GRAYSCALE BITCOIN TRUST ETF - USD 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 audited financial statements and related notes included elsewhere in this Annual 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 discussed below and elsewhere in this Annual Report, particularly in "Item 1A. Risk Factors" and "Statement Regarding Forward-Looking Statements."
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. The Trust is not
managed like a business corporation or an active investment vehicle.
As of December 31,
2020 2019 2018
Number of Shares authorized Unlimited Unlimited Unlimited
Number of Shares outstanding 638,906,600 269,445,300 206,559,100
Number of Shares freely tradable(1) 400,095,116 204,546,060 170,827,797
Number of beneficial holders owning at least
100 Shares(2) 415 145 115
Number of holders of record(2) 415 145 115
(1) Includes the total number of unrestricted Shares not held directly or
indirectly by an officer, director, any person who is the beneficial owner of
more than 10% of the total Shares outstanding, or anyone who controls, is
controlled by or is under common control with such person, or any immediate
family members of officers, directors and control persons. Freely tradable
Shares inclusive of holders with more than 10% of total Shares outstanding
was 400,095,116, 204,546,060 and 170,827,797 for the periods ending
(2)
Therefore, this number does not include the individual holders who have
bought/sold Shares on OTCQX or transferred their eligible Shares to their
brokerage accounts.
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: 67
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• 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 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 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 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
Financial Highlights for the Years ended
(All amounts in the following table and the subsequent paragraphs, except per Share, Bitcoin and price of Bitcoin amounts, are in thousands)
For the Year Ended
2020 2019 2018
Net realized and unrealized gain (loss) on investment in Bitcoin$ 11,196,384 $ 686,551 $ (1,957,388 ) Net increase (decrease) in net assets resulting from operations$ 11,102,880 $ 651,821 $ (1,985,912 ) Net assets$ 17,716,478 $ 1,866,218 $ 751,622 Net realized and unrealized gain on investment in Bitcoin for the year endedDecember 31, 2020 was$11,196,384 which includes a realized gain of$50,335 on the transfer of Bitcoins to pay the Sponsor's Fee and net change in unrealized appreciation on investment in Bitcoin of$11,146,049 . Net realized and unrealized gain on investment in Bitcoin for the year was driven by Bitcoin price appreciation from$7,145.00 per Bitcoin as ofDecember 31, 2019 to$29,185.05 per Bitcoin as ofDecember 31, 2020 . Net increase in net assets resulting from operations was$11,102,880 for the year endedDecember 31, 2020 , which consisted of the net realized and unrealized gain on investment in Bitcoin, less the Sponsor's Fee of$93,504 . Net assets increased to$17,716,478 atDecember 31, 2020 , an 849% increase for the year. The increase in net assets resulted from the aforementioned Bitcoin price 68 -------------------------------------------------------------------------------- appreciation and the contribution of approximately 353,646 Bitcoin with a value of$4,747,380 to the Trust in connection with Share creations during the period, partially offset by the withdrawal of approximately 7,799 Bitcoin to pay the foregoing Sponsor's Fee. Net realized and unrealized gain on investment for the year endedDecember 31, 2019 was$686,551 , which includes a realized gain of$23,305 on the transfer of Bitcoins to pay the Sponsor's Fee and net change in unrealized appreciation on investment in Bitcoin of$663,246 . Net realized and unrealized gain on investment in Bitcoin for the year was driven by Bitcoin price appreciation from$3,679.42 per Bitcoin as ofDecember 31, 2018 to$7,145.00 per Bitcoin as ofDecember 31, 2019 . Net increase in net assets resulting from operations was$651,821 for the year endedDecember 31, 2019 , which consisted of the net realized and unrealized gain on investment, less the Sponsor's Fee of$34,730 . Net assets increased to$1,866,218 atDecember 31, 2019 , a 148% increase for the year. The increase in net assets resulted from the aforementioned Bitcoin price appreciation and the contribution of approximately 61,556 Bitcoin with a value of$462,775 to the Trust in connection with Share creations during the year, partially offset by the withdrawal of approximately 4,641 Bitcoin to pay the foregoing Sponsor's Fee. Net realized and unrealized loss on investment for the year endedDecember 31, 2018 was ($1,957,388 ), which includes a realized gain of$22,379 on the transfer of Bitcoins to pay the Sponsor's Fee and net change in unrealized depreciation on investment in Bitcoin of ($1,979,767 ). Net realized and unrealized loss on investment was driven by Bitcoin price depreciation from$14,168.54 per Bitcoin as ofDecember 31, 2017 to$3,679.42 per Bitcoin as ofDecember 31, 2018 . Net decrease in net assets resulting from operations was ($1,985,912 ) for the year endedDecember 31, 2018 , which consisted of the net realized and unrealized loss on investment, plus the Sponsor's Fee of$28,524 . Net assets decreased to$751,622 atDecember 31, 2018 , a 70% decrease for the year. The decrease in net assets resulted from the aforementioned Bitcoin price depreciation and the withdrawal of 3,843 Bitcoin to pay the foregoing Sponsor's Fee, partially offset by the contribution of approximately 32,281 Bitcoin with a value of$246,151 to the Trust in connection with Share creations during the year.
