be
a lack of consensus or clarity on the governance of any particular decentralized digital asset network, which may stymie such network’s
utility and ability to grow and face challenges. The foregoing notwithstanding, the protocols for some decentralized networks,
such as the Bitcoin network, are informally managed by a group of core developers that propose amendments to the relevant network’s
source code. Core developers’ roles evolve over time, largely based on self-determined participation. If a significant majority
of users and miners adopt amendments to a decentralized network based on the proposals of such core developers, such network will
be subject to new protocols that may adversely affect the value of the relevant digital asset.
As a result of the foregoing,
it may be difficult to find solutions or marshal sufficient effort to overcome any future problems, especially long-term problems,
on digital asset networks.
Digital asset networks face significant
scaling challenges and efforts to increase the volume of transactions may not be successful.
Many digital asset networks
face significant scaling challenges due to the fact that public blockchains generally face a trade-off regarding security and scalability.
One means through which public blockchains achieve security is decentralization, meaning that no intermediary is responsible for
securing and maintaining these systems. For example, a greater degree of decentralization generally means a given digital asset
network is less susceptible to manipulation or capture. In practice, this typically means that every single node on a given digital
asset network is responsible for securing the system by processing every transaction and maintaining a copy of the entire state
of the network. As a result, a digital asset network may be limited in the number of transactions it can process by the capabilities
of each single fully participating node.
As corresponding increases
in throughput lag behind growth in the use of digital asset networks, average fees and settlement times may increase considerably.
For example, the Bitcoin Network has been, at times, at capacity, which has led to increased transaction fees. Since January 1,
2017, Bitcoin transaction fees have increased from $0.35 per Bitcoin transaction, on average, to a high of $55.16 per transaction,
on average, on December 22, 2017. As of December 2022, Bitcoin transaction fees stood around $1 per transaction, on average. Increased
fees and decreased settlement speeds could preclude certain uses for Bitcoin (e.g., micropayments), and could reduce demand for,
and the price of, Bitcoin, which could adversely impact the value of the Units.
Many developers are actively researching
and testing scalability solutions for public blockchains that do not necessarily result in lower levels of security or decentralization
(e.g., off-chain payment channels like the Lightning Network, sharing, or off-chain computations). However, there is no guarantee
that any of the mechanisms in place or being explored for increasing the scale of settlement of the Bitcoin Network transactions
will be effective, or how long these mechanisms will take to become effective, which could adversely impact the value of the Units.
If a malicious actor or botnet obtains
control of more than 50% of the processing power on the Bitcoin Network, or otherwise obtains control over the Bitcoin Network
through its influence over core developers or otherwise, such actor or botnet could manipulate the Blockchain to adversely affect
the value of the Units or the ability of the Trust to operate.
If a malicious actor
or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers)
obtains a majority of the processing power dedicated to mining on the Bitcoin Network, it may be able to alter the Blockchain on
which transactions in Bitcoin rely by constructing fraudulent blocks or preventing certain transactions from completing in a timely
manner, or at all. The malicious actor or botnet could also control, exclude or modify the ordering of transactions. Although the
malicious actor or botnet would not be able to generate new tokens or transactions using such control, it could “double-spend”
its own tokens (i.e., spend the same tokens in more than one transaction) and prevent the confirmation of other users’ transactions
for so long as it maintained control. To the extent that such malicious actor or botnet did not yield its control of the processing
power on the Bitcoin Network or the
Bitcoin community did not reject the fraudulent blocks as malicious, reversing any changes
made to the Blockchain may not be possible. Further, a malicious actor or botnet could create a flood of transactions in order
to slow down the Bitcoin Network.
Although there are no
known reports of malicious activity on, or control of, the Bitcoin Network, it is believed that certain mining pools may have exceeded
the 50% threshold on the Bitcoin Network. The possible crossing of the 50% threshold indicates a greater risk that a single mining
pool could exert authority over the validation of Bitcoin transactions, and this risk is heightened if over 50% of the processing
power on the network falls within the jurisdiction of a single governmental authority. If network participants, including the core
developers and the administrators of mining pools, do not act to ensure greater decentralization of Bitcoin mining processing power,
the feasibility of a malicious actor obtaining control of the processing power on the Bitcoin Network will increase, which may
adversely affect the value of the Units.
A malicious actor may
also obtain control over the Bitcoin Network through its influence over core developers by gaining direct control over a core developer
or an otherwise influential programmer. To the extent that the Bitcoin ecosystem does not grow, the possibility that a malicious
actor may be able obtain control of the processing power on the Bitcoin Network in this manner will remain heightened.
A temporary or permanent fork or
a “clone” could adversely affect the value of the Units.
The Bitcoin Network
operates using open-source protocols, meaning that any user can download the software, modify it and then propose that the users
and miners of Bitcoin adopt the modification. When a modification is introduced and a substantial majority of users and miners
consent to the modification, the change is implemented and the network remains uninterrupted. However, if less than a substantial
majority of users and miners consent to the proposed modification, and the modification is not compatible with the software prior
to its modification, the consequence would be what is known as a “hard fork” of the Bitcoin Network, with one group
running the pre-modified software and the other running the modified software. The effect of such a fork would be the existence
of two versions of Bitcoin running in parallel, yet lacking interchangeability. For example, in August 2017, Bitcoin forked into
Bitcoin and a new digital asset, Bitcoin Cash, as a result of a several-year dispute over how to increase the rate of transactions
that the Bitcoin Network can process. A fork may also occur as a result of an unintentional or unanticipated software flaw in the
various versions of otherwise compatible software that users run. Such a fork could lead to users and miners abandoning the digital
asset with the flawed software. It is possible, however, that a substantial number of users and miners could adopt an incompatible
version of the digital asset while resisting community-led efforts to merge the two chains. This could result in a permanent fork.
Forks may also occur
as a network community’s response to a significant security breach. For example, in June 2016, an anonymous hacker exploited
a smart contract running on the Ethereum network to syphon approximately $60 million of ETH held by The DAO, a distributed autonomous
organization, into a segregated account. In response to the hack, most participants in the Ethereum community elected to adopt
a fork that effectively reversed the hack. However, a minority of users continued to develop the original blockchain, now referred
to as “Ethereum Classic” with the digital asset on that blockchain now referred to as Ether Classic, or ETC. ETC now
trades on several digital asset exchanges. A fork may also occur as a result of an unintentional or unanticipated software flaw
in the various versions of otherwise compatible software that users run. Such a fork could lead to users and miners abandoning
the digital asset with the flawed software. It is possible, however, that a substantial number of users and miners could adopt
an incompatible version of the digital asset while resisting community-led efforts to merge the two chains. This could result in
a permanent fork, as in the case of Ether and Ether Classic.
In addition, many developers
have previously initiated hard forks in the Blockchain to launch new digital assets, such as Bitcoin Cash, Bitcoin Gold, Bitcoin
Silver and Bitcoin Diamond. To the extent such digital assets compete with Bitcoin, such competition could impact demand for Bitcoin
and could adversely impact the value of the Units.
Furthermore, a hard
fork can lead to new security concerns. For example, when the Ethereum and Ethereum Classic networks split in July 2016, replay
attacks, in which transactions from one network were rebroadcast to nefarious effect on the other network, plagued Ethereum exchanges
through at least October 2016. An Ethereum exchange announced in July 2016 that it had lost 40,000 units of Ethereum Classic, worth
about $100,000 at that time, as a result of replay attacks. Another possible result of a hard fork is an inherent decrease in the
level of security due to significant amounts of mining power remaining on one network or migrating instead to the new forked network.
After a hard fork, it may become easier for an individual miner or mining pool’s hashing power to exceed 50% of the processing
power of the digital asset network that retained or attracted less mining power, thereby making digital assets that rely on proof-of-work
more susceptible to attack.
Protocols may also be
cloned. Unlike a fork, which modified an existing blockchain, and results in two competing networks, each with the same genesis
block, a “clone” is a copy of a protocol’s codebase, but results in an entirely new blockchain and new genesis
block. Tokens are created solely from the new “clone” network and, in contrast to forks, holders of tokens of the existing
network that was cloned do not receive any tokens of the new network. A “clone” results in a competing network that
has characteristics substantially similar to the network it was based on, subject to any changes as determined by the developer(s)
that initiated the clone.
A future fork in or
clone of the Bitcoin Network could adversely affect the value of the Units or the ability of the Trust to operate.
Unitholders may not receive the benefits
of any forks or “airdrops.”
In addition to forks,
a digital asset may become subject to a similar occurrence known as an “airdrop.” In an airdrop, the promotors of a
new digital asset announce to holders of another digital asset that such holders will be entitled to claim a certain amount of
the new digital asset for free, based on the fact that they hold such other digital asset.
Unitholders may not
receive the benefits of any forks, the Trust may not choose, or be able, to participate in an airdrop, and the timing of receiving
any benefits from a fork, airdrop or similar event is uncertain. We refer to the right to receive any such benefit as an “Incidental
Right” and any such virtual currency acquired through an Incidental Right as “Additional Currency.” There are
likely to be operational, tax, securities law, regulatory, legal and practical issues that significantly limit, or prevent entirely,
Unitholders’ ability to realize a benefit, through their interests in the Trust, from any such Additional Currency. For instance,
unless specifically announced, the Custodian does not support airdrops, metacoins, colored coins, side chains, or other derivative,
enhanced, or forked protocols, tokens, or coins which supplement or interact with a digital asset supported by the Custodian. In
addition, the Sponsor may determine that there is no safe or practical way to custody the Additional Currency, or that trying to
do so may pose an unacceptable risk to the Trust’s holdings in Bitcoin, or that the costs of taking possession and/or maintaining
ownership of the Additional Currency exceed the benefits of owning the Additional Currency. Additionally, laws, regulation or other
factors may prevent Unitholders from benefiting from the Additional Currency even if there is a safe and practical
way to custody and secure the Additional Currency. For example, it may be illegal to sell or otherwise dispose of the Additional
Currency, or there may not be a suitable market into which the Additional Currency can be sold (immediately after the fork or airdrop,
or ever). The Sponsor may also determine, in consultation with its legal advisors and tax consultants, that the Additional Currency
is, or is likely to be deemed, a security under federal or state securities laws. In such a case, the Sponsor would irrevocably
abandon, as of any date on which the Trust creates Units, such Additional Currency if holding it would have an adverse effect on
the Trust and it would not be practicable to avoid such effect by disposing of the Additional Currency in a manner that would result
in Unitholders receiving more than insignificant value thereof. In making such a determination, the Sponsor expects to take into
account a number of factors, including the definition of a “security” under Section 2(a)(1) of the Securities Act and
Section 3(a)(10) of the Exchange Act, SEC v. W.J. Howey Co., 328 U.S. 293 (1946) and the case law interpreting it, as well
as reports, orders, press releases, public statements and speeches by the SEC providing guidance on when a digital asset is a “security”
for purposes of the federal securities laws.
In the event of a hard fork of the
Bitcoin Network, the Sponsor will, if permitted by the terms of the Trust Agreement, use its discretion to determine which network
should be considered the appropriate network for the Trust’s purposes, and in doing so may adversely affect the value of
the Units.
In the event of a hard
fork of the Bitcoin Network, the Sponsor will, if permitted by the terms of the Trust Agreement, use its discretion to determine,
in good faith, which peer-to-peer network, among a group of incompatible forks of the Bitcoin Network, is generally accepted as
the Bitcoin Network and should therefore be considered the appropriate network for the Trust’s purposes. The Sponsor will
base its determination on a variety of then relevant factors, including, but not limited to, the Sponsor’s beliefs regarding
expectations of the core developers of Bitcoin, users, services, businesses, miners and other constituencies, as well as the actual
continued acceptance of, mining power on, and community engagement with, the Bitcoin Network. There is no guarantee that the Sponsor
will choose the digital asset that is ultimately the most valuable fork, and the Sponsor’s decision may adversely affect
the value of the Units as a result. The Sponsor may also disagree with Unitholders, security vendors and the Index Provider on
what is generally accepted as Bitcoin and should therefore be considered “Bitcoin” for the Trust’s purposes,
which may also adversely affect the value of the Units as a result.
If the digital asset award for solving
blocks and transaction fees for recording transactions on the Bitcoin Network are not sufficiently high to incentivize miners,
miners may cease expanding processing power or demand high transaction fees, which could negatively impact the value of Bitcoin
and the value of the Units.
If the digital asset
awards for solving blocks and the transaction fees for recording transactions on the Bitcoin Network are not sufficiently high
to incentivize miners, miners may cease expending processing power to solve blocks and confirmations of transactions on the Blockchain
could be slowed. A reduction in the processing power expended by miners on the Bitcoin Network could increase the likelihood of
a malicious actor or botnet obtaining control.
Miners have historically
accepted relatively low transaction confirmation fees on most digital asset networks. If miners demand higher transaction fees
for recording transactions in the Blockchain or a software upgrade automatically charges fees for all transactions on the Bitcoin
Network, the cost of using Bitcoin may increase and the marketplace may be reluctant to accept Bitcoin as a means of payment. Alternatively,
miners could collude in an anti-competitive manner to reject low transaction fees on the Bitcoin Network and force users to pay
higher fees, thus reducing the attractiveness of the Bitcoin Network. Higher transaction confirmation fees resulting through collusion
or otherwise may adversely affect the attractiveness of the Bitcoin Network, the value of Bitcoin and the value of the Units.
Any name change and any associated
rebranding initiative by the core developers of Bitcoin may not be favorably received by the digital asset community, which could
negatively impact the value of Bitcoin and the value of the Units.
From time to time, digital
assets may undergo name changes and associated rebranding initiatives. For example, Bitcoin Cash may sometimes be referred to as
Bitcoin ABC in an effort to differentiate itself from any Bitcoin Cash hard forks, such as Bitcoin Satoshi’s Vision, and
in the third quarter of 2018, the team behind Zen rebranded and changed the name of ZenCash to “Horizen.” The Trust
cannot predict the impact of any name change and any associated rebranding initiative on Bitcoin. After a name change and an associated
rebranding initiative, a digital asset may not be able to achieve or maintain brand name recognition or status that is comparable
to the recognition and status previously enjoyed by such digital asset. The failure of any name change and any associated rebranding
initiative by a digital asset may result in such digital asset not realizing some or all of the anticipated benefits contemplated
by the name change and associated rebranding initiative, and could negatively impact the value of Bitcoin and the value of the
Units.
The Bitcoin Network requires significant
electricity to mine and it is possible that certain jurisdictions will implement regulations regarding the energy consumption of
the Bitcoin Network, which could result in a significant reduction in mining activity and adversely affect the security of the
Bitcoin Network.
Concerns have been raised
about the electricity required to secure and maintain the Bitcoin Network. On January 3, 2023, in connection with the mining process,
an all-time high of over 271 million tera hashing operations were performed every second, non-stop on the Bitcoin Network. Although
measuring the electricity consumed by this process is difficult because these operations are performed by various machines with
varying levels of efficiency, the process consumes a significant amount of energy. The operations of the Bitcoin Network and other
digital asset networks may also consume significant amounts of energy. Further, in addition to the direct energy costs of performing
these calculations, there are indirect costs that impact the Bitcoin Network’s total energy consumption, including the costs
of cooling the machines that perform these
calculations. In recent months, due to these concerns around energy consumption, particularly as such concerns relate to public
utilities companies, various states and cities have implemented, or are considering implementing, moratoriums on Bitcoin mining
in their jurisdictions. For example, in November 2022, New York imposed a two-year moratorium on new proof-of-work mining permits
at fossil fuel plants in the state. A significant reduction in mining activity as a result of such actions could adversely affect
the security of the Bitcoin Network by making it easier for a malicious actor or botnet to manipulate the Blockchain, which could
adversely affect the value of the Units or the ability of the Trust to operate. See “—If a malicious actor or botnet
obtains control of more than 50% of the processing power on the Bitcoin Network, or otherwise obtains control over the Bitcoin
Network through its influence over core developers or otherwise, such actor or botnet could manipulate the Blockchain to adversely
affect an investment in the Shares or the ability of the Trust to operate.”
