BITCOIN INVESTMENT 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 withU.S. GAAP. The following discussion may contain forward-looking statements based on assumptions we believe to be reasonable. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those set forth under Part I, Item 1A. Risk Factors or in Part II, Item 1A. Risk Factors or other sections of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 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 Bitcoins and, from time to time on a periodic basis, issues Creation Baskets in exchange for deposits of Bitcoins. As a passive investment vehicle, the investment objective of the Trust is for the Shares (based on Bitcoin per Share) to reflect the value of the Bitcoins 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 Bitcoins held by the Trust, less the Trust's expenses and other liabilities, but have instead traded at a substantial premium over such value. 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 Bitcoin for Share creations and the delivery of Bitcoin for Share redemptions or for payment of expenses in Bitcoin. 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 Bitcoin.
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 Bitcoin in a current sale, which assumes an orderly transaction between market participants on the measurement date. ASC 820-10 requires the Trust to assume that Bitcoin is sold in its principal market to market participants or, in the absence of a principal market, the most advantageous market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. The Trust only receives Bitcoin 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 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. 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 level of activity of Bitcoin
traded on each Digital Asset Market in the trailing twelve months.
• Third, the Trust then reviews intra-day pricing fluctuations and the degree
of variances in price on Digital Asset Markets to identify any material
notable variances that may impact the volume or price information of a
particular Digital Asset Market.
• Fourth, the Trust then selects a Digital Asset Market as its principal
market based on the highest market-based volume, level of activity and price
stability in comparison to the other Digital Asset Markets on the list.
Based on information reasonably available to the Trust, Exchange Markets
have the greatest volume and level of activity for the asset. The Trust
therefore
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looks to accessible Exchange Markets as opposed to the Brokered Market,
Dealer Market and Principal-to-Principal Markets to determine its principal
market. As a result of the aforementioned analysis, an Exchange Market has
been selected as the Trust's principal market.
The Trust determines its principal market (or in the absence of a principal market the most advantageous market) 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 Bitcoin recorded by the Trust for financial reporting purposes is the fair value of Bitcoin at the time of transfer. The cost basis recorded by the Trust may differ from proceeds collected by the Authorized Participant from the sale of the corresponding Shares to investors.
Investment Company Considerations
The Trust is an investment company for GAAP purposes and follows accounting and reporting guidance in accordance with the FASB ASC Topic 946, Financial Services - Investment Companies. The Trust uses fair value as its method of accounting for Bitcoin in accordance with its classification as an investment company for accounting purposes. The Trust is not registered 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 and Nine Months Ended
(All amounts in the following table and the subsequent paragraphs, except per Share, Bitcoin and price of Bitcoin amounts, are in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net realized and unrealized gain (loss)
on investment in Bitcoin $ 582,442 $ (708,082 ) $ 1,128,266 $ 979,077
Net increase (decrease) in net assets
resulting from operations $ 560,362 $ (720,450 ) $ 1,079,589 $ 954,716
Net assets $ 4,816,619 $ 1,976,897 $ 4,816,619 $ 1,976,897
Net realized and unrealized gain on investment in Bitcoin for the three months
ended September 30, 2020 was $582,442 which includes a realized gain of $10,694
on the transfer of Bitcoins to pay the Sponsor's Fee and net change in
unrealized appreciation on investment in Bitcoin of $571,748 . Net realized and
unrealized gain on investment in Bitcoin for the period was driven by Bitcoin
price appreciation from $9,134.09 per Bitcoin as of June 30, 2020 to $10,708.57
per Bitcoin as of September 30, 2020 . Net increase in net assets resulting from
operations was $560,362 for the three months ended September 30, 2020 , which
consisted of the net realized and unrealized gain on investment in Bitcoin, less
the Sponsor's Fee of $22,080 . Net assets increased to $4,816,619 at
September 30, 2020 , a 36% increase for the three-month period. The increase in
net assets resulted from the aforementioned Bitcoin price appreciation and the
contribution of approximately 65,143 Bitcoin with a value of $723,892 to the
Trust in connection with Share creations during the period, partially offset by
the withdrawal of approximately 2,075 Bitcoin to pay the foregoing Sponsor's
Fee.
Net realized and unrealized loss on investment in Bitcoin for the three months
ended September 30, 2019 was ($708,082 ) which includes a realized gain of $9,451
on the transfer of Bitcoins to pay the Sponsor's Fee and net change in
unrealized depreciation on investment in Bitcoin of ($717,533 ). Net realized and
unrealized loss on investment in Bitcoin for the period was driven by Bitcoin
price depreciation from $11,237.68 per Bitcoin as of June 30, 2019 to $8,283.71
per Bitcoin as of September 30, 2019 . Net decrease in net assets resulting from
operations was ($720,450 ) for the three months ended September 30, 2019 , which
consisted of the net realized and unrealized loss on investment in Bitcoin, plus
the Sponsor's Fee of $12,368 . Net assets decreased to $1,976,897 at
September 30, 2019 , a 22% decrease for the period. The decrease in net assets
resulted from the aforementioned Bitcoin price depreciation and the withdrawal
of approximately 1,196 Bitcoin to pay the foregoing Sponsor's Fee, partially
offset by the contribution of 14,418 Bitcoin with a value of $164,068 to the
Trust in connection with Share creations during the period.
