The accompanying notes are an integral part of
these financial statements.
The accompanying notes are an integral part of
these financial statements.
The accompanying notes are an integral
part of these financial statements.
The
accompanying notes are an integral part of these financial statements.
Notes to the Financial Statements (unaudited)
As of September 30, 2022
1. Organization
Osprey Bitcoin Trust (the “Trust”)
is a Delaware Statutory Trust, formed on January 3, 2019, which commenced operations on January 22, 2019 and is governed by
the Second Amended and Restated Declaration of Trust and Trust Agreement dated November 1, 2020, as amended by the Amendment to
Trust Agreement dated April 15, 2022 (the “Trust Agreement”). In general, the Trust holds Bitcoin and, from time to
time, issues common units of fractional undivided beneficial interest (“Units”) in exchange for Bitcoin. The investment
objective of the Trust is for the Units to track the price of Bitcoin, less liabilities and expenses of the Trust. The Units are
designed as a convenient and cost-effective method for investors to gain investment exposure to Bitcoin, similar to a direct investment
in Bitcoin.
Osprey Funds, LLC (the “Sponsor”)
acts as the sponsor of the Trust. Other funds under the Osprey name are also managed by the Sponsor. The Sponsor is responsible
for the day-to-day administration of the Trust pursuant to the provisions of the Trust Agreement. The Sponsor is responsible for
preparing and providing annual reports on behalf of the Trust to investors and is also responsible for selecting and monitoring
the Trust’s service providers. As consideration for the Sponsor’s services, the Trust pays the Sponsor a Management
Fee (as defined herein) as discussed in Notes 2 and 5.
Fidelity Digital Asset Services, LLC was
the custodian for the Trust as of and for the year ended December 31, 2021. During March 2022, the Trust changed custodians to
Coinbase Custody Trust Company, LLC (the “Custodian”). The Custodian is responsible for safeguarding the Bitcoin held
by the Trust.
The transfer agent for the Trust (the “Transfer
Agent”) is Continental Stock Transfer & Trust Company. The Transfer Agent is responsible the issuance and redemption
of Units, the payment, if any, of distributions with respect to the Units, the recording of the issuance of the Units and the maintaining
of certain records therewith.
2. Summary
of Significant Accounting Policies
Basis of Presentation
The financial statements are expressed in
US dollars and have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).
The Trust qualifies as an investment company for accounting purposes pursuant to the accounting and reporting guidance under Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services
– Investment Companies. The Trust is not registered with U.S. Securities and Exchange Commission (“SEC”) under
the Investment Company Act of 1940. The results for the nine months ended September 30, 2022 and 2021 are not necessarily indicative
of the results for the entire year or any subsequent interim period. These financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2021.
Use of Estimates
GAAP requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and accompanying notes. The most significant estimate
in the financial statements is the fair value of investments in Bitcoin. Actual results could differ from those estimates and these
differences could be material.
Cash
Cash is received by the Trust from investors
and converted into Bitcoin for investment. Cash held by the Trust represents deposits maintained with Signature Bank (New York).
At times, bank deposits may be in excess of federally insured limits. In accordance with ASC 230 “Statement of Cash Flows”,
the Trust qualifies for an exemption from the requirement
to provide a statement of cash flows and
has elected not to provide a statement of cash flows.
Subscriptions and Redemptions of Units
Proceeds received by the Trust from the
issuance and sale of Units consist of Bitcoin deposits and forked or airdropped cryptocurrency coins from the Bitcoin Network,
or their respective U.S. dollar cash equivalents. Such Bitcoins (or cash equivalent) will only be (1) owned by the Trust and held
by the Custodian (or, if cash, used by the Sponsor to purchase Bitcoins to be held by the Custodian), (2) disbursed (or converted
to U.S. dollars, if necessary) to pay the Trust’s expenses, (3) distributed to Accredited Investors (subject to obtaining
regulatory approval from the SEC described below) in connection with the redemption of Units, (4) distributed (or converted to
U.S. dollars, prior to distribution, to Unitholders as dividends, and (5) liquidated in the event that the Trust terminates or
as otherwise required by law or regulation.
The Trust conducts its transactions in Bitcoin,
including receiving Bitcoin for the creation of Units and delivering Bitcoin for the redemption of Units (if a redemption program
were to be established) and for the payment of the Management Fee.
