GRAYSCALE BITCOIN CASH TRUST The following discussion and analysis of our financial condition and results of operations should be read together with, and is qualified in its entirety by reference to, our unaudited financial statements and related notes included elsewhere in this Quarterly Report, which have been prepared in accordance with generally accepted accounting principles inthe United States ("U.S. GAAP"). The following discussion may contain forward-looking statements based on assumptions we believe to be reasonable. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those set forth under Part II, Item 1A. Risk Factors in this Quarterly Report or under "Risk Factors" or other sections of the Information Statement.
Trust Overview
The Trust is a passive entity that is managed and administered by the Sponsor and does not have any officers, directors or employees. The Trust holds BCH and, from time to time on a periodic basis, issues Creation Baskets in exchange for deposits of BCH. As a passive investment vehicle, the Trust's investment objective is for the value of the Shares (based on BCH per Share) to reflect the value of BCH held by the Trust, determined by reference to the Index Price, less the Trust's expenses and other liabilities. To date, the Trust has not met its investment objective and the Shares quoted on OTCQX have not reflected the value of BCH held by the Trust, less the Trust's expenses and other liabilities, but instead have traded at both premiums and discounts to such value, with variations that have at times been substantial. The Trust is not managed like a business corporation or an active investment vehicle.
Critical Accounting Policies and Estimates
Investment Transactions and Revenue Recognition
The Trust considers investment transactions to be the receipt of BCH for Share creations and the delivery of BCH for Share redemptions or for payment of expenses in BCH. At this time, the Trust is not accepting redemption requests from shareholders. The Trust records its investment transactions on a trade date basis and changes in fair value are reflected as net change in unrealized appreciation or depreciation on investments. Realized gains and losses are calculated using the specific identification method. Realized gains and losses are recognized in connection with transactions including settling obligations for the Sponsor's Fee in BCH.
Principal Market and Fair Value Determination
To determine which market is the Trust's principal market (or in the absence of a principal market, the most advantageous market) for purposes of calculating the Trust's NAV, the Trust followsFinancial 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 BCH 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 BCH is sold in its principal market to market participants or, in the absence of a principal market, the most advantageous market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. The Trust only receives BCH from the Authorized Participant and does not itself transact on any Digital Asset Markets. Therefore, the Trust looks to the Authorized Participant when assessing entity-specific and market-based volume and level of activity for Digital Asset Markets. The Authorized Participant transacts in a Brokered Market, a Dealer Market, Principal-to-Principal Markets and Exchange Markets, each as defined in the FASB ASC Master Glossary. The Authorized Participant, as a related party of the Sponsor, provides information about the Digital Asset Markets on which it transacts to the Trust. In determining which of the eligible Digital Asset Markets is the Trust's principal market, the Trust reviews these criteria in the following order:
• First, the Trust reviews a list of Digital Asset Markets and excludes any
Digital Asset Markets that are non-accessible to the Trust and the
Authorized Participant(s). The Trust or the Authorized Participant does not
have access to Digital Asset Exchanges that do not have a BitLicense and has
access only to non-Digital Asset Exchange Markets that the Authorized
Participant reasonably believes are operating in compliance with applicable
law, including federal and state licensing requirements, based upon
information and assurances provided to it by each market.
• Second, the Trust sorts the remaining Digital Asset Markets from high to low
by entity-specific and market-based volume and activity of BCH traded on
each Digital Asset Market in the trailing twelve months.
• Third, the Trust then reviews intra-day pricing fluctuations and the degree
of variances in price on Digital Asset Markets to identify any material
notable variances that may impact the volume or price information of a
particular Digital Asset Market.
• Fourth, the Trust then selects a Digital Asset Market as its principal
market based on the highest market volume, activity and price stability in
comparison to the other Digital Asset Markets on the list. Based on
information reasonably available to the Trust, Exchange Markets have the
greatest volume and level of activity for the asset. The Trust therefore
looks to accessible Exchange Markets as opposed to the Brokered Market,
Dealer Market and Principal-to-Principal Markets to determine its
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principal market. As a result of the aforementioned analysis, an Exchange
Market has been selected as the Trust's principal market.
The Trust determines its principal market (or in the absence of a principal market the most advantageous market) annually and conducts a quarterly analysis to determine (i) if there have been recent changes to each Digital Asset Market's trading volume and level of activity in the trailing twelve months, (ii) if any Digital Asset Markets have developed that the Trust has access to, or (iii) if recent changes to each Digital Asset Market's price stability have occurred that would materially impact the selection of the principal market and necessitate a change in the Trust's determination of its principal market. The cost basis of the investment in BCH recorded by the Trust for financial reporting purposes is the fair value of BCH at the time of transfer. The cost basis recorded by the Trust may differ from proceeds collected by the Authorized Participant from the sale of the corresponding Shares to investors.