Net realized and unrealized gain on investment in Bitcoin for the nine months
ended September 30, 2020 was $1,128,266 , which includes a realized gain of
$24,275 on the transfer of Bitcoins to pay the Sponsor's Fee and net change in
unrealized appreciation on investment in Bitcoin of $1,103,991 . Net realized and
unrealized gain on investment in Bitcoin for the period was driven by Bitcoin
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price appreciation from $7,145.00 per Bitcoin as of December 31, 2019 to
$10,708.57 per Bitcoin as of September 30, 2020 . Net increase in net assets
resulting from operations was $1,079,589 for the nine months ended September 30,
2020 , which consisted of the net realized and unrealized gain on investment in
Bitcoin, less the Sponsor's Fee of $48,677 . Net assets increased to $4,816,619
at September 30, 2020 , a 158% increase for the period. The increase in net
assets resulted from the aforementioned Bitcoin price appreciation and the
contribution of approximately 193,802 Bitcoin with a value of $1,870,812 to the
Trust in connection with Share creations during the period, partially offset by
the withdrawal of approximately 5,203 Bitcoin to pay the foregoing Sponsor's
Fee.
Net realized and unrealized gain on investment in Bitcoin for the nine months
ended September 30, 2019 was $979,077 , which includes a realized gain of $17,006
on the transfer of Bitcoins to pay the Sponsor's Fee and net change in
unrealized appreciation on investment in Bitcoin of $962,071 . Net realized and
unrealized gain on investment in Bitcoin for the period was driven by Bitcoin
price appreciation from $3,679.42 per Bitcoin as of December 31, 2018 to
$8,283.71 per Bitcoin as of September 30, 2019 . Net increase in net assets
resulting from operations was $954,716 for the nine months ended September 30,
2019 , which consisted of the net realized and unrealized gain on investment in
Bitcoin, less the Sponsor's Fee of $24,361 . Net assets increased to $1,976,897
at September 30, 2019 , a 163% increase for the period. The increase in net
assets resulted from the aforementioned Bitcoin price appreciation and the
contribution of approximately 37,714 Bitcoin with a value of $270,559 to the
Trust in connection with Share creations during the period, partially offset by
the withdrawal of approximately 3,342 Bitcoin to pay the foregoing Sponsor's
Fee.
Off-Balance Sheet Arrangements
The Trust is not a party to any off-balance sheet arrangements.
Cash Resources and Liquidity
The Trust has not had a cash balance at any time since inception. When selling Bitcoins, Incidental Rights and/or IR Virtual Currency to payAdditional Trust Expenses, the Sponsor endeavors to sell the exact number of Bitcoins, Incidental Rights and/or IR Virtual Currency needed to pay expenses in order to minimize the Trust's holdings of assets other than Bitcoin. As a consequence, the Sponsor expects that the Trust will not record any cash flow from its operations and that its cash balance will be zero at the end of each reporting period. In exchange for the 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 Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Bitcoins: Opening balance 386,723 225,427 261,192 204,277 Creations 65,143 14,418 193,802 37,714 Sponsor's Fee, related party (2,075 ) (1,196 ) (5,203 ) (3,342 ) Closing balance 449,791 238,649 449,791 238,649 Accrued but unpaid Sponsor's Fee, related party - - - - Net closing balance 449,791 238,649 449,791 238,649 Number of Shares: Opening balance 402,941,400 230,217,300 269,445,300 206,559,100 Creations 68,081,300 14,734,200 201,577,400 38,392,400 Closing balance 471,022,700 244,951,500 471,022,700 244,951,500 As of September 30, 2020 2019
Price of Bitcoin on principal market (1)
$ 10.23 $ 8.07 Index Price$ 10,748.51 $ 8,065.08
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(1) The Trust performed an assessment of the principal market atSeptember 30, 2020 and 2019, and identified the principal market as Coinbase Pro.
(2) As of
fair value of Bitcoin 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 "Item 1. Business-Trust Objective and
Key Operating Metrics" in the Trust's Annual Report on Form 10-K for a
description of the
Asset Exchanges used to calculate the Index Price as of
were Coinbase Pro, LMAX Digital, Kraken and Bitstamp. As of
2019, the Digital Asset Exchanges used to calculate the Index Price
consisted of Coinbase Pro, Bittrex, Kraken, Bitstamp, and itBit.
For accounting purposes, the Trust reflects creations and the Bitcoins 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 Bitcoins 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, 2020 , the Trust had a net closing balance with a value of$4,834,583,325 , based on the Index Price (non-GAAP methodology). As ofSeptember 30, 2020 , the Trust had a total market value of$4,816,618,672 , based on the principal market (Coinbase Pro). As ofSeptember 30, 2019 , the Trust had a net closing balance with a total value of$1,924,721,610 , based on the Index Price (non-GAAP methodology). As ofSeptember 30, 2019 , the Trust had a total market value of$1,976,897,396 , based on the principal market (Coinbase Pro).