During June 2020, the Trust began a continuous
offering of up to $5,000,000 of Units with no par value, each Unit representing a fractional undivided beneficial interest in the
Trust. 154,183 Units were sold to both accredited and non-accredited investors in an offering of up to $5,000,000 of Units, dated
June 1, 2020, registered in Connecticut and qualified in New York, pursuant to Rule 504 of Regulation D under the Securities Act
of 1933, as amended (the “Securities Act”) (“Rule 504 Offering”). The Rule 504 Offering closed on August
12, 2020.
On November 12, 2020, the Trust began an
offering of an unlimited number of Units pursuant to Rule 506(c) under the Securities Act (“November 2020 Offering”).
4,206,224 Units were sold in the November 2020 Offering.
On December 30, 2020, the Sponsor of the
Trust announced that it has declared a four to one split of the Trust’s issued and outstanding Units of fractional undivided
beneficial interest. With the Unit split, Unitholders of record on December 31, 2020 received four additional Units of the Trust
for each Unit held. The effective date of the split was January 5, 2021. The Units that were issued in the Rule 504 Offering and
the November 2020 Offering were adjusted retroactively to reflect the 4:1 Unit split effective January 5, 2021.
On January 14, 2021, the Financial Industry
Regulatory Authority (“FINRA”) determined that the Trust’s Units met the criteria for trading on the over-the-counter
market (“OTC Market”). On February 16, 2021, the Trust’s Units began trading in the OTC Market, operated by OTC
Markets Group, Inc., under the ticker symbol “OBTC”. On March 3, 2021, the Trust’s Units began trading in the
OTCQX tier of the OTC Market, under the ticker symbol “OBTC.”
Effective November 1, 2021, the Trust suspended
the November 2020 Offering under Rule 506(c) under the Securities Act.
As of September 30, 2022, there were 8,340,536
Units issued and outstanding. 173,372 of the Units are restricted securities that may not be resold absent registration or an exemption
from registration under the Securities Act, and 8,167,164 of the Units are unrestricted securities.
The Trust is currently unable to redeem
Units. At some date in the future, the Trust may seek approval from the SEC to operate an ongoing redemption program.
Investment Transactions and Revenue Recognition
The Trust identifies Bitcoin as an “other
investment” in accordance with ASC 946. The Trust records its investment transactions on a trade date basis and changes in
fair value are reflected as the net change in unrealized appreciation or depreciation on investments. Realized gains and losses
are calculated using a first in first out method. Realized gains and losses are recognized in connection with transactions including
settling obligations for the Management Fee and other expenses in Bitcoin.
Management Fee
The Trust is expected to pay the remuneration
due to the Sponsor (the “Management Fee” or “Sponsor Fee”). The Management Fee is charged by the Sponsor
to the Trust at an annual rate of 0.49% of the daily Net Asset Value of the Trust and accrues daily in Bitcoin. The Management
Fee is payable at the Sponsor’s sole discretion, in Bitcoin or in U.S. Dollars for the Bitcoin Market Price (as defined herein)
in effect for such Bitcoin at the time of payment.
Trust Expenses
In accordance with the Trust Agreement,
the Sponsor bears the routine operational, administrative and other ordinary administrative operating expenses of the Trust (the
“Assumed Expenses”) other than audit fees, index license fees, aggregate legal fees in excess of $50,000 per annum
and the fees of the Custodian ( “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 trading on OTCQX (“Extraordinary
Expenses”). Other expenses reported on the accompanying statements of operations is comprised of Excluded Expenses.
Fair Value Measurements
The Trust’s investment in Bitcoin is stated
at fair value in accordance with ASC 820-10 “Fair Value Measurements”, which outlines the application of fair value
accounting. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the
“exit price”) in an orderly transaction between market participants at 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. Principal market is the market with the greatest volume and level of activity for Bitcoin, and the most
advantageous market is defined as the market that maximizes the amount that would be received to sell the asset or minimizes the
amount that would be paid to transfer the liability, after taking into account transaction costs. The principal market is generally
selected based on the most liquid and reliable exchange (including consideration of the ability for the Trust to access the specific
market, either directly or through an intermediary, at the end of each period). The Sponsor has identified Coinbase Pro as the
principal market for Bitcoin.
GAAP utilizes a fair value hierarchy for
inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use
in pricing the asset or liability based on market data obtained from sources independent of the Trust. Unobservable inputs reflect
the Trust’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the
best information available in the circumstances.
The fair value hierarchy is categorized
into three levels based on the inputs as follows:
Level 1 – Valuations based on unadjusted
quoted prices in active markets for identical assets or liabilities that the Trust has the ability to access. Since valuations
are based on quoted prices that are readily and regularly available in an active market, these valuations do not entail a significant
degree of judgment.