The failure of several prominent
crypto trading venues and lending platforms has impacted and may continue to impact the broader crypto economy, which could have
an adverse impact on the Trust.
Although the Trust has
no direct exposure to any of the digital asset market participants that recently filed for Chapter 11 bankruptcy, such as Celsius
Network (other than as a significant investor in the Trust), FTX or BlockFi Inc. (“BlockFi”), it may not be immune
to unfavorable investor sentiment resulting from these recent events or other developments in the broader digital asset market.
The Trust may also be negatively affected by further developments in the broader digital asset market, including, but not limited
to, through indirect exposure to third-party market participants that have:
| ● | filed
for bankruptcy, been decreed insolvent or bankrupt, made any assignment for the benefit
of creditors, or have had a receiver appointed for them; |
| ● | have
experienced excessive redemptions or suspended redemptions or withdrawals of digital
assets; |
| ● | have
the digital assets of their customers unaccounted for; or |
| ● | have
experienced material corporate compliance failures. |
As a result of any direct
or indirect exposure to adverse developments in the broader digital asset market, the Trust may be exposed to the risk of reputational
harm.
Risk Factors Related to the Bitcoin
Markets
The value of the Units relates directly
to the value of Bitcoins, the value of which may be highly volatile and subject to fluctuations due to a number of factors.
The value of the Units
relates directly to the value of the Bitcoins held by the Trust and fluctuations in the price of Bitcoin could adversely affect
the value of the Units. The market price of Bitcoin may be highly volatile, and subject to a number of factors, including:
| |
● |
An increase in the global Bitcoin supply; |
| |
● |
Manipulative trading activity on Bitcoin exchanges, which are largely unregulated; |
| |
● |
The adoption of Bitcoin as a medium of exchange, store-of-value or other
consumptive asset and the maintenance and development of the open-source software protocol of the Bitcoin Network; |
| |
● |
Forks in the Bitcoin Network; |
| |
● |
Investors’ expectations with respect to interest rates, the rates of inflation of fiat
currencies or Bitcoin, and digital asset exchange rates; |
| |
● |
Consumer preferences and perceptions of Bitcoin specifically and digital assets generally; |
| |
● |
Fiat currency withdrawal and deposit policies on Bitcoin exchanges; |
| |
● |
The liquidity of Bitcoin markets; |
| |
● |
Investment and trading activities of large investors that invest directly or indirectly in
Bitcoin; |
| |
● |
A “short squeeze” resulting from speculation on the price of Bitcoin, if aggregate
short exposure exceeds the number of Units available for purchase; |
| |
● |
An active derivatives market for Bitcoin or for digital assets generally; |
| |
● |
Monetary policies of governments, trade restrictions, currency devaluations and revaluations
and regulatory measures or enforcement actions, if any, that restrict the use of Bitcoin as a form of payment or the purchase
of Bitcoin on the Bitcoin markets; |
| |
● |
Global or regional political, economic or financial conditions, events and situations; |
| |
● |
Events involving limited liquidity, defaults, non-performance or other adverse developments
that impact financial institutions, counterparties or other companies in the financial services industry or the financial
services industry generally, or concerns about any events of these kinds or other similar risks, such as the recent events
involving the Federal Deposit Insurance Corporation’s (FDIC) decision to place Silicon Valley Bank and Signature Bank
into receivership; |
| |
● |
Fees associated with processing a Bitcoin transaction and the speed at which Bitcoin transactions
are settled; |
| |
● |
Interruptions in service from or failures of major Bitcoin exchanges; |
| |
● |
Decreased confidence in Bitcoin exchanges due to the unregulated nature and
lack of transparency surrounding the operations of Bitcoin exchanges, and the failure of several prominent crypto trading
venues and lending platforms, such as FTX, Celsius Networks, Voyager and Three Arrows Capital in 2022; |
| |
● |
Increased competition from other forms of digital assets or payment services; |
| |
● |
Correlation between the prices of Bitcoin and other digital assets, a decrease
in the price of other digital assets, including as a result of a crash in one or more digital assets or platforms, such as
the May 2022 crash of the stablecoin Terra USD or widespread defaults on digital asset exchanges, trading venues or lending
platforms, such as the crash and subsequent filing for bankruptcy protection of the digital asset lending platform Celsius
Network; and |
| |
● |
The Trust’s own acquisitions or dispositions of Bitcoin, since there
is no limit on the number of Bitcoin that the Trust may acquire. |
In addition, there is
no assurance that Bitcoin will maintain its value in the long or intermediate term. In the event that the price of Bitcoin declines,
the Sponsor expects the value of the Units to decline proportionately.
The value of a Bitcoin
as represented by the Bitcoin Market Price or by the Trust’s principal market may also be subject to momentum pricing due
to speculation regarding future appreciation in value, leading to greater volatility that could adversely affect the value of the
Units. Momentum pricing typically is associated with growth stocks and other assets whose valuation, as determined by the investing
public, accounts for future appreciation in value, if any. The Sponsor believes that momentum pricing of Bitcoins has resulted,
and may continue to result, in speculation regarding future appreciation in the value of Bitcoin, inflating and making the Bitcoin
Market Price more volatile. As a result, Bitcoin may be more likely to fluctuate in value due to changing investor confidence,
which could impact future appreciation or depreciation in the Bitcoin Market Price and could adversely affect the value of the
Units.
“Volatility”
of an asset may be defined as a measure of the risk or price moves for the asset calculated from the standard deviation of day-to-day
logarithmic historical price changes. The 30-day price volatility equals the annualized standard deviation of the relative price
change for the 30 most recent trading days closing price, expressed as a percentage (source: Bloomberg).
Bitcoin has experienced
significant price fluctuations, such as its historic decline of over $19,000 to less than $3,200 from December 2017 to December
2018, the price decline from over $59,000 to less than $34,000 during the period from May 7, 2021 to May 28, 2021, and the price
decline from over $47,000 to less than $19,000 during the period from January 1, 2022 to June 18, 2022.
As of December 31, 2022,
Bitcoin’s 30-day annualized price volatility denominated in U.S. dollars was 19.79%. Over the past five years, Bitcoin’s
rolling 30-day annualized volatility has averaged 61% with a maximum value of 134.14% on April 2, 2020 and a minimum value of 18.99%
on July 26, 2020. (Source: Bloomberg). Bitcoin has and may continue to experience rapid changes in volatility depending on market
conditions. For example, in May of 2021, Bitcoin’s volatility transitioned from a volatility range of 39% to over 100% by
June of 2021, where it stayed for 23 consecutive days.
Due to the unregulated nature and
lack of transparency surrounding the operations of Bitcoin exchanges, they may experience fraud, business failures, security failures
or operational problems, which may adversely affect the value of Bitcoin and, consequently, the value of the Units.
Bitcoin exchanges are
relatively new and, in some cases, unregulated. Many trading platforms for digital assets are not subject to regulation to the
same extent or in the same manner as other regulated trading platforms, such as Listing Exchanges or designated contract markets
that face a variety of federal standards for fair access, cybersecurity and other areas of regulation. Bitcoin is susceptible to
the dissemination of false or misleading information regarding material non-public information related to: the actions of regulators
with respect to Bitcoin; order flow, such as plans of market participants to significantly increase or decrease their holdings
in Bitcoin; new sources of demand, such as new exchange-traded products (“ETPs”) that would hold Bitcoin; or the decision
of a Bitcoin-based ETP, a Bitcoin trading venue, or a Bitcoin wallet service provider with respect to how it would respond to a
fork in the blockchain, which would create two different, non-interchangeable types of Bitcoin. Bitcoin trading activity is dispersed
across markets and over-the-counter transactions worldwide, and there is no centralized, regulatory data source for Bitcoin trading
statistics. Furthermore, while many prominent Bitcoin exchanges provide the public with significant information regarding their
ownership structure, management teams, corporate practices and regulatory compliance, many Bitcoin exchanges do not provide this
information. The Trust is not in a position to determine the extent to which the Bitcoin exchanges included in the Index are in
compliance with regulatory requirements, as those exchanges are not affiliated with or managed by the Trust of the Sponsor. As
a result, the marketplace may lose confidence in Bitcoin exchanges, including prominent exchanges that handle a significant volume
of Bitcoin trading.
For example, in 2019
there were reports claiming that 80%-95% of Bitcoin trading volume on Bitcoin exchanges was false or non-economic in nature, with
specific focus on unregulated exchanges located outside of the U.S. Such reports may indicate that the Bitcoin exchange market
is significantly smaller than expected and that the U.S. makes up a significantly larger percentage of the Bitcoin exchange market
than is commonly understood. Nonetheless, any actual or perceived false trading in the Bitcoin exchange market, and any other fraudulent
or manipulative acts and practices, could adversely affect the value of Bitcoin and/or negatively affect the market perception
of Bitcoin.
In addition, over the
past several years, some Bitcoin exchanges have been closed due to fraud and manipulative activity, business failure or security breaches. In many of
these instances, the customers of such Bitcoin exchanges were not compensated or made whole for the partial or complete losses
of their account balances in such Bitcoin exchanges. While smaller Bitcoin exchanges are less likely to have the infrastructure
and capitalization that make larger Bitcoin exchanges more stable, larger Bitcoin exchanges are more likely to be appealing targets
for hackers and malware and may be more likely to be targets of regulatory enforcement action. For example, the collapse of Mt.
Gox, which filed for bankruptcy protection in Japan in late February 2014, demonstrated that even the largest Bitcoin exchanges
could be subject to abrupt failure with consequences for both users of Bitcoin exchanges and the Bitcoin industry as a whole. In
particular, in the two weeks that followed the February 7, 2014 halt of Bitcoin withdrawals from Mt. Gox, the value of one Bitcoin
fell on other exchanges from around $795 on February 6, 2014 to $578 on February 20, 2014. Additionally, in January 2015, BitStamp
announced that approximately 19,000 Bitcoin had been stolen from its operational or “hot” digital wallets. Further,
in August 2016, it was reported that almost 120,000 Bitcoins worth around $78 million were stolen from Bitfinex, a large Bitcoin
exchange.
The value of Bitcoin
immediately decreased over 10% following reports of the theft at Bitfinex and the Units suffered a corresponding decrease in value.
In July 2017, the Financial Crimes Enforcement Network (“FinCEN”) assessed a $110 million fine against BTC-E, a now
defunct Bitcoin exchange, for facilitating crimes such as drug sales and ransomware attacks. In addition, in December 2017, Yapian,
the operator of Seoul-based cryptocurrency exchange Youbit, suspended digital asset trading and filed for bankruptcy following
a hack that resulted in a loss of 17% of Yapian’s assets. Following the hack, Youbit users were allowed to withdraw approximately
75% of the digital assets in their exchange accounts, with any potential further distributions to be made following Yapian’s
pending bankruptcy proceedings. In addition, in January 2018, the Japanese digital asset exchange, Coincheck, was hacked, resulting
in losses of approximately $535 million, and in February 2018, the Italian digital asset exchange, Bitgrail, was hacked, resulting
in approximately $170 million in losses. Most recently in May 2019, one of the world’s largest Bitcoin exchanges, Binance,
was hacked, resulting in losses of approximately $40 million.
Negative perception,
a lack of stability, and standardized regulation in the Bitcoin markets and the closure or temporary shutdown of Bitcoin exchanges
due to fraud, business failure, hackers or malware, or government-mandated regulation may reduce confidence in the Bitcoin Network
and result in greater volatility in the prices of Bitcoin. Furthermore, the closure or temporary shutdown of a Bitcoin exchange
used in calculating the Bitcoin Market Price may result in a loss of confidence in the Trust’s ability to determine its NAV
on a daily basis. These potential consequences of such a Bitcoin exchange’s failure could adversely affect the value of the
Units.
Recent developments in the digital
asset economy have led to extreme volatility and disruption in digital asset markets, a loss of confidence in participants of the
digital asset ecosystem, significant negative publicity surrounding digital assets broadly and market-wide declines in liquidity.
Beginning in the fourth
quarter of 2021 and continuing throughout 2022, digital asset prices began falling precipitously. This has led to volatility and
disruption in the digital asset markets and financial difficulties for several prominent industry participants, including
digital
asset exchanges, hedge funds and lending platforms. For example, in the first half of 2022, digital asset lenders Celsius Network
LLC and Voyager Digital Ltd. and digital asset hedge fund Three Arrows Capital each declared bankruptcy. This resulted in a loss
of confidence in participants in the digital asset ecosystem, negative publicity surrounding digital assets more broadly and market-wide
declines in digital asset trading prices and liquidity.
Thereafter, in November
2022, FTX, the third largest digital asset exchange by volume at the time, halted customer withdrawals amid rumors of the company’s
liquidity issues and likely insolvency. Shortly thereafter, FTX’s CEO resigned and FTX and several affiliates of FTX filed
for bankruptcy. The U.S. Department of Justice (“DOJ”) subsequently brought criminal charges, including charges of
fraud, violations of federal securities laws, money laundering, and campaign finance offenses, against FTX’s former CEO and
others. FTX is also under investigation by the SEC, the DOJ, and the CFTC, as well as by various regulatory authorities in the
Bahamas, Europe and other jurisdictions. In response to these events, the digital asset markets have experienced extreme price
volatility and declines in liquidity, and regulatory and enforcement scrutiny has increased, including from the DOJ, the SEC, the
CFTC, the White House and Congress. In addition, several other entities in the digital asset industry filed for bankruptcy following
FTX’s bankruptcy filing, such as BlockFi and Genesis Global Capital, LLC. The SEC also brought charges against Genesis Global
Capital, LLC and Gemini Trust Company, LLC on January 12, 2023 for their alleged unregistered offer and sale of securities to retail
investors.
These events have led
to significant negative publicity around digital asset market participants. This publicity could negatively impact the reputation
of the Sponsor and have an adverse effect on the trading price and/or the value of the Units. Moreover, sales of a significant
number of Units of the Trust as a result of these events could have a negative impact on the trading of the Units.
These events are continuing
to develop at a rapid pace and it is not possible to predict at this time all of the risks that they may pose to the Sponsor, the
Trust, their affiliates and/or the Trust’s third-party service providers, or on the digital asset industry as a whole.
Continued disruption
and instability in the digital asset markets as these events develop, including further declines in the trading prices and liquidity
of Bitcoin, could have a material adverse effect on the value of the Units and the Units could lose all or substantially all of
their value.
Competition from the emergence or
growth of other digital assets or methods of investing in Bitcoin could have a negative impact on the price of Bitcoin and adversely
affect the value of the Units.