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 Annual 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 For the Year Ended December 31, 2020 2019 2018 (All Bitcoin balances
are rounded to the nearest whole
Bitcoin)
Bitcoins:
Opening Balance 261,192 204,277 175,839
Creations 353,646 61,556 32,281
Sponsor's Fee, related party (7,799 ) (4,641 ) (3,843 )
Closing balance 607,039 261,192 204,277
Accrued but unpaid Sponsor's Fee, related party - - -
Net closing balance 607,039 261,192 204,277
Number of Shares:
Opening balance 269,445,300 206,559,100 174,283,200
Creations 369,461,300 62,886,200 32,275,900
Closing balance 638,906,600 269,445,300 206,559,100
69
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December 31,
2020 2019 2018
Price of Bitcoin on principal market (1) $ 29,185.05 $ 7,145.00 $ 3,679.42
NAV per Share (2) $ 27.73 $ 6.93 $ 3.64
Index Price $ 28,788.57 $ 7,200.71 $ 3,760.46
3.72
(1) The Trust performed an assessment of the principal market at
2020, 2019 and 2018, respectively, and identified the principal market as
Coinbase Pro.
(2) As of
calculated using the 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" for a description of the Trust's Digital Asset
Holdings per Share. The Digital Asset Exchanges used to calculate the Index
Price as of
calculate the Index Price consisted of Coinbase Pro,
Bittrex and itBit. As of
to calculate the Index Price consisted of Coinbase Pro,
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 ofDecember 31, 2020 , the Trust had a net closing balance of 607,039.48515191 Bitcoins with a total value of$17,475,798,711 , based on the Index Price of$28,788.57 onDecember 31, 2020 (non-GAAP methodology). As ofDecember 31, 2020 , the total market value of the Trust's Bitcoin based on the principal market (Coinbase Pro) of$29,185.05 onDecember 31, 2020 was$17,716,477,727 . As ofDecember 31, 2019 , the Trust had a net closing balance of 261,192.14022299 Bitcoins with a total value of$1,880,768,856 , based on the Index Price of$7,200.71 onDecember 31, 2019 (non-GAAP methodology). As ofDecember 31, 2019 , the total market value of the Trust's Bitcoin based on the principal market (Coinbase Pro) of$7,145.00 onDecember 31, 2019 was$1,866,217,842 . As ofDecember 31, 2018 , the Trust had a net closing balance of 204,277.35165345 Bitcoins with a total value of$768,176,810 , based on the Index Price of$3,760.46 onDecember 31, 2018 (non-GAAP methodology). As ofDecember 31, 2018 , the Trust had a net closing balance with a total market value of$751,622,174 , based on the principal market (Coinbase Pro) of$3,679.42 onDecember 31, 2018 .