Level 2 – Valuations based on quoted
prices in markets that are not active or for which significant inputs are observable, either directly or indirectly.
Level 3 – Valuations based on inputs
that are unobservable and significant to the overall fair value measurement.
The availability of valuation techniques
and observable inputs can vary by investment. To the extent that valuations are based on sources that are less observable or unobservable
in the market, the determination of fair value requires more judgment. Fair value estimates do not necessarily represent the amounts
that may be ultimately realized by the Trust.
Definition of Net Asset Value
The net asset value (“NAV”)
of the Trust is used by the Trust in its day-to-day operations to measure the net value of the Trust’s assets. The NAV is
calculated on each business day and is equal to the aggregate value of the Trust’s assets
less its liabilities (which include accrued
but unpaid fees and expenses, both estimated and finally determined), based on the Bitcoin Market Price. In calculating the value
of the Bitcoin held by the Trust on any business day, the Trust will use the market price as of 4:00 p.m. New York time. The Trust
will also calculate the NAV per Unit of the Trust daily, which equals the NAV of the Trust divided by the number of outstanding
Units (the “NAV per Unit”). The Trust considers 4:00 p.m. New York time as a cut off for the end of day reporting.
3. Fair
Value of Bitcoin
The investment measured at fair value on
a recurring basis and categorized using the three levels of fair value hierarchy consisted of the following as of September 30,
2022 and December 31, 2021:
|
|
Number |
|
Per Bitcoin |
|
Amount at |
|
Fair
Value Measurement Category |
September 30, 2022 |
|
of Bitcoin |
|
Fair Value |
|
Fair Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Bitcoin |
|
|
2,805.69 |
|
$ |
19,480.51 |
|
$ |
54,656,306 |
|
$ |
— |
|
$ |
54,656,306 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
Per Bitcoin |
|
Amount at |
|
Fair Value Measurement
Category |
December 31, 2021 |
|
of Bitcoin |
|
Fair Value |
|
Fair Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Bitcoin |
|
|
2,828.93 |
|
$ |
45,867.86 |
|
$ |
129,756,984 |
|
$ |
— |
|
$ |
129,756,984 |
|
$ |
— |
The Trust determined the fair value per
Bitcoin using the price provided at 4:00 p.m., New York time, by Coinbase Pro, the Trust’s principal market.
The Management Fee payable accrued in Bitcoin
is converted into United States dollar amount at the period-end Bitcoin Market Price. The fluctuations arising from the effect
of changes in liability denominated in Bitcoin are included with the net realized or unrealized appreciation or depreciation on
investment in Bitcoin in the statements of operations.
The following represents the changes in
quantity and the respective fair value of Bitcoin for the nine months ended September 30, 2022:
| |
Bitcoin | | |
Fair Value | |
Balance at January 1, 2022 | |
| 2,828.93 | | |
$ | 129,756,984 | |
Bitcoin distributed for Management Fee, related party | |
| (10.36 | ) | |
| (341,408 | ) |
Bitcoin distributed for other fees | |
| (12.88 | ) | |
| (364,852 | ) |
Net realized gain on investment in Bitcoin | |
| — | | |
| 622,963 | |
Net change in unrealized depreciation on investment in Bitcoin | |
| — | | |
| (75,017,381 | ) |
Balance at September 30, 2022 | |
| 2,805.69 | | |
$ | 54,656,306 | |
Net realized gain on the transfer of Bitcoins
to pay the Management Fee and other expenses for the nine months ended September 30, 2022, was $648,250, which includes $622,963
net realized gain on investment in Bitcoin, and $25,287 net realized gain resulted from the changes in liabilities denominated
in Bitcoin. Net change in unrealized depreciation on investment in Bitcoin for the nine months ended September 30, 2022, was $75,016,296,
which includes net change in unrealized depreciation on investment in Bitcoin of $75,017,381, and $1,085 net unrealized appreciation
due to changes in value of liabilities denominated in Bitcoin.