Bitcoin was the first
digital asset to gain global adoption and critical mass, and as a result, it has a “first to market” advantage over
other digital assets. As of January 6, 2023, Bitcoin was the largest digital asset by market capitalization and had the largest
user base and largest combined mining power. Despite this first to market advantage, as of January 6, 2023, there were over 8,000
alternative digital assets tracked by CoinMarketCap.com, having a total market-capitalization of approximately $825 billion (including
the approximately $326 billion market cap of Bitcoin), as calculated using market prices and total available supply of each digital
asset. In addition, many consortiums and financial institutions are also researching and investing resources into private or permissioned
blockchain platforms rather than open platforms like the Bitcoin Network. Competition from the emergence or growth of alternative
digital assets could have a negative impact on the demand for, and price of, Bitcoin and thereby adversely affect the value of
the Units.
Investors may invest
in Bitcoin through means other than the Units, including through direct investments in Bitcoin and other potential financial vehicles,
possibly including securities backed by or linked to Bitcoin and digital asset financial vehicles similar to the Trust. Market
and financial conditions, and other conditions beyond the Sponsor’s control, may make it more attractive to invest in other
financial vehicles or to invest in Bitcoin directly, which could limit the market for, and reduce the liquidity of, the Units.
In addition, to the extent digital asset financial vehicles other than the Trust tracking the price of Bitcoin are formed and represent
a significant proportion of the demand for Bitcoin, large purchases or redemptions of the securities of these digital asset financial
vehicles, or private funds holding Bitcoin, could negatively affect the Bitcoin Market Price, the price of the Units, the NAV and
the NAV per Unit.
Failure of funds that hold digital
assets or that have exposure to digital assets through derivatives to receive SEC approval to list their shares on exchanges could
adversely affect the value of the Units.
There have been a growing
number of attempts to list on national securities exchanges the shares of funds that hold digital assets or that have exposures
to digital assets through derivatives. These investment vehicles attempt to provide institutional and retail investors exposure
to markets for digital assets and related products. The SEC has repeatedly denied such requests. On January 18, 2018, the SEC’s
Division of Investment Management outlined several questions that sponsors would be expected to address before the SEC will consider
granting approval for funds holding “substantial amounts” of cryptocurrencies or “cryptocurrency-related products.”
The questions, which focus on specific requirements of the Investment Company Act, generally fall into one of five key areas: valuation,
liquidity, custody, arbitrage and potential manipulation. The SEC has not explicitly stated whether each of the questions set forth
would also need to be addressed by entities with similar products and investment strategies that instead pursue registered offerings
under the Securities Act, although such entities would need to comply with the registration and prospectus disclosure requirements
of the Securities Act. Requests to list the shares of other funds on national securities exchanges have also been submitted to
the SEC. Although the SEC approved several futures-based
Bitcoin ETFs in October 2021, it has not approved any requests to list
the shares of digital asset funds like the Trust to date. The requests to list the shares of digital asset funds submitted by the
Chicago Board Options Exchange (“CBOE”) and the NYSE Arca in 2019 were withdrawn or received disapprovals. Subsequently,
NYSE Arca and CBOE filed several new requests to list shares of various digital asset funds in 2021. Several of those requests
were recently denied by the SEC in 2021 and to date in 2022. The exchange listing of shares of digital asset funds would create
more opportunities for institutional and retail investors to invest in the digital asset market. If exchange-listing requests are
not approved by the SEC and further requests are ultimately denied by the SEC, increased investment interest by institutional or
retail investors could fail to materialize, which could reduce the demand for digital assets generally and therefore adversely
affect the value of the Units.
NAV may not always correspond to
the weighted-average market price of Bitcoin and, as a result, Units may be purchased (or redeemed, if ever permitted) at a value
that differs from the secondary market price of the Units.
The NAV of the Trust
will change as fluctuations occur in the market price of the Trust’s Bitcoin Holdings. Unitholders should be aware that the
secondary market trading price of a Unit may be different from the NAV per Unit (i.e., Units may trade at a premium over, or a
discount to, the NAV), and similarly the secondary market trading price per Unit may be different from the NAV per Unit, for a
number of reasons, including price volatility, trading volume and any closings of Bitcoin trading platforms due to fraud, failure,
security breaches or otherwise. Consequently, an investor may be able to purchase Units from the Trust at a discount or a premium
to the market trading price per Unit (if and when Units trade on a secondary trading market). This price difference may be due,
in large part, but not exclusively, to the fact that supply and demand forces at work in the secondary trading market for Units
are related, but not identical, to the supply and demand forces influencing the market price of Bitcoin. Unitholders also should
note that the size of the Trust in terms of total Bitcoin held may change substantially over time and as Units are issued and redeemed
(if ever permitted).
Suspension or disruptions of market
trading may adversely affect the value of units.
On January 14, 2021,
FINRA determined the Units met the criteria for quotation and trading on the OTCQX under the ticker symbol “OBTC.”
Nevertheless, there can be no assurance that, the Units will trade with sufficient liquidity for the quotation to be of practical
use to investors. Moreover, quotation may be halted due to market conditions, or in light of the OTCQX rules and procedures. There
can be no assurance that the requirements necessary to maintain the quotation of the Units on the OTCQX will continue to be met.
The lack of active trading markets
for the Units may result in losses on an investment in the Trust at the time of disposition of Units.
There can be no guarantee
that an active trading market for the Units will develop or will be maintained. Even if an active trading market does develop, it may not provide
significant liquidity, and the Units may not trade at prices advantageous to Unitholders. If a Unitholder wishes to sell Units
at a time when no active market for such Units exists, the price received for the Units (assuming that the Unitholder is able to
sell them) likely will be lower than the price a Unitholder would receive if an active market did exist and, accordingly, the Unitholder
may suffer significant losses.
The Trust’s acquisition and
sale of Bitcoin may impact the supply and demand of Bitcoin, which may have a negative impact on the price of the Units.
If the number of Bitcoin
acquired by the Trust is large enough relative to global Bitcoin supply and demand, further issuances and redemptions (if any)
of Units could have an impact on the supply of and demand for Bitcoin in a manner unrelated to other factors affecting the global
market for Bitcoin. Such an impact could affect the Bitcoin Market Price, which would directly affect the price at which Units
are quoted on the OTCQX or the price of future Units issued or redeemed (if permitted) by the Trust.
A possible “short squeeze”
due to a sudden increase in demand for the Units that largely exceeds supply may lead to price volatility in the Units.
Bitcoin price speculation
may involve long and short exposures. To the extent that aggregate short exposure exceeds the number of Units available for purchase
(for example, in the event that large redemption requests by Unitholders dramatically affect Unit liquidity), Unitholders with
short exposure may have to pay a premium to repurchase Units for delivery to Unit lenders. Those repurchases may, in turn, dramatically
increase the price of the Units until additional Units are issued. This is often referred to as a “short squeeze.”
A short squeeze could lead to volatile price movements in the Units that are not directly correlated to the price of Bitcoin.
The Trust’s buying and selling
activity associated with the issuance and redemption (if any) of Units may adversely affect an investment in the Units.
The Trust’s purchase
of Bitcoin in connection with Unit issuance orders may cause the price of Bitcoin to increase, which will result in higher prices
for the Units. The Trust’s Bitcoin is stored in “cold” storage with Coinbase Custody, and as a result any withdrawal
and
subsequent transaction request to Coinbase Custody by the Trust requires twenty-four (24) hour notice to process. Such time
delay between the withdrawal request and processing of the withdrawal may negatively impact the price of the Bitcoin. Increases
in the Bitcoin prices may also occur as a result of Bitcoin purchases by other market participants who attempt to benefit from
an increase in the market price of Bitcoin when Units are issued. The market price of Bitcoin may therefore decline immediately
after Units are issued. Selling activity associated with sales of Bitcoin from the Trust in connection with redemption orders may
decrease the Bitcoin prices, which will result in lower prices for the Units. Decreases in Bitcoin prices may also occur as a result
of selling activity by other market participants. In addition to the effect that purchases and sales of Bitcoin by the Trust may
have on the price of Bitcoin, other exchange-traded products with similar investment objectives could represent a substantial portion
of demand for Bitcoin at any given time and the sales and purchases by such investment vehicles may impact the price of Bitcoin.
If the price of Bitcoin declines, the trading price of the Units will generally also decline.
Difficulties or limitations in the
processes of issuance and redemption (if any) of Units may interfere with opportunities for arbitrage transactions intended to
keep the price of the Units closely linked to the price of Bitcoin, which may adversely affect an investment in the Units.
If the processes of
issuance and trading of the Units encounter any unanticipated difficulties, potential market participants who would otherwise be
willing to purchase or redeem Units to take advantage of any arbitrage opportunity arising from discrepancies between the price
of the Units and the price of the underlying Bitcoin may not take the risk that, as a result of those difficulties, they may not
be able to realize the profit they expect. If this is the case, the liquidity of Units may decline and the price of the Units may
fluctuate independently of the price of Bitcoin and may fall. In addition, the Sponsor may postpone, suspend or reject purchase
orders, as applicable, for a variety of permitted reasons under certain circumstances. To the extent such orders are postponed,
suspended or rejected, the arbitrage mechanism resulting from the process through which investors purchase Units directly from
the Trust may fail to closely link the price of the Units to the value of the underlying Bitcoin, as measured using the Bitcoin
Market Price. If this is the case, the liquidity of the Units may decline and the price of the Units may fluctuate independently
of the Bitcoin Market Price and may fall. The Units have experienced significant premiums since their commencement of trading in
the OTC Markets and on OTCQX and may continue to do so in the future. Information about the Trust’s historical trading prices,
including its premiums is located under “Secondary Market Trading.”
Disruptions at OTC trading desks
and potential consequences of an OTC trading desk’s failure could adversely affect an investment in the Units.
There are a limited
number of OTC trading desks with which the Trust can transact in Bitcoin to effect issuances and redemptions (if any). A disruption
at or withdrawal from the market by any such OTC trading desk may adversely affect the Trust’s ability to purchase or sell
Bitcoin, which may potentially negatively impact the market price of the Units. A disruption at one or more OTC trading desks will
reduce liquidity in the market and may negatively impact the Trust’s ability to value its Bitcoin. Because there is currently
no publicly disseminated and verifiable feed with respect to the price of Bitcoin on a regulated exchange, investors must rely
on other pricing sources, such as the Bitcoin Market Price or prices obtained directly from the OTC trading desks, to obtain the
price of Bitcoin.
Disruptions at Bitcoin exchanges
and potential consequences of a Bitcoin exchange’s failure could adversely affect an investment in the Units.
Bitcoin exchanges operate
websites on which users can trade Bitcoin for U.S. dollars, currencies of other governments and other cryptocurrencies. Trades
on Bitcoin exchanges are unrelated to transfers of Bitcoin between users via the Bitcoin network. Bitcoin trades on exchanges are
recorded on the exchange’s internal ledger only and each internal ledger entry for a trade will correspond to an entry for
an offsetting trade in U.S. dollars or other government currency. To sell Bitcoin on a Bitcoin exchange, a user will transfer Bitcoin
(using the Bitcoin network) from him or herself to the Bitcoin exchange. Conversely, to buy Bitcoin on a Bitcoin exchange, a user
will transfer U.S. dollars or other government currency to the Bitcoin exchange. After completing the transfer of Bitcoin or U.S.
dollars, the user will execute his or her trade and withdraw either the Bitcoin (using the Bitcoin network) or the U.S. dollars
back to the user. Bitcoin exchanges are an important part of the Bitcoin industry.
Bitcoin exchanges have
a limited history. Since 2009, several Bitcoin exchanges have been closed or experienced disruptions due to fraud, failure, security
breaches or distributed denial of service attacks, a/k/a “DDoS Attacks.” In many of these instances, the customers
of such exchanges were not compensated or made whole for the partial or complete losses of their funds, Bitcoin or other cryptocurrencies
held at the exchanges. In 2014, the largest Bitcoin exchange at the time, Mt. Gox, filed for bankruptcy in Japan amid reports the
exchange lost up to 850,000 Bitcoin, valued then at over $450 million. Bitcoin exchanges are also appealing targets for hackers
and malware. In August 2016, Bitfinex, an exchange located in Hong Kong, reported a security breach that resulted in the theft
of approximately 120,000 Bitcoin valued at the time at approximately $72 million, a loss which was allocated to all Bitfinex account
holders (rather than just specified holders whose digital wallets were affected directly), regardless of whether the account holder
held Bitcoin or cash in their account. In February 2017 following a statement by the People’s Bank of China, China’s
three largest exchanges (BTCC, Huobi and OKCoin) suspended withdrawals of users’ Bitcoin. Although withdrawals were permitted
to resume in late May 2017, Chinese regulators in September 2017 issued a directive to Chinese exchanges to cease operations with
respect to Chinese users by September 30, 2017. In July 2017, FinCEN and the U.S.
Department of Justice levied a $110 million fine
and an indictment against BTC-e, another Bitcoin exchange and one of its operators for financial crimes. The Department of Justice
also seized the Internet domain of the exchange. Similar to the outcome of the Bitfinex breach, losses due to assets seized by
FinCEN were allocated among exchange users. In addition, it has been reported that Bitcoin exchange Coincheck lost approximately
$500 million to hackers in 2018 and that Bitcoin exchange Binance lost approximately $40 million to hackers in 2019. The potential
for instability of Bitcoin exchanges and the closure or temporary shutdown of exchanges due to fraud, business failure, hackers,
DDoS or malware, or government-mandated regulation may reduce confidence in Bitcoin, which may result in greater volatility in
the Bitcoin Market Price.
Because the Trust relies
on the 4:00 p.m., New York time price of Bitcoin traded on Coinbase Pro to determine the Bitcoin Market Price, which is the basis
for the Trust’s NAV, any disruption to Coinbase Pro’s operations affecting the Trust’s ability to value Bitcoin
could negatively affect the ability to determine the Trust’s NAV per Unit, both during the disruption and until the impact
of the disruption is absorbed by the marketplace. Moreover, because Coinbase Pro is not regulated as a national securities exchange
by the SEC or otherwise as an exchange by a federal regulator, there may be greater risk in relying on Coinbase Pro as the reference
for the Bitcoin Market Price which used for the Trust’s NAV. For example, there may be greater risk of price fluctuations,
front running and price manipulation than if Coinbase Pro were regulated as an exchange, Coinbase Pro is also a relatively new
market, having started operations fewer than ten years ago, and it could be subject to more operational problems than more established,
more highly regulated markets, such as national securities exchanges.
Despite efforts to ensure
accurate pricing, the Bitcoin Market Price and the price of Bitcoin generally, remains subject to volatility. Such volatility can
adversely affect an investment in the Units.
Momentum pricing of Bitcoin may subject
the Bitcoin price to greater volatility and adversely affect an investment in the Units.
Momentum pricing typically
is associated with growth stocks and other assets whose valuation, as determined by the investing public, accounts for anticipated
future appreciation in value. The Sponsor believes that momentum pricing of Bitcoin has resulted, and may continue to result, in
speculation regarding future appreciation in the value of Bitcoin, inflating and making more volatile the value of a Bitcoin. As
a result, Bitcoin may be more likely to fluctuate in value due to changing investor confidence in future appreciation in the Bitcoin
price, which could adversely affect an investment in the Units.
Risk Factors Related to the Trust and
the Units
As the Sponsor and its management
have little history of operating the Trust, their experience may be inadequate or unsuitable to manage the Trust.
The Sponsor has only
a limited history of past performance in managing the Trust. Similarly, the Sponsor’s management has only a limited history
of past performance in managing the Trust. The past performances of the Sponsor and management in other positions are no indication
of their ability to manage an investment vehicle such as the Trust. If the experience of the Sponsor and its management is inadequate
or unsuitable to manage an investment vehicle such as the Trust, the operations of the Trust may be adversely affected.