Investment Company Considerations
The Trust is an investment company for GAAP purposes and follows accounting and reporting guidance in accordance with the FASB ASC Topic 946, Financial Services - Investment Companies. The Trust uses fair value as its method of accounting for BCH in accordance with its classification as an investment company for accounting purposes. The Trust is not a registered investment company under the Investment Company Act of 1940. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates and these differences could be material.
Review of Financial Results (unaudited)
Financial Highlights for the Three Months Ended
(All amounts in the following table and the subsequent paragraphs, except Share and per Share, BCH and price of BCH amounts, are in thousands)
Three Months Ended
2021 2020
Net realized and unrealized loss on investment in Bitcoin Cash $ (7,136 )$ (6,868 ) Net decrease in net assets resulting from operations $ (8,262 )$ (7,018 ) Net assets $ 158,328$ 38,075 Net realized and unrealized loss on investment in BCH for the three months endedSeptember 30, 2021 was ($7,136 ) which includes a realized gain of$395 on the transfer of BCH to pay the Sponsor's Fee and net change in unrealized depreciation on investment in BCH of ($7,531 ). Net realized and unrealized loss on investment in BCH for the period was driven by BCH price depreciation from$520.99 per BCH as ofJune 30, 2021 to$497.46 per BCH as ofSeptember 30, 2021 . Net decrease in net assets resulting from operations was ($8,262 ) for the three months endedSeptember 30, 2021 , which consisted of the net realized and unrealized loss on investment in BCH, plus the Sponsor's Fee of$1,126 . Net assets increased to$158,328 atSeptember 30, 2021 , a 2% increase for the period. The increase in net assets resulted from the contribution of approximately 21,840 BCH with a value of$11,124 to the Trust in connection with Share creations during the period, partially offset by the aforementioned BCH price depreciation and the withdrawal of approximately 1,972 BCH to pay the foregoing Sponsor's Fee. Net realized and unrealized loss on investment in BCH for the three months endedSeptember 30, 2020 was ($6,868 ) which includes a realized loss of ($85 ) on the transfer of BCH to pay the Sponsor's Fee and net change in unrealized depreciation on investment in BCH of ($6,783 ). Net realized and unrealized loss on investment in BCH for the period was driven by pricing trends in BCH during the period in which the contribution of BCH to the Trust in connection with Share creations occurred when the price per BCH was higher during the three months endedSeptember 30, 2020 . Net decrease in net assets resulting from operations was ($7,018 ) for the three months endedSeptember 30, 2020 , which consisted of the net realized and unrealized loss on investment in BCH, plus the Sponsor's Fee of$150 . Net assets increased to$38,075 atSeptember 30, 2020 , a 570% increase for the period. The increase in net assets resulted from the BCH price appreciation from$221.14 per BCH as ofJune 30, 2020 to$225.60 per BCH as ofSeptember 30, 2020 and the contribution of approximately 143,663 BCH with a value of$39,409 to the Trust in connection with Share creations during the period, partially offset by the withdrawal of approximately 597 BCH to pay the foregoing Sponsor's Fee.
Off-Balance Sheet Arrangements
The Trust is not a party to any off-balance sheet arrangements.
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Cash Resources and Liquidity
The Trust has not had a cash balance at any time since inception. When selling
BCH, Incidental Rights and/or IR Virtual Currency in the Digital Asset Market to
pay Additional Trust Expenses, the Sponsor endeavors to sell the exact number of
BCH, Incidental Rights and/or IR Virtual Currency needed to pay expenses in
order to minimize the Trust's holdings of assets other than BCH. As a
consequence, the Sponsor expects that the Trust will not record any cash flow
from its operations and that its cash balance will be zero at the end of each
reporting period.
In exchange for the Sponsor's Fee, the Sponsor has agreed to assume most of the
expenses incurred by the Trust. As a result, the only ordinary expense of the
Trust during the periods covered by this Quarterly Report was the Sponsor's Fee.
The Trust is not aware of any trends, demands, conditions or events that are
reasonably likely to result in material changes to its liquidity needs.
Selected Operating Data
Three Months Ended September 30,
2021 2020
Bitcoin Cash:
Opening balance 298,406 25,708
Creations 21,840 143,663
Sponsor's Fee, related party (1,972 ) (597 )
Closing balance 318,274 168,774
Accrued but unpaid Sponsor's Fee, related party - -
Net closing balance 318,274 168,774
Number of Shares:
Opening balance 32,434,700 2,725,300
Creations 2,378,200 15,279,400
Closing balance 34,812,900 18,004,700
As of September 30,
2021 2020
Price of BCH on principal market (2)
$ 4.55 $ 2.11 Index Price$ 492.84 $ 227.97
(1) The Trust performed an assessment of the principal market atSeptember 30, 2021 and 2020, and identified the principal market as Coinbase Pro.