The following represents the changes in
quantity and the respective fair value of Bitcoin for the year ended December 31, 2021:
| |
Bitcoin | | |
Fair Value | |
Balance at January 1, 2021 | |
| 1,548.46 | | |
$ | 44,946,574 | |
Bitcoin distributed for Management Fee, related party | |
| (12.12 | ) | |
| (577,302 | ) |
Bitcoin distributed for other fees | |
| (6.90 | ) | |
| (314,213 | ) |
Subscriptions | |
| 1,299.49 | | |
| 68,827,516 | |
Net realized gain on investment in Bitcoin | |
| — | | |
| 29,635 | |
Net change in unrealized appreciation on investment in Bitcoin | |
| — | | |
| 16,844,774 | |
Balance at December 31, 2021 | |
| 2,828.93 | | |
$ | 129,756,984 | |
Net realized gain on the transfer of Bitcoins
to pay the Management Fee and other expenses for the year ended December 31, 2021, was $12,335, which includes $29,635 net realized
gain on investment in Bitcoin, and $17,300 net realized loss resulted from the changes in liabilities denominated in Bitcoin. Net
change in unrealized appreciation on investment in Bitcoin for the year ended December 31, 2021, was $16,857,832, which includes
net change in unrealized appreciation on investment in Bitcoin of $16,844,774, and $13,058 net unrealized appreciation due to changes
in value of liabilities denominated in Bitcoin.
4. Income
Taxes
The Trust is a grantor trust for U.S. federal
income tax purposes. Accordingly, 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.
In accordance with GAAP, the Trust has defined
the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not”
to be sustained by the applicable taxing authority and requires measurement of a tax position meeting the “more-likely-than-not”
threshold, based on the largest benefit that is more than 50% likely to be realized. As of September 30, 2022, the Trust did not
have a liability for any unrecognized tax amounts for uncertain tax positions related to federal, state, and local income
taxes.
However, the conclusions concerning the
determination of “more-likely-than-not” tax positions may be subject to review and adjustment at a later date based
on factors including, but not limited to, further implementation guidance, and on-going analyses of and changes to tax laws, regulations
and interpretations thereof.
The Sponsor of the Trust has evaluated whether
or not there are uncertain tax positions that require financial statement recognition and has determined that no reserves for uncertain
tax positions related to federal, state and local income taxes existed as of September 30, 2022 and December 31, 2021. The Trust’s
2019, 2020, and 2021 tax returns are subject to audit by federal, state and local tax authorities.
5. Related
Parties
The Trust is responsible for custody, audit,
legal fees in excess of $50,000, and index license fees, which are included in other expenses in the statement of operations and
are paid by the Sponsor on behalf of the Trust. For the three months ended September 30, 2022, and 2021 the Trust reimbursed the
Sponsor the expenses in the amount of $153,497 and $40,786 respectively. For the nine months ended September 30, 2022, and 2021
the Trust reimbursed the Sponsor the expenses in the amount of $364,852 and $192,263, respectively.
The Sponsor in its discretion, may elect
to reduce, or waive, the Trust’s expenses. For the three months ended September 30, 2022, and 2021, the Sponsor irrevocably
waived $0, and $55,500, respectively, of the Trust’s audit fees. For the nine months ended September 30, 2022, and 2021,
the Sponsor irrevocably waived $0, and $55,500, respectively, of the Trust’s audit fees.
For the three months ended September 30,
2022, and 2021, the Trust incurred Management Fees of $73,637 and $146,014, respectively, which are recorded in the accompanying
statements of operations. For the nine months ended September 30, 2022, and 2021, the Trust incurred Management Fees of $326,553
and $410,107, respectively, which are recorded in the accompanying statements of operations. As of September 30, 2022 and December
31, 2021, there
were unpaid Management Fees of $21,972 and
$53,985, respectively, which are recorded as management fee payable in the accompanying statements of assets and liabilities.
The Trust’s Management Fee is accrued
daily in Bitcoins and will be payable, at the Sponsor’s sole discretion, in U.S. dollars or in Bitcoins at the Bitcoin market
price in effect at the time of such payment. From inception through September 30, 2022, all Management Fees have been made in Bitcoin
to the Sponsor.
6. Risks
and Uncertainties
Investment in Bitcoin
The Trust is subject to various risks including
market risk, liquidity risk, and other risks related to its concentration in a single asset, Bitcoin. Investing in Bitcoin is currently
unregulated, highly speculative, and volatile.
The net asset value of the Trust relates
primarily to the value of Bitcoin held by the Trust, and fluctuations in the price of Bitcoin could materially and adversely affect
an investment in the Units of the Trust. The price of Bitcoin has a limited history. During such history, Bitcoin prices have been
volatile and subject to influence by many factors including the levels of liquidity.
If Bitcoin exchanges continue to experience
significant price fluctuations, the Trust may experience losses. Several factors may affect the price of Bitcoin, including, but
not limited to, global Bitcoin supply and demand, theft of Bitcoin from global exchanges or vaults, and competition from other
forms of digital currency or payment services. The Bitcoin held by the Trust are commingled and the Trust’s Unitholders have
no specific rights to any specific Bitcoin. In the event of the insolvency of the Trust, its assets may be inadequate to satisfy
a claim by its Unitholders.