Because of the lack of an ongoing
redemption program for Unitholders that invest directly into the Trust (as opposed to Unitholders who acquire Units in the public
secondary trading market) there is no arbitrage mechanism to keep the price of the Units closely linked to the value of the underlying
Bitcoin holdings held by the Trust, less the Trust’s expenses and other liabilities, on any secondary trading market.
Because of the lack
of an ongoing redemption program for Unitholders that invest directly into the Trust, the Trust cannot rely on arbitrage opportunities
resulting from differences between the price of the Units and the price of Bitcoin. As a result, the value of the Units may not
approximate, and the Units may trade at a substantial premium over, or discount to, the value of the Bitcoin holdings, less the
Trust’s expenses and other liabilities, on any secondary trading market. Investors who purchase Units in the secondary market
that are trading at a substantial premium over, or discount to, the NAV per Unit may not be able to realize losses or gains if
the premium decreases, or discount increases, after the purchase of Units. At times when the Units trade at a substantial premium
to the NAV per Unit, investors who purchase Units on OTCQX may pay substantially more for their Units than investors who purchase
Units in the private placements.
The Trust has only a limited performance
history.
The Trust has only a
limited operating history. Therefore, a potential Unitholder has little performance history, aside from the historical price of
Bitcoin, to serve as a factor in evaluating an investment in the Trust.
The value of the Units could decrease
if unanticipated operational or trading problems arise.
The mechanisms and procedures governing
the issuance, redemption (if any) and offering of the Units have been developed specifically for
the Trust. Consequently, there
may be unanticipated problems or issues with respect to the mechanisms of the operations of the Trust and the trading of the Units,
which could have a material adverse effect on an investment in the Units. In addition, to the extent that unanticipated operational
or trading problems or issues arise, the Trust management’s past experience and qualifications may not be suitable for solving
these problems or issues.
Substantial sales or dispositions
by a large Unitholder could negatively impact the price of our Units in the secondary market.
The market price of
our Units could decline as a result of substantial sales or dispositions of our Units by large Unitholders. A large disposition
of Units may cause a negative perception of our Units in the market and could result in other Unitholders deciding to sell and
further disrupt the market price of our Units.
Fees and expenses are charged regardless
of profitability.
Unitholders in the Trust
will pay fees and expenses in connection with their investment in Units, including the Management Fee at an annualized rate of
0.49% of the average daily NAV of the Trust. The Sponsor will bear the Assumed Expenses; provided, however, that the Trust shall
be responsible for the Excluded Expenses and the Extraordinary Expenses.
The Trust qualifies as a “smaller
reporting company” and the reduced disclosure requirements applicable to smaller reporting companies may make the Units less
desirable.
The Trust qualifies
as a “smaller reporting company” under the rules of the SEC. As a smaller reporting company, the Trust will be able
to take advantage of certain reduced disclosure requirements, such as reduced financial statement disclosure requirements permitting
only two years of audited financial statements. Decreased disclosures in the Trust’s SEC filings due to its status as a smaller
reporting company may make it harder for investors to analyze the Trust’s results of operations and financial prospects.
The Trust cannot predict if investors will find the Trust’s units less attractive because of its smaller reporting company
status and reduced disclosure.
The security of our Bitcoin Holdings
cannot be assured, by the Trust, the Custodian or any other person.
The Trust’s Bitcoin
holdings are held by a custodian subject to security methods and procedures designed to ensure the Trust’s control over those
holdings and keep those holdings safe from unauthorized use, theft or other misuse. However, no security measures can provide assurance
that the Trust’s Bitcoin holdings will not be affected by theft, misuse, cybersecurity breaches or other harms. FDAS was
engaged to keep in safe custody the Trust’s digital assets for the period ended December 31, 2021 and until the Trust transferred
its custodied digital assets to Coinbase Custody on March 10, 2022. The Trust provided notice of termination of the custodial services
agreement with FDAS on March 11, 2022, which was effective on April 10, 2022. The terms of the Custodial Services Agreement with
Coinbase Custody limit the liability of the custodian. In this respect, Coinbase Custody’s liability with respect to the
Trust will never exceed the value of the Bitcoins on deposit in the digital asset account at the time of, and directly relating
to, the events giving rise to the liability occurred, as determined in accordance with the Custodial Services Agreement. In addition,
the maximum liability with respect to each cold storage address is limited to $100,000,000.
The Custodian is subject
to certain risks related and challenges, including cybersecurity risks such as ransomware, malicious code, destructive malware
and other hidden threats, fake antiviruses, spyware, phishing and other imposter style attacks. The Custodian manages such risks through the Coinbase Global
Information Security Program Policy (“Information Security Policy”). However, the Custodian may not be able to prevent
all illicit activity and may be the victim of a hack by illicit actors. For example, between March and May 2021, illicit actors
gained unauthorized access to the accounts of Coinbase customers via an indeterminate method, where the illicit actors gained knowledge
of the email address, password, and phone number associated with certain Coinbase customer accounts. With such information and
for customers who use SMS texts for two-factor authentication, the illicit actor took advantage of a flaw in Coinbase’s SMS
Account Recovery process in order to receive an SMS two-factor authentication token and gain access to the customer’s account.
At least 6,000 Coinbase customers had funds removed from their accounts. The Custodian addresses such challenges by ensuring its
Information Security Policy is reviewed and updated at least annually, and which must be presented to the Board of Directors. Coinbase
Custody’s cold storage solution has not had a publicly disclosed incident of, nor are we aware of any incident of, lost client
funds, to date. While the Trust has taken and will continue to take steps to secure its assets, the Trust’s assets are continuously
subject to risks of theft, fraud and other security breaches, and some or all of the Trust’s assets may be lost or otherwise
compromised as a result of such security breaches.
The Custodian is not liable for any
lost profits or any special, incidental, indirect, intangible, or consequential damages arising out of or in connection with authorized
or unauthorized use of the Coinbase Custody site or the custodial services.
The Custodian and its
affiliates are not liable (a) for any amount greater than the value of Bitcoin on deposit in the Custodial Account at the time
of the events giving rise to the liability (the value of which shall be calculated at the average U.S. dollar ask price, at the
time of the loss, of the three (3) largest exchanges (by trailing 30-day volume) which offer the relevant digital currency or digital
asset/USD trading pair, as relevant, subject to the per address limitation as described below) and/or (b) for any lost profits
or any special, incidental, indirect,
intangible, or consequential damages arising out of or in connection with authorized or unauthorized
use of the Coinbase Custody site or the custodial services. The Custodian does not make any representations or warranties that
access to the site or any part of the custodial services will be continuous, uninterrupted, or timely; be compatible or work with
any software, system or other services; or be secure, complete, free of harmful code, or error-free.
The Custodian does not
bear any liability for any damage or interruptions caused by any computer viruses or other malware that may affect the Trust’s
computer or other equipment, or any phishing, spoofing or other attack, unless such damage or interruption directly resulted from
the Custodian’s gross negligence, fraud, or willful misconduct. Such gross negligence, fraud, or willful misconduct will
be determined on a facts and circumstances basis and may include activity such as failing to timely react to a cybersecurity incident,
preventable fraudulent activity, and the willful misconduct of Coinbase Custody representative officers, directors, and employees.
In any case, the Custodian is not liable for any amount greater than the value of the Bitcoin holdings and its maximum liability
for each cold storage address is limited to $100,000,000.
The Trust does not maintain audit
or inspection rights under the Custodial Services Agreement, and as such our Bitcoin Holdings held in the custodial account cannot
be independently verified.
The Trust does not enjoy
audit or inspection rights under the Custodial Services Agreement and cannot independently verify the Bitcoin Holdings held in
the custodial account. The Sponsor relies on the Custodian’s System and Organization Controls (“SOC”) reports
to provide assurances as to the existence of the Trust’s Bitcoin at the Custodian. SOC reports are internal control evaluations
conducted by independent auditors. SOC 1 reports broadly comment on controls and processes that impact financial statements and
reporting. SOC 2 reports comment on controls and processes that address the security, availability, processing integrity, confidentiality
and privacy. SOC 1 and 2 reports can be subcategorized into Type I, which is an attestation of controls at a service organization
at specific point in time, and Type II, which is an attestation of controls as a service organization over a period of time. The
Custodian engages an independent auditor to conduct both a SOC 1, Type II audit and a SOC 2, Type II audit. Such reports cannot
specifically identify the existence of the Trust’s Bitcoin Holdings at the Custodian. The Trust can use such reports to demonstrate
the existence of effective controls in place by the Custodian providing assurance and confidence in the Custodian’s service
delivery processes and controls for digital assets.
Possibility of termination of the
Trust may adversely affect a Unitholder’s portfolio.
The Sponsor may terminate
the Trust in its sole discretion upon the occurrence of certain events, and shall terminate the Trust upon the occurrence of certain
other events. If this power is so exercised, Unitholders who may wish to continue to invest in Bitcoin through the Trust will have
to find another vehicle, and may not be able to find another vehicle that offers the same features as the Trust. Such detrimental
developments could cause a Unitholder to liquidate its investments and upset the overall maturity and timing of its investment
portfolio.
Any errors, discontinuance or changes
in determining the value of the Bitcoin held by the Trust may have an adverse effect on the value of the Units.
The Administrator will
determine the NAV of the Trust and the NAV per Unit on a daily basis as soon as practicable after 4:00 p.m., New York time on each
Business Day. The Administrator’s determination will be made based on the Bitcoin Market Price. To the extent that such NAV
or NAV per Unit is incorrectly calculated, there may be no liability for any error, but such misreporting of valuation data could
adversely affect an investment in the Units.
Unitholders may be adversely affected
by redemption orders that are subject to postponement, suspension, or rejection under certain circumstances.
If redemptions of Units
are ever permitted, the Sponsor may nevertheless, in its discretion, suspend the right of redemption or postpone the redemption
settlement date if (1) the order is not in proper form as determined by the Trust or Sponsor, (2) during an emergency 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 Unitholders. Any such postponement, suspension or rejection could adversely affect
a redeeming investor. For example, the resulting delay may adversely affect the value of the investor’s redemption proceeds
if the NAV of the Trust declines during the period of delay. The Trust disclaims any liability for any loss or damage that may
result from any such suspension or postponement.
As a Unitholder, you will not have
the rights normally associated with ownership of Units of other types of investment vehicles. For example, in comparison to those
of securityholders in traditional operating companies, you will have no voting rights.
The Trust is a passive
investment vehicle with no management and no board of directors. Thus, the Units are not entitled to the same rights as shares
issued by a corporation operating a business enterprise with management and a board of directors. By acquiring Units, you are not
acquiring the right to elect directors, to vote on certain matters regarding the issuer of your Units or to take other actions
normally
associated with the ownership of shares, such as the right to bring “oppression” or “derivative”
actions. You will only have the extremely limited rights described under “Description of the Units.”
Your right to bring derivative actions
is limited and it might be difficult for minority Unitholders to locate other Unitholders to reach the ownership threshold for
derivative actions.
Under Section 7.4 of
the Trust Agreement, no Unitholder shall have the right to bring or maintain a derivative action, suit or other proceeding on behalf
of the Trust unless two or more Unitholders who (i) are not affiliates of one another and (ii) collectively hold at least 10% of
the outstanding Units join in the bringing or maintaining of such action, suit or other proceeding. This provision applies to any
derivative actions brought in the name of the Trust other than claims under the federal securities laws and the rules and regulations
thereunder. Due to this additional requirement, a Unitholder attempting to bring or maintain a derivative action in the name of
the Trust will be required to locate other Unitholders with which it is not affiliated and that have sufficient Units to meet the
10.0% threshold based on the number of Units outstanding on the date the claim is brought and thereafter throughout the duration
of the action, suit or proceeding. A minority Unitholder may have difficulties attempting to locate other Unitholders to reach
the 10% threshold under this provision and may result in increased costs to a Unitholder attempting to seek redress in the name
of the Trust in court, further limiting investors’ right to bring derivative actions on behalf of the Trust.
The value of the Units will be adversely
affected if the Trust is required to indemnify the Sponsor or the Custodian as contemplated in the Trust Agreement or the Custodial
Services Agreement.
Under the Trust Agreement,
each of the Sponsor and the Trustee has a right to be indemnified from the Trust for any liability or expense it incurs without
gross negligence, bad faith or willful misconduct on its part. Under the Trust Agreement, the Trust’s officers, directors,
employees and agents also have a right to be indemnified from the Trust for any liability or expense they incur without gross negligence,
bad faith, or willful misconduct on their part. Similarly, the Custodial Services Agreement provides for indemnification of the
Custodian by the Trust under certain circumstances. That means that it may be necessary to sell assets of the Trust to cover losses
or liability suffered by any of the foregoing parties. Any sale of that kind would reduce the NAV of the Trust and the NAV per
Unit.
The Trust’s Bitcoin Holdings
could become illiquid, which could cause large losses to Unitholders at any time or from time to time.
The Trust may not always
be able to liquidate its Bitcoin at a desired price, or at all. It may become difficult to execute a trade at a specific price
when there is a relatively small volume of buy and sell orders in the marketplace, including on Bitcoin exchanges and with OTC
Bitcoin participants.
A market disruption,
such as a foreign government taking political actions that disrupt the market in its currency, its commodity production or exports,
or in another major export, can also make it difficult to liquidate a position. In the event of a fork of the Bitcoin network,
certain Bitcoin exchanges and/or OTC counterparties may halt deposits and withdrawals of Bitcoin for a set period of time thus
reducing liquidity in the markets. Unexpected market illiquidity may cause major losses to Unitholders at any time. The large amount
of Bitcoin the Trust may acquire increases the risk of illiquidity by both making its Bitcoin more difficult to liquidate and increasing
the losses incurred while trying to do so. To the extent the Trust is unable to purchase or sell Bitcoin at a desired price as
a result of illiquidity, the Trust may not be able to effect issuances and redemptions (if permitted) of Units for cash.
Transactions in Bitcoin are irreversible
and the Trust may be unable to recover improperly transferred Bitcoin.
Bitcoin transactions
are irreversible. An improper transfer, whether accidental or resulting from theft, can only be undone by the receiver of the Bitcoin
agreeing to send the Bitcoin back to the original sender in a separate subsequent transaction. To the extent the Trust erroneously
transfers, whether accidental or otherwise, Bitcoin in incorrect amounts or to the wrong recipients, the Trust may be unable to recover the Bitcoin, which could adversely
affect an investment in the Units.
The Trust’s Bitcoin may be
lost, stolen or subject to other inaccessibility.
There is a risk that
part or all of the Trust’s Bitcoin could be lost, stolen or destroyed. Hackers or malicious actors may launch attacks to
steal or compromise cryptocurrencies, such as by attacking the network source code, exchange miners, third-party platforms, cold
and hot storage locations or software, or by other means. Digital asset transactions and accounts are not insured by any type of
government program and cryptocurrency transactions generally are permanent by design of the networks. Certain features of digital
asset networks, such as decentralization, the open-source protocols, and the reliance on peer-to-peer connectivity, may increase
the risk of fraud or cyber-attack by potentially reducing the likelihood of a coordinated response.
Although the Trust will
secure the Trust’s Bitcoin to seek to minimize the risk of loss, the Trust cannot guarantee that such a loss will be prevented.