Historical
As movements in the price of Bitcoin will directly affect the price of the Shares, investors should understand recent movements in the price of Bitcoin. Investors, however, should also be aware that past movements in the Bitcoin price are not indicators of future movements. Movements may be influenced by various factors, including, but not limited to, government regulation, security breaches experienced by Service Providers, as well as political and economic uncertainties around the world.
The following chart illustrates the movement in the
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-------------------------------------------------------------------------------- The following table illustrates the movements in the Index Price from the beginning of the Trust's operations onSeptember 25, 2013 toSeptember 30, 2020 . Since the beginning of the Trust's operations, the Index Price has ranged from$117.03 to$18,756.45 , with the straight average being$3,865.55 throughSeptember 30, 2020 . The Sponsor has not observed a material difference between the Index Price and average prices from the constituent Digital Asset Exchanges individually or as a group. Last Period Average High Date Low Date End of period business day Twelve months ended September 30, 2016$ 469.23 $ 749.85 6/20/2016$ 237.51 10/1/2015$ 605.59 $ 605.59 Twelve months ended September 30, 2017$ 1,784.44 $ 4,793.03 9/1/2017$ 605.59 10/1/2016$ 4,136.77 $ 4,136.77 Twelve months ended September 30, 2018$ 8,537.84 $ 18,756.45 12/18/2017$ 4,136.77 10/1/2017$ 6,586.74 $ 6,664.78 Twelve months ended September 30, 2019$ 6,613.53 $ 12,681.53 7/10/2019$ 3,228.07 12/14/2018$ 8,065.08 $ 8,065.08 Twelve months ended September 30, 2020$ 8,874.05 $ 12,147.33 8/18/2020$ 5,050.07 3/16/2020$ 10,748.51 $ 10,748.51 September 25, 2013 (the first Creation Basket of the Trust) to September 30, 2020$ 3,865.55 $ 18,756.45 12/18/2017$ 117.03 10/3/2013$ 10,748.51 $ 10,748.51
The following table illustrates the movements in the price of Bitcoin, as
reported on the Trust's principal market, from the beginning of the Trust's
operations on
Last
Period Average High Date Low Date End of period business day
Twelve months ended
September 30, 2016 $ 470.09 $ 769.07 6/18/2016 $ 237.68 10/2/2015 $ 604.84 $ 604.84
Twelve months ended
September 30, 2017 $ 1,792.56 $ 4,871.83 9/1/2017 $ 607.73 10/4/2016 $ 4,332.53 $ 4,168.33
Twelve months ended
September 30, 2018 $ 8,601.17 $ 19,433.21 12/16/2017 $ 4,208.00 10/4/2017 $ 6,588.01 $ 6,675.09
Twelve months ended
September 30, 2019 $ 6,637.57 $ 13,849.81 6/26/2019 $ 3,164.61 12/14/2018 $ 8,283.71 $ 8,283.71
Twelve months ended
September 30, 2020 $ 8,882.90 $ 12,342.86 8/17/2020 $ 4,950.39 3/16/2020 $ 10,708.57 $ 10,708.57
September 25, 2013 (the first
Creation Basket of the Trust)
to September 30, 2020 $ 3,880.33 $ 19,433.21 12/16/2017 $ 110.83 10/2/2013 $ 10,708.57 $ 10,708.57 The following chart sets out the historical closing prices for the Shares as
reported by OTCQX and the
GBTC Premium: GBTC Share Price vs. Digital Asset Holdings per Share ($)
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The following chart sets out the historical premium and discount for the Shares
as reported by OTCQX and the
GBTC Premium: GBTC Share Price vs.
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Update to "Certain
The section entitled "Certain
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 constituteU.S. -source FDAP income. Provisions of the Code commonly referred to as "FATCA" require withholding of 30% on payments ofU.S. -source FDAP income and, subject to the discussion of proposedU.S. Treasury regulations below, of gross proceeds of dispositions of certain types of property that produceU.S. -source FDAP income to "foreign financial institutions" (which is broadly defined for this purpose and in general includes investment vehicles) and certain other non-U.S. entities unless variousU.S. information reporting and due diligence requirements (generally relating to ownership byU.S. persons of interests in or accounts with those entities) have been satisfied, or an exemption applies. An intergovernmental agreement betweenthe United States and an applicable foreign country may modify these requirements. In addition, regulations proposed by theU.S. Treasury Department (the preamble to which indicates that taxpayers may rely on the regulations pending their finalization) would eliminate the requirement under FATCA of withholding on gross proceeds. 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 aU.S. federal income tax return (which may entail a significant administrative burden). Shareholders should consult their tax advisers regarding the effects of FATCA on an investment in the Trust.
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