(2) As of
fair value of BCH based on the price provided by Coinbase Pro, the Digital
Asset Exchange that the Trust currently considers its principal market, as
of
(3)
as represented by the Index as of
date.
non-GAAP methodology where the volume-weighted average price is derived from
multiple Digital Asset Exchanges. See "Determination of NAV" in the Trust's
Information Statement for a description of the Trust's Digital Asset
Holdings per Share. The Digital Asset Exchanges used to calculate the Index
Price as of
Digital and Kraken.
For accounting purposes, the Trust reflects creations and the BCH receivable with respect to such creations on the date of receipt of a notification of a creation but does not issue Shares until the requisite number of BCH is received. At this time, the Trust is not accepting redemption requests from shareholders. Subject to receipt of regulatory approval from theSEC and approval by the Sponsor in its sole discretion, the Trust may in the future operate a redemption program. The Trust currently has no intention of seeking regulatory approval to operate an ongoing redemption program. As ofSeptember 30, 2021 , the Trust had a net closing balance with a value of$156,858,134 , based on the Index Price (non-GAAP methodology). As ofSeptember 30, 2021 , the Trust had a total market value of$158,328,560 , based on the principal market (Coinbase Pro). 17 -------------------------------------------------------------------------------- As ofSeptember 30, 2020 , the Trust had a net closing balance with a total value of$38,475,318 , based on the Index Price (non-GAAP methodology). As ofSeptember 30, 2020 , the Trust had a total market value of$38,075,325 , based on the principal market (Coinbase Pro).
As movements in the price of BCH will directly affect the price of the Shares, investors should understand recent movements in the price of BCH. Investors, however, should also be aware that past movements in the BCH price are not indicators of future movements. Movements may be influenced by various factors, including, but not limited to, government regulation, security breaches experienced by service providers, as well as political and economic uncertainties around the world. The following chart illustrates the movement in theTrust's Digital Asset Holdings per Share versus the Index Price and the Trust's NAV per Share fromMarch 1, 2018 (date of the first Creation Basket of the Trust) toSeptember 30, 2021 . [[Image Removed]] The following table illustrates the movements in the Index Price from the beginning of the Trust's operations onMarch 1, 2018 toSeptember 30, 2021 . Since the beginning of the Trust's operations, the Index Price has ranged from$83.82 to$1,646.79 , with the straight average being$440.10 throughSeptember 30, 2021 . The Sponsor has not observed a material difference between the Index Price and average prices from the constituent Digital Asset Exchanges individually or as a group. High Low Last End of business Period Average Index Price Date Index Price Date period day March 1, 2018 to September 30, 2018$ 857.77 $ 1,646.79 9/30/2018$ 425.98 9/18/2018$ 549.95 $ 549.95 Twelve months ended September 30, 2019$ 282.74 $ 619.64 11/7/2018$ 83.82 12/14/2018$ 223.60 $ 223.60 Twelve months ended September 30, 2020$ 259.44 $ 483.25 2/14/2020$ 164.44 3/13/2020$ 227.97 $ 227.97 Twelve months ended September 30, 2021$ 533.73 $ 1,505.55 5/12/2021$ 219.49 10/2/2020$ 492.84 $ 492.84 March 1, 2018 to September 30, 2021$ 440.10 $ 1,646.79 5/7/2018$ 83.82 12/14/2018$ 492.84 $ 492.84 18
-------------------------------------------------------------------------------- The following table illustrates the movements in the Digital Asset Market price of BCH, as reported on the Trust's principal market, from the beginning of the Trust's operations onMarch 1, 2018 toSeptember 30, 2021 . Since the beginning of the Trust's operations, the price of BCH has ranged from$76.78 to$1,719.00 , with the straight average being$440.76 . High Low Digital Digital Asset Last Asset Market Market End of business Period Average Price Date Price Date period dayMarch 1, 2018 to September 30, 2018$ 859.14 $ 1,719.00 5/6/2018$ 417.62 9/17/2018$ 530.02 $ 542.60 Twelve months ended September 30, 2019$ 284.83 $ 611.87 11/7/2018$ 76.78 12/15/2018$ 226.36 $ 226.36 Twelve months ended September 30, 2020$ 258.96 $ 493.09 2/14/2020$ 168.00 3/16/2020$ 225.60 $ 225.60 Twelve months ended September 30, 2021$ 533.69 $ 1,465.48 5/6/2021$ 217.41 10/2/2020$ 497.46 $ 497.46 March 1, 2018 (the first Creation Basket of the Trust) to September 30, 2021$ 440.76 $ 1,719.00 5/6/2018 $
76.78
The following chart sets out the historical closing prices for the Shares as
reported by OTCQX and the
BCHG Premium/(Discount): BCHG Share Price vs.Digital Asset Holdings per Share ($) [[Image Removed]]
The following chart sets out the historical premium and discount for the Shares
as reported by OTCQX and the
BCHG Premium/(Discount): BCHG Share Price vs.Digital Asset Holdings per Share (%) [[Image Removed]] 19
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