Access to the Trust’s Bitcoin could also be restricted by natural events (such as a hurricane, earthquake or pandemic) or
human actions (such as a terrorist attack). Any of these events may adversely affect the operations of the Trust and, consequently,
an
investment in the Units. See the section below entitled “The Bitcoin Security System” for more information relating
to the Trust’s security measures.
Any disruptions to the computer technology
used by the Trust or its service providers could adversely affect the Trust’s ability to function and an investment in the
Units.
The Trust will monitor
its technology and may develop and redesign its technology, including enhancements and alterations that may be implemented from
time to time, and it expects its service providers to do the same. In doing so, there is risk that failures may occur and result
in service interruptions or other negative consequences. Any technology updates that cause disruptions in the proper functioning
of the Trust’s or any of its service provider’s technology systems may have an adverse impact on the Trust and an investment
in the Units.
The Trust may take such
steps as the Sponsor determines, in its sole judgment, to be required to maintain and upgrade its technology systems, in order
to protect against failure, hacking, malware and general security threats, and it expects its service providers to take their own
steps to maintain and upgrade their own technology systems with the same goals in mind. The Trust is not liable to Unitholders
for the failure or penetration of technology systems absent gross negligence, willful misconduct or bad faith. To the extent technology
systems fail or are penetrated, any loss of the Trust’s Bitcoin or loss of confidence in the Trust’s ability to safeguard
its Bitcoin may adversely affect an investment in the Units.
The Sponsor’s computer infrastructure
may be vulnerable to security breaches. Any such problems could cause interruptions in the Trust’s operations and adversely
affect an investment in the Units.
The Sponsor’s
computer infrastructure is potentially vulnerable to physical or electronic computer break-ins, viruses and similar disruptive
problems and security breaches. Any such problems or security breaches could give rise to a halt in the Trust’s operations,
and expose the Trust to a risk of financial loss, litigation and other liabilities. In the event of a security breach, the Trust
may cease operations, suspend redemptions or suffer a loss of Bitcoin or other assets. Any of these events, particularly if they
result in a loss of confidence in the Trust’s ability to operate, could have a material adverse effect on an investment in
the Units.
Technology system failures could
cause interruptions in the Trust’s ability to operate.
If the Sponsor’s
systems fail to perform, the Trust could experience disruptions in operations and slower response times, which may cause delays
in the Trust’s ability to buy or sell Bitcoin. Any such failures may also result in the theft, loss or damage of the Trust’s
Bitcoin. Any such theft, loss or damage of the Trust’s Bitcoin would have a negative impact on the value of the Units and
adversely affect the Trust’s ability to operate. In addition, a loss of confidence in the Trust’s ability to secure
the Trust’s Bitcoin with its technology system may adversely affect the Trust and the value of an investment in the Units.
Because the Units reflect the estimated
accrued but unpaid expenses of the Trust, the number of Bitcoins represented by a Unit will gradually decrease over time as the
Trust’s Bitcoins are used to pay the Trust’s expenses.
Each outstanding Unit
represents a fractional, undivided interest in the Bitcoins held by the Trust. The Units reflect the estimated accrued but unpaid
expenses of the Trust. Therefore, the number of Bitcoins represented by each Unit will gradually decrease over time as the Trust’s
Bitcoins are used to pay the Trust’s expenses. This is also true with respect to Units that are issued in exchange for additional
deposits of Bitcoins into the Trust, as the number of Bitcoins required to create Units proportionately reflects the number of
Bitcoins represented by the Units outstanding at the time of creation. Assuming a constant Bitcoin price, the trading price of
the Units is expected to gradually decrease relative to the price of Bitcoin as the number of Bitcoins represented by the Units
gradually decreases. Investors should be aware that the gradual decrease in the number of Bitcoins represented by the Units will
occur regardless of whether the trading price of the Units rises or falls in response to changes in the price of Bitcoin.
Unitholders may not be able to withdraw
or value his/her units upon death, legal disability, bankruptcy, insolvency, dissolution or withdrawal from the Trust.
Under the Trust Agreement,
the death, legal disability, bankruptcy, insolvency, dissolution or withdrawal of any Unitholder (as long as such Unitholder is
not the sole Unitholder of the Trust) shall not result in the termination of the Trust, and such Unitholder, his/her estate, custodian
or personal representative shall have no right to withdrawal or value such Unitholder’s Units. In addition, Unitholders shall
waive the furnishing of any inventory, accounting or appraisal of the assets of the Trust and any right to an audit or examination
of the books of the Trust, except as otherwise provided in the Trust Agreement.
The Trust’s Bitcoin Holdings
may be considered property of a bankruptcy estate should our Custodian initiate bankruptcy proceedings and the Trust could be considered
an unsecured creditor, and the Custodian’s assets may not be adequate to satisfy a claim by the Trust.
The legal rights of
customers with respect to digital assets held on their behalf by a third-party custodian, such as the Custodian, in insolvency
proceedings are currently uncertain. The Custody Agreement contains an agreement by the parties to treat the digital assets credited
to the Trust’s account as financial assets under Article 8 of the New York Uniform Commercial Code (“Article 8”),
in addition to stating that the Custodian will serve as fiduciary and custodian on the Trust’s behalf. The Custodian’s
parent, Coinbase Global Inc., has stated in its most recent public securities filings that in light of the inclusion in its custody
agreements of provisions relating to Article 8 it believes that a court would not treat custodied digital assets as part of its
general estate in the event the Custodian were to experience insolvency. However, due to the novelty of digital asset custodial
arrangements courts have not yet considered this type of treatment for custodied digital assets and it is not possible to predict
with certainty how they would rule in such a scenario. If the Custodian became subject to insolvency proceedings and a court were
to rule that the custodied digital assets were part of the Custodian’s general estate and not the property of the Trust,
then the Trust would be treated as a general unsecured creditor in the Custodian’s insolvency proceedings and the Custodian’s
assets may not be adequate to satisfy a claim by the Trust. As such, the Trust could be subject to the loss of all or a significant
portion of its assets.
Risks Associated with the Index
The Index has a limited
history and the methodology for determining the Index established by the Index Provider is relatively new and untested. The failure
of the Index methodology to measure the actual value of Bitcoin could have an adverse effect on the Trust and on the value of an
investment in the Trust. In addition, the value of Bitcoin as calculated by the Index methodology may differ from the value of
Bitcoin calculated by other methodologies and the price of Bitcoin on any single spot market, including the principal market used
to determine NAV.
We have
concluded that certain of our previously issued financial statements should not be relied upon and have restated certain of our
previously issued financial statements which was time-consuming and expensive and could expose us to additional risks that could
have a negative effect on our Company.
As
previously announced, we have concluded that certain of our previously issued financial statements should not be relied upon. We
restated our previously issued audited financial statements as of and for the year ended December 31, 2020 and the interim period
ended March 31, 2021. The restatement could continue to expose us to additional risks that could have a negative effect on the
Trust. In particular, we incurred some unanticipated expenses and costs, including audit, legal and other professional fees, in
connection with the restatement of our previously issued financial statements and the remediation of a material weakness in our
internal control over financial reporting, including hiring new personnel and enhancing our policies and procedures. To the extent
these steps are not successful, we could be forced to incur additional time and expense. Our Sponsor’s management attention
was also diverted from some aspects of the operation of our business in connection with the restatement and these ongoing remediation
efforts.
We previously
identified a material weakness in our system of internal controls. While we believe the material weakness has been fully remediated,
new material weaknesses could result in additional material misstatements in our financial statements. We may be unable to develop,
implement and maintain appropriate controls in future periods.
We
identified a material weakness in our internal control over financial reporting as a result of the restatement of the previously
audited financial statements for the year ended December 31, 2020 and the interim period ended March 31, 2021, and we also concluded
that our internal controls and procedures were not effective as of December 31, 2021, March 31, 2022, June 30, 2022 and September
30, 2022. This material weakness resulted in identified misstatements to the financial statements, and previously issued financial
statements were restated. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements
will not be prevented or detected on a timely basis.
Although
we believe that we have fully remedied the ineffectiveness of our internal control over financial reporting and disclosure controls
and procedures, there can be no assurance that additional material weakness could occur in the future. Further and continued determinations
that there are one or more material weaknesses in the effectiveness of our internal control over financial reporting and/or our
disclosure controls and procedures could adversely affect our business, reputation, revenues, results of operations, financial
condition and stock price and limit our ability to access the capital markets through equity or debt issuances.
Effective internal controls are necessary to provide reliable financial reports and to assist in the effective prevention of fraud.
As a public company, we are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on,
among other things, the effectiveness of our internal control over financial reporting for each annual report on Form 10-K to be
filed with the SEC. This assessment will require disclosure of any material weaknesses identified by our management in our internal
control over financial reporting. Any system of internal controls, however well designed and operated, is based in part on certain
assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. If we, or our
independent registered public accounting firm, determine that our internal control over financial reporting is not effective, discover
areas that need improvement in the future or discover a material weakness, these shortcomings could have an adverse effect on our
business and financial results, and the price of our units could be negatively affected.
Any dispute regarding the subscription
agreement will be resolved by arbitration, which follows different procedures than in-court litigation and may be more restrictive
to Unitholders asserting claims than in-court litigation.
The subscription agreement
that Unitholders enter into provides that the sole forum for any dispute arising thereunder will be arbitration conducted in New
York, New York in accordance with the rules of the American Arbitration Association. As a result, Unitholders will not be able
to pursue litigation in state or federal court for any disputes pertaining to the subscription agreement. Arbitration is intended
to be the exclusive means for resolving such disputes or claims arising thereunder except for claims made under the federal securities
laws. Costs in arbitration proceedings may be higher than those in litigation proceedings, and Unitholders may face limited access
to information and other imbalances of resources. This provision can discourage claims against us because it limits the ability
of Unitholders to bring a claim in a judicial forum that they find favorable. As arbitration provisions in commercial agreements
have generally been respected by federal courts and state courts, we believe that the arbitration provision in the subscription
agreement is enforceable, however, the issue of enforceability is not free from doubt. To the extent that one or more of the provisions
in our subscription agreement with respect to the arbitration were to be found by a court to be unenforceable, we would abide by
such decision. We do not intend for secondary purchasers of Unitholders to be bound by the arbitration provision in the subscription
agreement.
Unitholders are bound by the fee-shifting
provision contained in the subscription agreement, which may discourage actions against us.
The subscription agreement
also provides that if any legal action or any arbitration or other proceeding is brought for the enforcement of the subscription
agreement or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions in the
subscription agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys’
fees and their costs incurred in that action nor proceedings, in addition to any other relief to which they may be entitled; provided,
however, that the foregoing shall not apply to any claim, suit, action or proceeding brought to enforce any duty or liability created
by the federal securities laws. In the event a Unitholder initiates or asserts a claim against us, including the Trust, our Sponsor
and its officers, in accordance with the dispute resolution provisions contained in the subscription agreement and the Unitholder
does not prevail, the Unitholder will be obligated to reimburse us for all reasonable costs and expenses incurred in connection
with such claim, including, but not limited to, reasonable attorney’s fees and expenses and costs of appeal, if any. The
subscription agreement does not define what constitutes a successful or prevailing party, though we intend to apply a broad interpretation
to such provision to apply the fee-shifting provision broadly. We, including our Sponsor and its officers, reserve the ability
to seek to enforce such provision against a former or current Unitholder, including those who purchase Units in a secondary transaction,
depending on the nature and facts of the claim made or instituted by the Unitholder, however, whether a specific judgment satisfies
the applicable criteria and the extent of recovery for applicable fees and expenses will be subject to judicial interpretation.
The provision could discourage Unitholder lawsuits that might otherwise benefit the Trust or its Unitholders.
Under Delaware law,
“fee shifting by contract . . . [is] enforceable self-ordering by contractual parties.” Manti Holdings, LLC v. Authentix
Acquisition Company, Inc., 2020 WL 4596838, at 6 (Del. Ch Aug. 11, 2020), aff’d, 261 A.3d 1199 (Del. 2021). While there are
statutes prohibiting fee-shifting provisions in corporations’ charters and bylaws with respect to intra-corporate litigation,
fee-shifting provisions in agreements between corporations and their stockholders have been found acceptable. See id. at *7-*8.
Delaware courts have also confirmed that, where a corporation and a stockholder are parties to a negotiated transaction (e.g.,
a shareholders agreement), either party thereto can enforce an agreed-upon fee-shifting provision against each other. See id. at
*8-*9. We are not aware of any Delaware case law or statutes indicating that a statutory trust would be treated any differently
to a corporation or any other business entity with regard to its ability to enforce the fee-shifting provision in a contract between
any entity and its owner. Moreover, “[i]t is the policy of [The Delaware Statutory Trust Act] to give maximum effect to the
principle of freedom of contract and to the enforceability of governing instruments.” 8 Del. C. 3828(b). Although we believe
the fee-shifting provision is enforceable, the enforceability of fee-shifting provisions has been challenged in legal proceedings,
and it is possible that a court could find this type of provision to be inapplicable to, or unenforceable in respect of, one or
more of the specified types of actions or proceedings.
The Trust relies on third-party service
providers to perform certain functions essential to the affairs of the Trust and the replacement of such service providers could
pose a challenge to the safekeeping of the Trust’s Bitcoins and to the operations of the Trust.
The Trust relies on
the Custodian and other third-party service providers to perform certain functions essential to managing the affairs of the Trust.
Any disruptions to such service providers’ business operations, resulting from business failures, financial instability,
security failures, government mandated regulation or operational problems, could have an adverse impact on the Trust’s ability
to access critical services and be disruptive to the operations of the Trust and require the Sponsor to replace such service provider.
Moreover, the Sponsor could decide to replace a service
provider to the Trust for other reasons.
If the Sponsor is required
to replace any other service provider, they may not be able to find a party willing to serve in such capacity in a timely manner
or at all. If the Sponsor decides, or is required, to replace a third-party service provider, this could negatively impact the
Trust’s ability to operate the Trust and could have a negative impact on the value of the Units.
Pandemics, epidemics and other natural
and man-made disasters could negatively impact the value of the Trust’s holdings and/or significantly disrupt its affairs.
Pandemics, epidemics
and other natural and man-made disasters could negatively impact demand for digital assets, including Bitcoin, and disrupt the
operations of many businesses, including the businesses of the Trust’s service providers. For example, the COVID-19 pandemic
had serious adverse effects on the economies and financial markets of many countries, resulting in increased volatility and uncertainty
in economies and financial markets of many countries and in the digital asset markets. Moreover, governmental authorities and regulators
throughout the world have in the past responded to major economic disruptions, including as a result of the COVID-19 pandemic,
with a variety of fiscal and monetary policy changes, such as quantitative easing, new monetary programs and lower interest rates.
An unexpected or quick reversal of any such policies, or the ineffectiveness of such policies, could increase volatility in economies
and financial markets generally, and could specifically increase volatility in digital asset markets, which could adversely affect
the value of Bitcoin and the value of the Units.
Risk Factors Related to the Regulation
of the Trust and the Units
Regulation of the Bitcoin industry
continues to evolve and is subject to change; future regulatory developments are impossible to predict but may significantly and
adversely affect the Trust.
