Grayscale Litecoin Trust (LTC) SEC 10-Q Report

Grayscale Litecoin Trust (LTC), a passive entity managed by Grayscale Investments, LLC, has released its Form 10-Q report for the third quarter of 2024. The report provides a comprehensive overview of the Trust's financial performance, business operations, strategic initiatives, and the challenges and risks it faces. The Trust aims to reflect the value of Litecoin (LTC) held, less expenses and liabilities, through its shares, although it has faced challenges in consistently meeting this objective.

Financial Highlights

• Net realized and unrealized loss on investment in LTC: ($13,264) thousand, driven by LTC price depreciation from $74.60 per LTC as of June 30, 2024, to $67.29 per LTC as of September 30, 2024.
• Net decrease in net assets resulting from operations: ($14,034) thousand, which consisted of the net realized and unrealized loss on investment in LTC, plus the Sponsor’s Fee of $770 thousand.
• Net assets: $127,514 thousand as of September 30, 2024, a 5% decrease for the three-month period.
• Principal market net asset value per Share: $5.71 as of September 30, 2024, compared to $6.37 as of June 30, 2024.
• Total return: -10.36% for the three months ended September 30, 2024.

Business Highlights

• Trust Overview: The Grayscale Litecoin Trust (LTC) is a passive entity managed by Grayscale Investments, LLC. It holds Litecoin (LTC) and periodically issues Creation Baskets in exchange for deposits of LTC. The Trust aims for the value of its Shares to reflect the value of LTC held, less expenses and liabilities. However, the Shares have traded at both premiums and discounts to the value of LTC held by the Trust.
• Investment Objective: The Trust's investment objective is for the value of the Shares to reflect the value of LTC held by the Trust, less the Trust’s expenses and other liabilities. The Trust has not consistently met this objective, with Shares trading at premiums and discounts to the value of LTC held.
• Principal Market and Fair Value Determination: The Trust determines its principal market for calculating net asset value (NAV) based on market-based volume, level of activity, and price stability. The principal market is reviewed annually and analyzed quarterly. As of the reporting period, Coinbase was identified as the principal market.
• Investment Transactions and Revenue Recognition: The Trust records investment transactions on a trade date basis and recognizes changes in fair value as net change in unrealized appreciation or depreciation on investments. Realized gains and losses are calculated using the specific identification method.
• Fair Value of Litecoin: As of September 30, 2024, the Trust held 1,895,003.59784959 LTC, valued at $67.29 per LTC. The fair value is determined using the price provided by Coinbase at 4:00 p.m., New York time.
• Creations and Redemptions of Shares: The Trust creates Shares in exchange for LTC but does not currently accept redemption requests. Each Share represented approximately 0.0848 LTC as of September 30, 2024. The Trust may consider operating a redemption program in the future, subject to regulatory approval.
• Sponsor’s Fee: The Trust pays a Sponsor’s Fee to Grayscale Investments, LLC, calculated as 2.5% of the aggregate value of the Trust’s assets, less liabilities. The fee is payable in LTC and accrues daily in U.S. dollars.
• Operational Risks: The Trust is subject to various risks, including market risk, liquidity risk, and risks related to its concentration in LTC. The price of LTC is highly volatile and influenced by multiple factors, including global supply and demand, competition, and political and economic conditions.
• Custodian and Security: The Custodian, Coinbase Custody Trust Company, LLC, is responsible for safeguarding the Trust’s LTC. There is a risk of loss or theft of LTC, and transactions in LTC are irrevocable.
• Regulatory Risks: The SEC has indicated that certain digital assets may be considered securities. If LTC is classified as a security, it could impact its liquidity and acceptance, and the Trust could be subject to additional regulatory requirements.
• Future Outlook: The Trust does not currently plan to seek regulatory approval for a redemption program but may consider it in the future. The Trust will continue to monitor the principal market and adjust its operations as necessary to align with regulatory developments and market conditions.