As movements in the price of Bitcoins 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 theTrust's Digital Asset Holdings per Share (as adjusted for the Share Split for periods prior toJanuary 26, 2018 ) versus the Index Price and the Trust's NAV per Share (as adjusted for the Share Split for periods prior toJanuary 26, 2018 ) fromSeptember 25, 2013 toDecember 31, 2020 . For more information on the determination of theTrust's Digital Asset Holdings , see "Item 1. Business-Overview of the Bitcoin Industry and Market-Bitcoin Value-The Index and the Index Price." 70 -------------------------------------------------------------------------------- [[Image Removed]] The following table illustrates the movements in the Index Price from the beginning of the Trust's operations onSeptember 25, 2013 toDecember 31, 2020 . Since the beginning of the Trust's operations, the Index Price has ranged from$117.03 to$28,788.57 , with the straight average being$4,310.89 . The Sponsor has not observed a material difference between the Index Price and average prices from the constituent Digital Asset Exchanges individually or as a group. End of Last business Period Average High Date Low Date period day Twelve months ended December 31, 2016$ 565.26 $ 969.43
$ 3,942.40 $ 18,756.45
$ 7,497.29 $ 15,736.96
$ 7,319.77 $ 12,681.53
$ 11,074.72 $ 28,788.57 12/31/2020$ 5,050.07 3/16/2020$ 28,788.57 $ 28,788.57 September 25, 2013 (the inception of the Trust's operations) to December 31, 2020$ 4,310.89 $ 28,788.57 12/31/2020$ 117.03 10/3/2013$ 28,788.57 $ 28,788.57
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
End of Last business
Period Average High Date Low Date period day
Twelve months ended December 31,
2016 $ 566.31 $ 968.08 $ 3,987.48 $ 19,433.21
$ 7,517.17 $ 16,849.50
$ 7,356.06 $ 13,849.81
$ 11,103.80 $ 29,185.05 12/31/2020$ 4,950.39 3/16/2020$ 29,185.05 $ 29,185.05 September 25, 2013 (the inception of the Trust's operations) to December 31, 2020$ 4,328.79 $ 29,185.05 12/31/2020$ 110.83 10/2/2013$ 29,185.05 $ 29,185.05 Secondary Market Trading The Trust's Shares have been quoted on OTCQX under the symbol GBTC sinceMarch 26, 2015 . The price of the Shares as quoted on OTCQX has varied significantly from theBitcoins Holdings per Share. FromMay 5, 2015 toDecember 31, 2020 , the maximum premium of the closing price of the Shares quoted on OTCQX over the value of theTrust's Digital Asset Holdings per Share was 142% and the average premium was 37%. Moreover, the closing price of the Shares as, quoted on OTCQX at4:00 p.m. ,New York time, on each business day, has only been quoted at a discount onOctober 28, 2015 . The discount on that day was 0.1%. 71
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As of
The following table sets out the range of high and low closing prices for the Shares as reported by OTCQX, the Trust's NAV per Share and theTrust's Digital Asset Holdings per Share for each of the quarters sinceJanuary 1, 2018 . High Low Digital Asset Digital NAV per Holdings per NAV per Asset Holdings OTCQX Share(2) Share(3) OTCQX Share(2) per Share(3) 2018 First quarter(1) 25.69 16.99 15.87 10.05 6.89 6.80 Second quarter 16.88 9.84 9.67 10.55 5.87 5.89 Third quarter 12.26 8.24 8.23 7.85 6.07 5.89 Fourth quarter 7.88 6.59 6.55 3.84 3.13 3.20 2019 First quarter 4.99 4.08 4.02 3.84 3.31 3.32 Second quarter 17.08 13.56 12.37 4.97 4.07 4.05 Third quarter 16.35 12.25 12.41 9.83 7.75 7.81 Fourth quarter 11.82 9.48 9.30 8.01 6.39 6.56 2020 First quarter 13.48 10.05 10.00 5.54 4.78 4.88 Second quarter 12.30 9.59 9.55 6.50 5.99 6.07 Third quarter 14.75 11.81 11.63 9.31 8.67 8.73 Fourth quarter 32.90 27.73 27.35 10.85 10.04 10.04
(1) Per Share amounts have been retroactively adjusted for the 91-for-1 Share
Split of the Trust's issued and outstanding Shares completed on
2018.
(2) The NAV is calculated using the fair value of Bitcoins based on the price
provided by the Digital Asset Market that the Trust considers its principal
market, which since
(3)
represented by the Index as of
date.
methodology where the volume-weighted average price is derived from multiple
Digital Asset Exchanges. See "Item 1. Business-Trust Objective and Key
Operating Metrics." On
and also added Bittrex to the Index. On
removed Bittrex and added LMAX Digital as part of its scheduled quarterly
review. On
any constituents as part of its scheduled quarterly review.
The following chart sets out the historical closing prices for the Shares as
reported by OTCQX and the
[[Image Removed]]
72
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The following chart sets out the historical premium and discount for the Shares
as reported by OTCQX and the
[[Image Removed]]Jumpstart Our Business Startups Act of 2012
The JOBS Act permits the Trust, as an "emerging growth company," to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. The Trust has elected to "opt out" of this provision and, as a result, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for public companies that are not emerging growth companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
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