Both
domestic and foreign regulators and governments have focused on regulation of Bitcoin. In the U.S., developments include the following:
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On May 7, 2014 the SEC published an investor alert that highlighted fraud
and other concerns relating to certain investment opportunities denominated in Bitcoin and fraudulent and unregistered investment
schemes targeted at participants in online Bitcoin forums. On July 25, 2017, the SEC issued a Report of Investigation (the
“Report”) which concluded that digital assets or tokens issued for the purpose of raising funds may be securities
within the meaning of the federal securities laws. The Report emphasized that whether a digital asset is a security is based
on the particular facts and circumstances, including the economic realities of the transactions. On January 7, 2020, the SEC
issued a press release announcing that digital assets and electronic investments, would be at the top of the SEC’s priorities
for 2020. The SEC continues to take action against persons or entities misusing Bitcoin in connection with fraudulent schemes
(i.e., Ponzi scheme), inaccurate and inadequate publicly disseminated information, and the offering of unregistered securities. |
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On September 17, 2015, the CFTC provided clarity regarding the regulatory
treatment of Bitcoin in the Coinflip civil enforcement case. There the CFTC determined that Bitcoin and other virtual currencies
are regulated as commodities under the CEA. Based on this determination, the CFTC applied Commodity Exchange At provisions
and CFTC regulations to a Bitcoin derivatives trading platform. Also of significance, the CFTC took the position that Bitcoin
is not encompassed by the definition of currency under the Commodity Exchange Act and CFTC regulations. The CFTC defined Bitcoin
and other “virtual currencies” as “a digital representation of value that functions as a medium of exchange,
a unit of account, and/or a store of value, but does not have legal tender status in any jurisdiction. Bitcoin and other virtual
currencies are distinct from ‘real’ currencies, which are the coin and paper money of the United States or another
country that are designated as legal tender, circulate, and are customarily used and accepted as a medium of exchange in the
country of issuance.” On July 6, 2017, the CFTC granted LedgerX, LLC an order of registration as a Swap Execution Facility
for digital assets and on July 24, 2017, the CFTC approved LedgerX, LLC as the first derivatives clearing organization for
digital currency. On September 21, 2017, the CFTC filed a civil enforcement action in federal court against a New York corporation
and its principal, charging them with fraud, misappropriation, and issuing false account statements in connection with a Ponzi
scheme involving investments in Bitcoin, which the CFTC asserted is a commodity subject to its jurisdiction. On October 17,
2017, the CFTC’s LabCFTC office issued A CFTC Primer on Virtual Currencies (“Primer”). As noted in the Primer,
beyond instances of fraud or manipulation, the CFTC staff does not claim general jurisdiction over “spot” or cash-market
exchanges and transactions involving virtual currencies that do not utilize margin, leverage or financing. On December 1,
2017, the CFTC approved the self-certification of binary Bitcoin options for the Cantor Exchange and exchange-traded Bitcoin
futures contracts for the Chicago Mercantile Exchange Inc. and CBOE Futures Exchange. On December 15, 2017, the CFTC issued
a proposed interpretation of the “actual delivery” requirements with respect to virtual currencies under the CEA.
Section 2(c)(2)(D) of the Commodity Exchange Act provides the CFTC with direct oversight authority over “retail commodity
transactions” – defined as agreements, contracts or transactions in any commodity that are entered into with,
or offered to retail market participants on a leveraged or margined basis, or financed by the offeror, the counterparty or
a person acting in concert with the offeror or counterparty on a similar basis. Such a transaction is subject to the Commodity
Exchange Act as if it were a commodity future. The statute contains an exception for contracts of sale that result in “actual
delivery” within 28 days from the date of the transaction. The proposed interpretation establishes two primary factors
necessary to demonstrate “actual delivery” of retail commodity transactions in virtual currency: (1) a customer
having the ability to: (i) take possession and control of the entire quantity of the commodity, whether it was purchased on
commerce (both within and away from any particular platform) no later than 28 days from the date of the transaction; and (2)
the offeror and counterparty seller (including any of their respective affiliates or other persons acting in concert with
the offeror or counterparty seller on a similar basis) not retaining any interest in or control over any of the commodity
purchased on margin, leverage, or other financing arrangement at the expiration of 28 days from the date of the transaction. |
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Currently, the CFTC takes the position that Bitcoin is a commodity, although
it has not issued regulations to formalize this position. The Trust is not registered as a commodity pool for purposes of
the CEA, and the Sponsor is not registered as a commodity pool operator, a commodity trading advisor or otherwise. The Trust
and the Sponsor will continue to monitor and evaluate whether any such registrations may be or may become required. |
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On March 25, 2014, the “IRS released the Notice noting that Bitcoin
will be treated as property for U.S. Federal income tax purposes and that Bitcoin may be held as a capital asset. On October
9, 2019, the IRS released the Revenue Ruling and published the FAQs on reporting virtual currency transactions. The Revenue
Ruling provides more guidance to taxpayers and tax practitioners regarding the treatment of a cryptocurrency hard forks and
airdrops. The FAQs provide guidance on how to report virtual currency transactions for those who hold virtual currency as
a capital asset. |
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On March 18, 2013, FinCEN issued interpretive guidance relating to the application
of the Bank Secrecy Act to distributing, exchanging and transmitting “virtual currencies.” More specifically,
it determined that a user of virtual currencies (such as Bitcoin) for its own account will not be considered a money service
business (“MSB”) or be required to register, report and perform recordkeeping; however, an administrator or exchanger
of virtual currency must be a registered money services business under FinCEN’s money transmitter regulations. As a
result, Bitcoin exchanges that deal with U.S. residents or otherwise fall under U.S. jurisdiction are required to obtain licenses
and comply with FinCEN regulations. FinCEN released additional guidance clarifying that, under the facts presented, miners
acting solely for their own benefit, software developers, hardware manufacturers, escrow service providers and investors in
Bitcoin would not be required to register with FinCEN on the basis of such activity alone, but that Bitcoin exchanges, certain
types of payment processors and convertible digital asset administrators would likely be required to register with FinCEN
on the basis of the activities described in the October 2014 and August 2015 letters. FinCEN has also taken significant enforcement
steps against companies alleged to have violated its regulations, including the assessment in July 2017 of a civil money penalty
in excess of $110 million against BTC-e for alleged willful violation of U.S. anti-money laundering laws. On May 9, 2019 FinCEN
published a guidance entitled “Application of FinCEN’s Regulations to Certain Business Models Involving Convertible
Virtual Currencies.” In that guidance, FinCEN consolidated and clarified regulatory requirements and prior guidance
since 2011. In February 2020, former U.S. Treasury Secretary Steven Mnuchin testified in Congress that FinCEN was set to release
new requirements related to cryptocurrencies. In December 2020, FinCEN released a notice of proposed rulemaking setting forth
proposed U.S. anti-money laundering regulations that would expand the application of U.S. anti-money laundering rules to virtual
currencies. Such rules have not yet been finalized. |
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In a report titled “Strategies for Improving the U.S. Payment System,”
published in January 2015 by the Federal Reserve, “Digital Value Transfer Vehicles” technology was identified
for further exploration and monitoring. Since then, the Federal Reserve Chairman, Jerome Powell confirmed that the Federal
Reserve is in the initial stages of exploring and analyzing the “costs and benefits of pursuing” a central bank
digital currency initiative. |
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In June 2015, the New York Department of Financial Services (the “NYDFS”)
finalized a rule that requires most businesses involved in digital currency business activity in or involving New York, excluding
merchants and consumers, to apply for a license (“BitLicense”) from the NYDFS and to comply with anti-money laundering,
cyber security, consumer protection, and financial and reporting requirements, among others. As an alternative to the BitLicense
in New York, firms can apply for a charter to become limited purpose trust companies qualified to engage in digital currency
business activity. Other states have considered regimes similar to the BitLicense or have required digital currency businesses
to register with their states as money transmitters, such as Washington and Georgia, which results in digital currency businesses
being subject to requirements similar to those of NYDFS’ BitLicense regime. Certain state regulators, such as the Texas
Department of Banking, Kansas Office of the State Bank Commissioner and the Illinois Department of Financial and Professional
Regulation, have found that mere transmission of Bitcoin, without activities involving transmission of fiat currency, does
not constitute money transmission requiring licensure. The North Carolina Commissioner of Banks has issued guidance providing
that North Carolina’s money transmission regulations only apply to the transmission of digital currency and not its
use. In July 2017, Delaware amended its General Corporation Law to provide for the creation and maintenance of certain required
records by blockchain technology and permit its use for electronic transmission of stockholder communications. |
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On September 15, 2015, the Conference of State Bank Supervisors finalized
their proposed model regulatory framework for state regulation of participants in “virtual currency activities.”
The Conference of State Bank Supervisors’ proposed framework is a non-binding model and would have to be independently
adopted, in sum or in part, by state legislatures or regulators on a case-by-case basis. In July 2017, the Uniform Law Commission
(the “ULC”), a private body of lawyers and legal academics from the several U.S. states, voted to finalize and
approve a uniform model state law for the regulation of virtual currency businesses, including Bitcoin (the “Uniform
Virtual Currency Act”). Having been approved by the ULC, the Uniform Virtual Currency Act now goes to each of the U.S.
states and territories for their consideration and would have to be independently adopted, in sum or in part, by state legislatures
or regulators on a case-by-case basis. |
The regulation of Bitcoin,
digital assets and related products and services continues to evolve. The inconsistent and sometimes conflicting regulatory landscape
may make it more difficult for Bitcoin businesses to provide services, which may impede the growth of the Bitcoin economy and have
an adverse effect on consumer adoption of Bitcoin. There is a possibility of future regulatory change altering, perhaps to a material
extent, the nature of an investment in the Units or the ability of the Trust to continue to operate. Additionally, to the extent
that Bitcoin itself is determined to be a security, commodity future or other regulated asset, or to the extent that a United States
or foreign government or quasi-governmental agency exerts regulatory authority over the Bitcoin network, Bitcoin trading or ownership
in Bitcoin, such determination may have an adverse effect on the value of your investment in the Trust. In sum, Bitcoin regulation
takes many different forms and will, therefore, impact Bitcoin and its usage in a variety of manners.
Regulatory changes or actions may
affect the value of the Units or restrict the use of Bitcoins, mining activity or the operation of the Bitcoin Network or the Bitcoin
markets in a manner that adversely affects the value of the Units.
As digital assets have
grown in both popularity and market size, the U.S. Congress and a number of U.S. 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 Bitcoin
networks, Bitcoin users and Bitcoin markets, with particular focus on the extent to which Bitcoin can be used to launder the proceeds
of illegal activities or fund criminal or terrorist enterprises and the safety and soundness of exchanges and other service providers
that hold digital assets for users. Many of these state and federal agencies have issued consumer advisories regarding the risks
posed by digital assets to investors. Ongoing and future regulatory actions with respect to digital assets generally or Bitcoin
in particular may alter, perhaps to a materially adverse extent, the nature of an investment in the Units or the ability of the
Trust to continue to operate.
In August 2021, SEC
Chair Gary Gensler asked Congress to pass a law that could give the agency the legal authority to monitor crypto exchanges. This
statement follows former U.S. Treasury Secretary Steven Mnuchin’s statement in July 2019 that he had “very serious
concerns” about digital assets. Former Secretary Mnuchin indicated that one source of concern is digital assets’ potential
to be used to fund illicit activities in July 2019. Former Secretary Mnuchin had indicated that FinCEN was planning to release
new requirements relating to digital asset activities in the first half of 2020. As of the date of this disclosure, no such requirements
have been released. Moreover, President’s Bident’s March 9, 2022 Executive Order, asserting that technological advances
and the rapid growth of the digital asset markets “necessitate an evaluation and alignment of the United States Government
approach to digital assets,” signals an ongoing focus on digital asset policy and regulations in the United States. A number
of reports issued pursuant to the Executive Order have focused on various risks related to the digital asset ecosystem, and have
recommended additional legislation and regulatory oversight. There have also been several bills introduced in Congress that propose
to establish additional regulation and oversight of the digital asset markets.
On February
15, 2023, the SEC proposed a new rule that would enhance safeguarding of assets for registered investment advisers. If adopted,
the changes would amend and redesign Rule 206(4)-2, the SEC’s custody rule, under the Advisers Act and amend certain related
recordkeeping and reporting obligations. The proposed rule would exercise the SEC’s authority under Section 411 of the Dodd-Frank Act by broadening the application
of the current investment adviser custody rule beyond client funds and securities to include any client assets in an investment
adviser’s possession or when an investment adviser has authority to obtain possession of client assets, requiring the investment
adviser to hold client assets with a qualified custodian. As such, the rule would expand SEC authority to digital assets held by
or in control of an investment adviser on behalf of clients.
Law enforcement agencies
have often relied on the transparency of blockchains to facilitate investigations. However, certain privacy-enhancing features
have been, or are expected to be, introduced to a number of digital asset networks. If any such features are introduced to the
Bitcoin Network, any exchanges or businesses that facilitate transactions in Bitcoin may be at an increased risk of criminal or
civil lawsuits, or of having banking services cut off if there is a concern that these features interfere with the performance
of anti-money laundering duties and economic sanctions checks. In addition, these features will provide law enforcement agencies
with less visibility into transaction-level data. Europol, the European Union’s law enforcement agency, released a report
in October 2017 noting the increased use of privacy-enhancing digital assets like Zcash and Monero in criminal activity on the
internet. In August 2022, OFAC banned all U.S. citizens from using Tornado Cash, a digital asset protocol designed to obfuscate
blockchain transactions, by adding certain Ethereum digital wallet addresses associated with the protocol to its Specially Designated
Nationals list. Approximately 60% of Ethereum validators, as well as notable industry participants such as Centre Consortium, the
issuer of the USDC stablecoin, have reportedly complied with the sanctions and blacklisted the sanctioned addresses from interacting
with their network. Although no regulatory action has been taken to treat privacy-enhancing digital assets differently, this may
change in the future.
Additionally, concerns
have been raised about the electricity required to secure and maintain digital asset networks. As of December 31, 2020, in connection
with the mining process, over 138 million tera hashing operations are performed every second, non-stop on the Bitcoin Network.
Although measuring the electricity consumed by this process is difficult because these operations are performed by various machines
with varying levels of efficiency, the process consumes a significant amount of energy. Further, in addition to the direct energy
costs of performing these calculations, there are indirect costs that impact the digital asset network’s total energy consumption,
including the costs of cooling the machines that perform these calculations. Due to these concerns around energy consumption, particularly
as such concerns relate to public utilities companies, various states and cities have implemented, or are considering implementing,
moratoriums on digital asset mining in their jurisdictions. A significant reduction in mining activity as a result of such actions
could adversely affect the security of the Bitcoin Network by making it easier for a malicious actor or botnet to manipulate the
Blockchain. See “—If a malicious actor or botnet obtains control of more than 50% of the processing power on the Bitcoin
Network, or otherwise obtains control over the Bitcoin Network through its influence over core developers or otherwise, such actor
or botnet could manipulate the Blockchain to adversely affect the value of the Units or the ability of the Trust to operate.”
To the extent that Bitcoin itself
is determined to be a security, such determination may have an adverse effect on the value of your investment in the Trust.
Many blockchain startups use
digital asset networks, such as the Bitcoin network, to launch their initial coin offerings, also known as ICOs. In July 2017, the
SEC determined that tokens issued by The DAO, for instance, were securities under the U.S. securities laws. The SEC reasoned that
the unregistered sale of digital asset tokens can, in certain circumstances, including initial coin offerings, be considered illegal public offering of securities. In November 2018, the SEC determined that two other token issuances by companies called
CarrierEQ,
Inc., (d/b/a Airfox) and Paragon Coin, Inc. were unregistered securities offerings. In September 2019, the SEC determined
that the token issuance of EOS by a company called Block.one, was an unregistered securities offering and ordered Block.one to
pay a $24 million civil penalty. The SEC could make a similar determination with respect to digital tokens distributed in other
initial coin offerings. If the SEC were to determine that Bitcoin is a security, the Trust and the Sponsor would be subject to
additional regulatory and compliance requirements under U.S. federal securities laws, including the Investment Company Act and,
with respect to the Sponsor, the Advisers Act. In addition, the SEC’s determination or a market expectation of the SEC’s
determination that any digital asset is a security could adversely affect the market price of Bitcoin or digital assets generally
and thus the value of the Shares.