There is currently no clearing house for
Bitcoin, nor is there a central or major depository for the custody of Bitcoin. There is a risk that some or all of the Trust’s
Bitcoin could be lost or stolen. The Trust does not have insurance protection on its Bitcoin which exposes the Trust and its Unitholders
to the risk of loss of the Trust’s Bitcoin. Further, Bitcoin transactions are irrevocable. Stolen or incorrectly transferred
Bitcoin may be irretrievable. As a result, any incorrectly executed Bitcoin transactions could adversely affect an investment in
the Trust.
To the extent private keys for Bitcoin addresses
are lost, destroyed or otherwise compromised and no backup of the private keys are accessible, the Trust may be unable to access
the Bitcoin held in the associated addresses and the private keys will not be capable of being restored. The processes by which
Bitcoin transactions are settled are dependent on the Bitcoin peer-to-peer network, and as such, the Trust is subject to operational
risk. A risk also exists with respect to previously unknown technical vulnerabilities, which may adversely affect the value of
Bitcoin.
7. Indemnifications
In the normal course of business, the Trust
enters into contracts with service providers that contain a variety of representations and warranties and which provide general
indemnifications. It is not possible to determine the maximum potential exposure or amount under these agreements due to the Trust
having no prior claims. Based on experience, the Trust would expect the risk of loss to be remote.
8. Financial
Highlights
| |
Three months ended September 30, 2022 | |
Three months ended September 30, 2021 |
| |
Nine months ended September 30, 2022 | |
Nine months ended September 30, 2021 |
|
Per Unit Performance | |
| | | |
| | |
| |
| | | |
| | |
|
(for a unit outstanding throughout the period) | |
| | | |
| | |
| |
| | | |
| | |
|
| |
| | | |
| | |
| |
| | | |
| | |
|
Net asset value per unit at beginning of period | |
$ | 6.36 | | |
$ | 11.83 | |
| |
$ | 15.55 | | |
$ | 9.91 | |
* |
| |
| | | |
| | |
| |
| | | |
| | |
|
Net increase (decrease) in net assets resulting from operations | |
| | | |
| | |
| |
| | | |
| | |
|
Net realized gain (loss) and change in unrealized appreciation (depreciation) on investment in Bitcoin | |
| 0.21 | | |
| 2.98 | |
| |
| (8.92 | ) | |
| 4.96 | |
|
Net investment loss | |
| (0.03 | ) | |
| (0.03 | ) |
| |
| (0.09 | ) | |
| (0.09 | ) |
|
Net increase (decrease) in net assets resulting from operations | |
| 0.18 | | |
| 2.95 | |
| |
| (9.01 | ) | |
| 4.87 | |
|
| |
| | | |
| | |
| |
| | | |
| | |
|
Net asset value per unit at end of period | |
$ | 6.54 | | |
$ | 14.78 | |
| |
$ | 6.54 | | |
$ | 14.78 | |
|
| |
| | | |
| | |
| |
| | | |
| | |
|
Total return | |
| 2.83 | % | |
| 24.94 | % |
| |
| (57.94) | % | |
| 49.14 | % |
|
| |
| | | |
| | |
| |
| | | |
| | |
|
Supplemental Data | |
| | | |
| | |
| |
| | | |
| | |
|
Ratios to average net asset value Expenses | |
| 1.38 | % | |
| 0.83 | % |
** | |
| 1.14 | % | |
| 0.76 | % |
** |
| |
| | | |
| | |
| |
| | | |
| | |
|
Net investment loss | |
| (1.38) | % | |
| (0.83) | % |
| |
| (1.14) | % | |
| (0.76) | % |
|
*The net asset value per unit has been adjusted
to retroactively reflect the 4:1 Unit split effective January 5, 2021.
** Such percentages are after expenses waivers.
The Sponsor voluntarily waived a portion of Other Expenses (equal to 0.07% of average net assets, annualized for the period less
than one year).
An
individual Unitholder’s return, ratios, and per Unit performance may vary from those presented above based on the timing
of Unit transactions. Total return and ratios to average net asset value are calculated for the Unitholders taken as a whole. Ratios
have been annualized for the partial periods ended September 30, 2022 and September 30, 2021.
9. Subsequent
Events
There are no events that have occurred that
require disclosure other than that which has already been disclosed in these notes to the financial statements.