Regulatory changes or other events
in foreign jurisdictions may have impacted the price of Bitcoin or may impact it in the future.
Various foreign jurisdictions
have and may, in the near future, adopt laws, regulations or directives that affect the Bitcoin Network, the Bitcoin exchange market
and their users, particularly Bitcoin exchanges and service providers that fall within such jurisdictions’ regulatory scope,
which may in turn, impact the price of Bitcoin. For example, China has made transacting in cryptocurrencies illegal for Chinese
citizens in mainland China, and additional restrictions may follow. Both China and South Korea have banned initial coin offerings
entirely and regulators in other jurisdictions, including Canada, Singapore and Hong Kong, have opined that initial coin offerings
may constitute securities offerings subject to local securities regulations. In May 2021, the Chinese government announced renewed
efforts to restrict cryptocurrency trading and mining activities, citing concerns about high energy consumption and its desire
to promote financial stability. Regulators in Inner Mongolia and other regions of China have proposed regulations that would create
penalties for companies engaged in cryptocurrency mining activities and introduce heightened energy saving requirements on industrial
parks, data centers and power plants providing electricity to cryptocurrency miners. In April 2018, the Reserve Bank of India banned
the entities it regulates from providing services to any individuals or business entities dealing with or settling digital assets.
On March 5, 2020, this ban was overturned in the Indian Supreme Court, although the Reserve Bank of India is currently challenging
this ruling and, in December 2021, reportedly informed its central board of directors that it favors a complete ban on cryptocurrencies.
The United Kingdom’s Financial Conduct Authority published final rules in October 2020 banning the sale of derivatives and
exchange traded notes that reference certain types of digital assets, contending that they are “ill-suited” to retail
investors citing extreme volatility, valuation challenges and association with financial
crime. A new bill, the Financial Services and Markets Bill (“FSMB”), has made its way through the House of Commons
and is expected to work through the House of Lords and become law in 2023. The FSMB would bring digital asset activities within
the scope of existing laws governing financial institutions, markets and assets. In addition, the European Council of the European
Union approved the text of MiCA in October 2022, establishing a regulatory framework for digital asset services across the European
Union. MiCA is intended to serve as a comprehensive regulation of digital asset markets and imposes various obligations on digital
asset issuers and service providers. The main aims of MiCA are industry regulation, consumer protection, prevention of market abuse
and upholding the integrity of digital asset markets. MiCA is expected to pass the European Parliament in 2023 and come into effect
in 2024. For further discussion, see “Government Oversight—Regulation of Bitcoin.”
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 globally,
or otherwise negatively affect the price and value of Bitcoin. Moreover, other events, such as the interruption in telecommunications
or Internet services, cyber-related terrorist acts, civil disturbances, war or other catastrophes, could also negatively affect
the digital asset economy in one or more jurisdictions. For example, Russia’s invasion of Ukraine on February 24, 2022 led
to volatility in digital asset prices, with an initial steep decline followed by a sharp rebound in prices. The regulatory uncertainty
surrounding the treatment of Bitcoin creates risks for the Trust.
The sale of the Units could be subject
to SEC or state securities registration.
The offer and sale of
the Units in a Rule 506 offering is not registered with the SEC under the Securities Act or with a state regulator under the securities
laws of any state. If a regulator or a court determines that the sale of the Units should have been registered, the Trust may be
required to provide investors who purchased in the offering the option to rescind their investment on terms favorable to those
investors. If this occurs, the Trust may lack sufficient assets to repay all purchasers seeking rescission, the secondary market
for the Units, if any, may be negatively impacted, and the value of the Units held by remaining investors may decrease.
The Trust is not a registered investment
company.
The Trust is not a registered
investment company subject to the Investment Company Act. Consequently, Unitholders of the Trust do not have the regulatory protections
provided to shareholders in registered investment companies which, for example, require that investment companies have a certain
percentage of disinterested directors and requirements as to the relationship between the investment company and certain of its
affiliates.
The Trust could be, or could become,
subject to the Commodity Exchange Act.
Currently, the CFTC
takes the position that Bitcoin is a commodity, although it has not issued regulations to formalize this position. The Trust is
not registered as a commodity pool for purposes of the CEA, and the Sponsor is not registered as a commodity pool operator, a commodity
trading advisor or otherwise. The Trust and the Sponsor will continue to monitor and evaluate whether any such registrations may
be or may become required.
Trading on Bitcoin markets outside
the United States is not subject to U.S. regulation, and may be less reliable than U.S. Markets.
To the extent any of
the Trust’s assets are valued based on trading conducted on Bitcoin markets outside the U.S., trading on such markets is
not regulated by any U.S. governmental agency and may involve certain risks not applicable to trading in U.S. markets. Certain
foreign markets may be more susceptible to disruption than U.S. markets. These factors could adversely affect the performance of
the Trust.
Future regulations may impose other
regulatory burdens, which could harm the Trust or even cause the Trust to liquidate.
Current and future legislation,
CFTC and SEC rulemaking and other regulatory developments may affect the manner in which Bitcoins are treated for classification
and clearing purposes, and the manner in which the Units, the Trust and the Sponsor are regulated. Currently, the CFTC takes the
position that Bitcoin is a commodity and has brought enforcement actions against Bitcoin operators who have not registered as futures
commission merchants or commodity pool operators, although several court challenges to this position are still pending and the
CFTC has not yet issued regulations to formalize its position. Although several U.S. federal district courts have recently held
for certain purposes that Bitcoin is a currency or a form of money, these rulings are not definitive and the Sponsor and the Trust
cannot be certain as to how future regulatory developments may affect the treatment of Bitcoin under the law. In addition, on March
9, 2022, President Biden announced an executive order on cryptocurrencies that seeks to establish a unified federal regulatory
regime for cryptocurrencies. On June 7, 2022, U.S. Senators Kirsten Gillibrand and Cynthia Lummis introduced the “Responsible
Financial Innovation Act,” a bipartisan proposed legislation that would create a regulatory framework for digital assets,
including a standard for determining which digital assets are commodities and what are securities, and would assign regulatory
authority over digital asset spot markets to the CFTC. In the face of such developments, new or additional registration and compliance
steps may result in extraordinary expenses to the Trust. If the Sponsor decides to terminate the Trust in response to changed regulatory
circumstances, the Trust may be dissolved or liquidated at a time that is disadvantageous to Unitholders.
To the extent that Bitcoin
is deemed to fall within the definition of a “commodity interest” under the CEA, the Trust and the Sponsor may be subject
to additional regulation under the CEA and CFTC regulations. The Sponsor or the Trust may be required to register as a commodity
pool operator or commodity trading advisor with the CFTC and become a member of the National Futures Association and may be subject
to additional regulatory requirements with respect to the Trust, including disclosure and reporting requirements. These additional
requirements may result in extraordinary, recurring and non-recurring expenses. If the Sponsor or the Trust determines not to comply
with such additional regulatory requirements, the Sponsor will terminate the Trust. Any such termination could result in the liquidation
of the Trust’s Bitcoin at a time that is disadvantageous to Unitholders.
To the extent that Bitcoin
is deemed to fall within the definition of a security under U.S. federal securities laws, the Trust and the Sponsor may be subject
to additional requirements under the Investment Company Act and the Advisers Act. For example, in February 15, 2023, the SEC proposed
a new rule that would enhance safeguarding of assets for registered investment advisers, If adopted, the changes would amend and
redesign Rule 206(4)-2, the SEC’s custody rule, under the Advisers Act and amend certain related recordkeeping and reporting
obligations. The proposed rule would exercise the SEC’s authority under Section 411 of the Dodd-Frank Act by broadening the
application of the current investment adviser custody rule beyond client funds and securities to include any client assets in an
investment adviser’s possession or when an investment adviser has authority to obtain possession of client assets, requiring
the investment adviser to hold client assets with a qualified custodian. As such, the rule, if adopted substantially as proposed,
would expand SEC authority to digital assets held by or in control of an investment adviser on behalf of clients. If the Sponsor
or the Trust were required to register as an investment adviser under the Advisers Act, such additional registration may result
in extraordinary, recurring and non-recurring expenses and create additional uncertainty with respect to new or shifting regulatory
requirements.
If the Sponsor or the
Trust determines not to comply with any additional regulatory requirements, the Sponsor will terminate the Trust. Any such termination
could result in the liquidation of the Trust’s Bitcoin at a time that is disadvantageous to Unitholders.
Banks may not provide banking services,
or may cut off banking services, to businesses that provide Bitcoin-related services or that accept Bitcoin as payment, which could
directly impact the Trust’s operations, damage the public perception of Bitcoin and the utility of Bitcoin as a payment system
and could decrease the price of Bitcoin and adversely affect an investment in the Units.
A number of companies
that provide Bitcoin-related services have been unable to find banks that are willing to provide them with bank accounts and banking
services. This may have an adverse impact on the Trust’s operations. Recently, the FDIC declared Signature Bank in New York
insolvent and placed the bank into receivership and established a bridge bank where all deposits were transferred. Although the
Trust does not have material cash operations, it had an account holding nominal cash at Signature Bank and was able to access
its
funds within one business day of the FDIC’s actions. Although the closing of Signature Bank did not have a material impact
on the Trust, it is possible that a future closing of a bank with which the Trust has a financial relationship could subject the
Trust to adverse conditions and pose challenges in finding an alternative suitable bank to provide the Trust with bank accounts
and banking services.
Also, a number of companies
that provide Bitcoin-related services have had their existing bank accounts closed by their banks. Banks may refuse to provide
bank accounts and other banking services to Bitcoin-related companies or companies that accept Bitcoin for a number of reasons,
such as perceived compliance risks or costs. The difficulty that many businesses that provide Bitcoin-related services have and
may continue to have in finding banks willing to provide them with bank accounts and other banking services may be currently decreasing
the usefulness of Bitcoin as a payment system and harming public perception of Bitcoin or could decrease its usefulness and harm
its public perception in the future. Similarly, the usefulness of Bitcoin as a payment system and the public perception of Bitcoin
could be damaged if banks were to close the accounts of many or of a few key businesses providing Bitcoin-related services. This
could decrease the price of Bitcoin and therefore adversely affect an investment in the Units.
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 Units may
also be considered illegal and subject to sanctions.
The United States, China,
Russia, India or other jurisdictions may take additional regulatory actions in the future that further restrict the right to acquire,
own, hold, sell or use Bitcoin or to exchange Bitcoin for fiat currency. For example, the United States and other G7 leaders imposed
expansive economic sanctions on Russia as a result of the conflict in Ukraine and new guidance issued by the Department of Treasury
highlighted the expectation of compliance with such sanctions, including as it relates to transactions using virtual currency,
such as Bitcoin. Additional regulatory actions could result in the restriction of ownership, holding or trading in the Units. Such
a restriction could subject the Trust or the Sponsor to investigations, civil or criminal fines and penalties, which could harm
the reputation of the Trust or its Sponsor, and could result in the termination and liquidation of the Trust at a time that is
disadvantageous to Unitholders, or may adversely affect an investment in the Units.
If the Bitcoin Network is used to
facilitate illicit activities, businesses that facilitate transactions in Bitcoin could be at increased risk of criminal and civil
lawsuits, or of having services cut off, which could negatively affect the price of Bitcoin and the value of the Units.
Digital asset networks
have in the past been, and may continue to be, used to facilitate illicit activities. If the Bitcoin Network is used to facilitate
illicit activities, businesses that facilitate transactions in Bitcoin could be at increased risk of potential criminal or civil
lawsuits, or of having banking or other services cut off, and Bitcoin could be removed from digital asset exchanges as a result
of these concerns. Other service providers of such businesses may also cut off services if there is a concern that the Bitcoin
network is being used to facilitate crime. Any of the aforementioned
occurrences could increase regulatory scrutiny of the Bitcoin Network and/or adversely affect the price of Bitcoin, the attractiveness
of the Bitcoin Network and an investment in the Units of the Trust.
If regulatory changes or interpretations
of the Trust’s or Sponsor’s activities require registration as money services businesses under the regulations promulgated
by FinCEN under the authority of the U.S. Bank Secrecy Act or as money transmitters or digital currency businesses under state
regimes for the licensing of such businesses, the Trust and/or Sponsor could suffer reputational harm and also extraordinary, recurring
and/or non-recurring expenses, which would adversely impact an investment in the Units.
If regulatory changes
or interpretations of the Trust’s or Sponsor’s activities require the registration of the Trust or Sponsor as a money
services business under the regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act, the Trust or Sponsor
may be required to register and comply with such regulations. 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 regime) (or equivalent designation) under state law in any state in which the Trust
or Sponsor operates, the Trust or Sponsor may be required to seek licensure or otherwise register and comply with such state law.
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, non-recurring expenses to the Trust. Regulatory compliance
would include, among other things, implementing anti-money laundering and consumer protection programs.
To the extent the Trust
or Sponsor is found to have operated without appropriate state or federal licenses, it may be subject to investigation, administrative
or court proceedings, and civil or criminal monetary fines and penalties, all of which would harm the reputation of the Trust or
its Sponsor, decrease the liquidity of the Trust, and have a material adverse effect on the price of the Units. If the Sponsor
decides to comply with such additional federal or state regulatory obligations and continue the Trust, the required registrations,
licensure and regulatory compliance steps may result in extraordinary, non-recurring expenses to the Trust, possibly affecting
an investment in the Units in a material and adverse manner. Furthermore, the Trust and its service providers may not be capable
of complying with certain federal or state regulatory obligations applicable to money services businesses’ money transmitters
and businesses involved in digital currency business activity. If the Sponsor and/or the Trust determines not to comply with such
requirements, the Sponsor will 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 Unitholders.
Laws and regulations may also be
introduced or interpreted by regulators that lack experience in digital assets and blockchain technology. This may result in unclear
rules with which compliance may be difficult.
Governments, quasi-government
organizations and financial institutions may impose additional regulation on digital assets and blockchain technology, and the
regulatory environment for digital assets is changing and unpredictable.
Many governments, regulators,
self-regulators and other quasi-government agencies around the world that seek to regulate the digital assets industry may lack
experience in digital assets and blockchain technology generally. They may seek to use existing laws and regulations and interpret
them to apply to the digital assets industry. Many of these legal and regulatory regimes were adopted prior to the advent of the
internet, mobile technologies, digital assets and related technologies. As a result, they do not contemplate or address unique
issues associated with digital assets and are thus subject to significant uncertainty and vary widely across jurisdictions. This
may result in unclear rules that are difficult or impractical to comply with, and therefore increase the Trust’s legal and
regulatory compliance risks.
The digital assets industry is relatively
new and has limited access to policymakers or lobbying organizations, which may harm the Trust’s ability to effectively react
to proposed laws and regulation of digital assets adverse to the Trust’s business.
Various governmental
organizations, consumer agencies and public advocacy groups around the world have been examining the operations of cryptocurrency
networks, customers and platforms, with a focus on how digital assets can be used to launder the proceeds of illegal activities,
fund criminal or terrorist enterprises, and the safety and soundness of platforms and other service providers that hold digital
assets for customers. Many of these entities have called for heightened regulatory oversight and have issued consumer advisories
describing the risks posed by digital assets to customers and investors.
Unlike more established
industries, the digital assets industry is relatively new and has limited access to policymakers and lobbying organizations in
many jurisdictions. Competitors from more established industries, including traditional financial services, may have greater access
to lobbyists or governmental officials. Accordingly, legislators and regulators that are concerned about the potential for digital
assets for illicit usage may affect statutory and regulatory changes with minimal or discounted inputs from the digital assets
industry. As a result, new laws and regulations may be proposed and adopted, or existing laws and regulations may be interpreted
in new ways that can adversely impact the digital assets industry and/or digital asset platforms.
The Trust may not be
able to appropriately adapt to such sudden adverse legal and regulatory changes. Its inability to adapt to such changes in time
may result in the Trust being unable to offer its product and services in certain jurisdictions or customer segments, which may
adversely impact its reputation, business, operating results, financial condition and share price.
The treatment of the Trust for U.S.
federal income tax purposes is uncertain.
As discussed in greater
detail above in “Certain U.S. Federal Income Tax Consequences—Tax Treatment of the Trust”, the Sponsor intends
to take the position that the Trust is properly treated as a grantor trust for U.S. federal income tax purposes. Assuming that
the Trust is a grantor trust, the Trust will not be subject to U.S. federal income tax. Rather, each beneficial owner of Units
will be treated as directly owning its pro rata share of the Trust’s assets, and a pro rata portion of the Trust’s
income, gain, losses and deductions will “flow through” to each beneficial owner of Units.
Because of the evolving
nature of digital currencies, it is not possible to predict potential future developments that may arise with respect to digital
currencies, including forks, airdrops and other similar events. Assuming that the Trust is currently a grantor trust for U.S. federal
income tax purposes, certain future developments could render it impossible, or impracticable, for the Trust to continue to be
treated as a grantor trust for such purposes.
If the Trust is not
properly classified as a grantor trust, the Trust might be classified as a partnership for U.S. federal income tax purposes. However,
due to the uncertain treatment of digital currency for U.S. federal income tax purposes (as discussed below in “Certain U.S.
Federal Income Tax Consequences—Uncertainty Regarding the U.S. Federal Income Tax Treatment of Digital Currency”),
there can be no assurance in this regard. If the Trust were classified as a partnership for U.S. federal income tax purposes, the
tax consequences of owning Units generally would not be materially different from the tax consequences described herein, although
there might be certain differences, including with respect to timing of the recognition of taxable income or loss. In addition,
tax information reports provided to beneficial owners of Units would be made in a different form. If the Trust were not classified
as either a grantor trust or a partnership for U.S. federal income tax purposes, it would be classified as a corporation for such
purposes. In that event, the Trust would be subject to entity-level U.S. federal income tax (currently at the rate of 21%) on its
net taxable income and certain distributions made by the Trust to Unitholders would be treated as taxable dividends to the extent
of the Trust’s current and accumulated earnings and profits (as calculated for U.S. federal income tax purposes). Any such
dividend distributed to a beneficial owner of Units that is a non-U.S. person for U.S. federal income tax purposes would be subject
to U.S. federal withholding tax at a rate of 30% (or such lower rate as provided in an applicable tax treaty).
Unitholders could incur a tax liability
without an associated distribution.
In the normal course
of business, it is possible that the Trust could incur a taxable gain in connection with the delivery or sale of Bitcoin (including,
as a result of the Trust using Bitcoin and Additional Currency to pay its expenses) that is otherwise not associated with a distribution
to Unitholders. In the event that this occurs, Unitholders may be subject to tax due to the grantor trust status of the Trust even
though there is not a corresponding distribution from the Trust. See “Certain U.S. Federal Income Tax Consequences—Tax
Consequences to U.S. Holders” above.
The treatment of Bitcoin for U.S.
federal income tax purposes is uncertain.
As discussed in the
section titled “Certain U.S. Federal Income Tax Consequences—Uncertainty Regarding the U.S. Federal Income Tax Treatment
of Digital Currency” below, assuming that the Trust is properly treated as a grantor trust for U.S. federal income tax purposes,
each beneficial owner of Units will be treated for U.S. federal income tax purposes as the owner of an undivided interest in the
Bitcoin (and, if applicable, any Additional Currency) held in the Trust. Due to the new and evolving nature of digital currencies
and the absence of comprehensive guidance with respect to digital currencies, many significant aspects of the U.S. federal income
tax treatment of digital currency are uncertain.
In 2014, the IRS released
the Notice, noting that Bitcoin will be treated as property for U.S. Federal income tax purposes and that Bitcoin may be held as
a capital asset. In 2019, the IRS released the Revenue Ruling and published the FAQs on reporting virtual currency transactions.
The Revenue Ruling provides more guidance to taxpayers and tax practitioners regarding the treatment of a cryptocurrency hard forks
and airdrops. The FAQs provide guidance on how to report virtual currency transactions for those who hold virtual currency as a
capital asset.
There can be no assurance
that the IRS will not alter its position with respect to digital currencies in the future or that a court would uphold the treatment
set forth in the Notice, Revenue Ruling and FAQs. It is also unclear what additional guidance on the treatment of digital currencies
for U.S. federal income tax purposes may be issued in the future. Any such alteration of the current IRS positions or additional
guidance could result in adverse tax consequences for Unitholders and could have an adverse effect on the value of Bitcoin. 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. For example, the Notice addresses only digital currency that is “convertible
virtual currency,” and it is conceivable that, as a result of a fork, airdrop or similar occurrence, the Trust will hold
certain types of digital currency that are not within the scope of the Notice.
Unitholders are urged
to consult their tax advisers regarding the tax consequences of owning and disposing of Units and digital currencies in general.
Future developments regarding the
treatment of digital currency for U.S. federal income tax purposes could adversely affect the value of the Units.
As discussed above,
many significant aspects of the U.S. federal income tax treatment of digital currency, such as Bitcoin, are uncertain, and it is
unclear what guidance on the treatment of digital currency for U.S. federal income tax purposes may be issued in the future. It
is possible that any such guidance would have an adverse effect on the prices of digital currency, including on the price of Bitcoin
in the Bitcoin markets, and therefore may have an adverse effect on the value of the Units.
Because of the evolving
nature of digital currencies, it is not possible to predict potential future developments that may arise with respect to digital
currencies, including forks, airdrops and similar occurrences. Such developments may increase the uncertainty with respect to the
treatment of digital currencies for U.S. federal income tax purposes. Moreover, certain future developments could render it impossible,
or impracticable, for the Trust to continue to be treated as a grantor trust for U.S. federal income tax purposes.
Future developments in the treatment
of digital currency for tax purposes other than U.S. federal income tax purposes could adversely affect the value of the Units.
The taxing authorities
of certain states, including New York, (i) have announced that they will follow the Notice with respect to the treatment of digital
currencies for state income tax purposes and/or (ii) have issued guidance exempting the purchase and/or sale of digital currencies
for fiat currency from state sales tax. However, it is unclear what further guidance on the treatment of digital currencies for
state tax purposes may be issued in the future.
The treatment of digital
currencies for tax purposes by non-U.S. jurisdictions may differ from the treatment of digital currencies for U.S. federal, state
or local tax purposes. It is possible, for example, that a non-U.S. jurisdiction would impose sales tax or value-added tax on purchases
and sales of digital currencies for fiat currency. If a foreign jurisdiction with a significant share of the market of Bitcoin
users imposes onerous tax burdens on digital currency users, or imposes sales or value-added tax on purchases and sales of digital
currency for fiat
currency, such actions could result in decreased demand for Bitcoin in such jurisdiction.
Any future guidance
on the treatment of digital currencies for state, local or non-U.S. tax purposes could increase the expenses of the Trust and could
have an adverse effect on the prices of digital currencies, including on the price of Bitcoin in the Bitcoin markets. As a result,
any such future guidance could have an adverse effect on the value of the Units.
A U.S. tax-exempt Unitholder may
recognize UBTI a consequence of an investment in Units.
Under the guidance provided
in Revenue Ruling and FAQs, hard forks, airdrops and similar occurrences with respect to digital currencies will under certain
circumstances be treated as taxable events giving rise to ordinary income. In the absence of guidance to the contrary, it is possible
that any such income recognized by a U.S. tax-exempt Unitholder would constitute UBTI. A tax-exempt Unitholder should consult its
tax advisor regarding whether such Unitholder may recognize UBTI as a consequence of an investment in Units.
Non-U.S. Unitholders may be subject
to U.S. federal withholding tax on income derived from forks, airdrops and similar occurrences.
The Revenue Ruling and
FAQs do not address whether income recognized by a non-U.S. person as a result of a fork, airdrop or similar occurrence could be
subject to the 30% withholding tax imposed on U.S.-source FDAP income. Non-U.S. Unitholders should assume that, in the absence
of guidance, a withholding agent is likely to withhold 30% of any such income recognized by a non-U.S. Unitholder in respect of
its Units, including by deducting such withheld amounts from proceeds that such non-U.S. Unitholder would otherwise be entitled
to receive in connection with a distribution of Additional Currency.
Risk Factors Related to Potential Conflicts
of Interest
Potential conflicts of interest may
arise among the Sponsor or its affiliates and the Trust. The Sponsor and its affiliates have no fiduciary duties to the Trust and
its Unitholders other than as provided in the Trust Agreement, which may permit them to favor their own interests to the detriment
of the Trust and its Unitholders.
The Sponsor will manage
the affairs of the Trust. Conflicts of interest may arise among the Sponsor and its affiliates, on the one hand, and the Trust
and its Unitholders, on the other. As a result of these conflicts, the Sponsor may favor its own interests and the interests of
its affiliates over the Trust and its Unitholders. These potential conflicts include, among others, the following:
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The Sponsor has no fiduciary duties to, and is allowed to take into account
the interests of parties other than, the Trust and its Unitholders in resolving conflicts of interest; |
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The Trust has agreed to indemnify the Sponsor and its affiliates pursuant
to the Trust Agreement; |
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The Sponsor is responsible for allocating its own limited resources among
different clients and potential future business ventures, to each of which it owes fiduciary duties; |
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The Sponsor and its staff also service affiliates of the Sponsor, including
several other digital asset investment vehicles, and their respective clients and cannot devote all of its, or their, respective
time or resources to the management of the affairs of the Trust; |
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The Sponsor, its affiliates and their officers and employees are not prohibited
from engaging in other businesses or activities, including those that might be in direct competition with the Trust; |
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There is an absence of arm’s-length negotiation with respect to certain
terms of the Trust, and, where applicable, there has been no independent due diligence conducted with respect to the Trust; |
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The Sponsor decides whether to retain separate counsel, accountants or others
to perform services for the Trust; |
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The Sponsor may appoint an agent to act on behalf of the Unitholders, including
in connection with the distribution of any Additional Currency, which agent may be the Sponsor or an affiliate of the Sponsor. |
By purchasing the Units,
Unitholders agree and consent to the provisions set forth in the Trust Agreement. See “Description of the Trust Documents—Description
of the Trust Agreement.”
For a further discussion
of the conflicts of interest among the Sponsor, the Trust and others, see “Conflicts of Interest.”
The respective officers, employees
and/or affiliates of the Sponsor may trade in Bitcoin or other cryptocurrency markets for their own personal trading accounts,
and in doing so may take positions opposite to those held by the Trust or may compete with the Trust for positions in the marketplace.
The respective officers,
employees and/or affiliates of the Sponsor may manage other accounts in addition to the services that they provide to the Trust,
including their personal trading accounts. The management of such other accounts in addition to services provided to the Trust
can present certain conflicts of interest. The other accounts might have similar or different investment objectives or strategies
as the Trust, or otherwise hold, purchase or sell investments that are eligible to be held, purchased or sold by the Trust, or
may take positions
that are opposite in direction from those taken by the Trust. When managing personal trading accounts, the respective
officers, employees and/or affiliates of the Sponsor may take into account their own interests without regard to the interests
of the Trust or the Unitholders. Records of other accounts, including personal trading accounts, will not be available for inspection
by Unitholders.
Unitholders cannot be assured of
the Sponsor’s continued services, the discontinuance of which may be detrimental to the Trust.
Unitholders cannot be
assured that the Sponsor will be willing or able to continue to serve as sponsor to the Trust for any length of time. If the Sponsor
discontinues its activities on behalf of the Trust and a substitute sponsor is not appointed, the Trust will terminate and liquidate
its Bitcoins.
Appointment of a substitute
sponsor will not guarantee the Trust’s continued operation, successful or otherwise. Because a substitute sponsor may have
no experience managing a digital asset financial vehicle, a substitute sponsor may not have the experience, knowledge or expertise
required to ensure that the Trust will operate successfully or continue to operate at all. Therefore, the appointment of a substitute
sponsor may not necessarily be beneficial to the Trust and the Trust may terminate. See “Conflicts of Interest—The
Sponsor.”
If the Custodian resigns or is removed
by the Sponsor or otherwise, without replacement, it could trigger early termination of the Trust, or the Sponsor would need to
find and appoint a replacement custodian, which could pose a challenge to the safekeeping of the Trust’s Bitcoin.
The custodial services
agreements with FDAS included and Coinbase Custody includes termination provisions. For example, the Custodial Services Agreement
with Coinbase Custody indicates that either party may terminate the agreement upon thirty-day’s prior written notice and
that the Trust may cancel its custodial account at any time by withdrawing all balances and contacting the Custodian. If Coinbase
Custody resigns or is removed without replacement, the Trust will dissolve in accordance with the terms of the Trust Agreement.
The Sponsor could replace the custodian of the Trust’s Bitcoin Holdings. On March 11, 2022, the Trust delivered to FDAS a
notice of termination of the custodial services agreement dated May 18, 2020. The notice of termination became effective on April
10, 2022. On March 10, 2022, the Trust transferred its custodied digital assets from FDAS to the Custodian. Although the transfer
of assets did not have any apparent negative impact on the Trust or its assets at this time, any transfer of assets to another
custodian is not without any risk. The transferring of maintenance responsibilities of the Trust’s Bitcoin Holdings to another
party will likely be complex and could subject the Trust’s Bitcoin to the risk of loss during the transfer, which could have
a negative impact on the performance of the Units or result in loss of the Trust’s assets.
In addition, to the
extent that the Sponsor is not able to find a suitable party willing to serve as a replacement custodian, the Sponsor may be required
to terminate the Trust and liquidate the Trust’s Bitcoin. In addition, the extent that the Sponsor finds a suitable party
and must enter into a modified Custodian Agreement that is less favorable for the Trust or Sponsor and/or transfer the Trust’s
assets in a relatively short time period, the safekeeping of the Trust’s Bitcoin may be adversely affected, which may in
turn adversely affect the value of the Units
Unitholders may be adversely affected
by the lack of independent advisers representing investors in the Trust.
The Sponsor has consulted with counsel, accountants
and other advisers regarding the formation and operation of the Trust. No counsel was appointed to represent investors in connection
with the formation of the Trust or the establishment of the terms of the Trust Agreement and the Units. Moreover, no counsel has been appointed
to represent Unitholders in connection with an investment in the Units. Accordingly, an investor should consult his, her or its
own legal, tax and financial advisers regarding the desirability of an investment in the Units. Lack of such consultation may lead
to an undesirable investment decision with respect to investment in the Units.