Strategic Initiatives

• Strategic Initiatives: The Trust's strategic initiatives include maintaining its investment objective of reflecting the value of LTC held by the Trust, less expenses and liabilities. The Trust does not currently operate a redemption program but may consider it in the future subject to regulatory approval and Sponsor's discretion. The Trust also focuses on ensuring compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations across Digital Asset Markets.
• Capital Management: The Trust's capital management activities include the issuance of Creation Baskets in exchange for deposits of LTC. During the three months ended September 30, 2024, the Trust issued 1,323,200 shares, resulting in the contribution of approximately 112,598 LTC valued at $7,715. The Trust also pays a Sponsor's Fee, which is 2.5% of the aggregate value of the Trust's assets, in LTC. For the three months ended September 30, 2024, the Trust incurred Sponsor’s Fees of $770,000. Additionally, DCG, the indirect parent company of the Sponsor, has an authorized share purchase program of up to $30 million worth of Shares, with $1.8 million worth of Shares purchased as of March 31, 2022, and no further purchases through October 28, 2024.
• Future Outlook: The Trust plans to continue its current strategy of issuing Creation Baskets and managing expenses through the Sponsor's Fee. The potential future operation of a redemption program remains subject to regulatory approval and the Sponsor's discretion. The Trust will also continue to monitor and ensure compliance with AML and KYC regulations across Digital Asset Markets. The Trust does not foresee any material changes to its liquidity needs and expects to maintain a zero cash balance at the end of each reporting period.

Challenges and Risks

• Management’s Discussion and Analysis of Financial Condition and Results of Operations: The Trust is a passive entity that does not have any officers, directors, or employees, and its investment objective is for the value of the Shares to reflect the value of LTC held by the Trust, less expenses and liabilities. However, the Trust has not met its investment objective, and the Shares have traded at both premiums and discounts to the value of LTC held by the Trust. This discrepancy poses a risk to investors as the Shares may not accurately reflect the value of the underlying LTC.
• Liquidity Risk: The Trust does not accept redemption requests from shareholders, which could limit liquidity for investors. The Trust's reliance on the Sponsor to pay expenses in LTC and the absence of a cash balance also present operational risks. The Trust's net assets decreased by 5% for the three months ended September 30, 2024, primarily due to LTC price depreciation and the withdrawal of LTC to pay the Sponsor’s Fee.
• Market Risk: The Trust does not engage in transactions in foreign currencies, invest in derivative financial instruments, or have foreign operations or long-term debt instruments, which limits its exposure to certain market risks. However, the Trust's value is directly tied to the price of LTC, which is subject to significant volatility. The Trust's principal market for LTC is determined based on market-based volume, level of activity, and price stability, with Coinbase identified as the principal market as of September 30, 2024.
• Regulatory Risk: A determination that LTC or any other digital asset is a “security” may adversely affect the value of LTC and the Shares, resulting in potentially extraordinary, nonrecurring expenses or termination of the Trust. The SEC's actions against Binance and Coinbase in June 2023, and the assertion that certain digital assets are securities, underscore the regulatory uncertainty surrounding digital assets. The SEC's enforcement actions and the conflicting views of different district court judges further highlight the ongoing uncertainty about which digital assets are considered securities.
• Potential Liquidation Risk: If LTC is determined to be a security, the Trust could be considered an unregistered “investment company” under the Investment Company Act, necessitating its liquidation. The Sponsor may also decide to terminate the Trust to liquidate its assets while a liquid market still exists. The SEC's action against the issuer of XRP in 2020 and the subsequent market impact illustrate the potential adverse effects of regulatory actions on digital assets. The Trust's reliance on external counsel for legal opinions on the security status of LTC, and the inherent uncertainties in the Howey and Reves tests, add to the regulatory risks.
• Market Volatility: The Trust's net assets and the value of the Shares are highly sensitive to the price of LTC, which has experienced significant volatility. The historical NAV and LTC prices show substantial fluctuations, with the price of LTC ranging from $32.16 to $371.71 from October 1, 2019, to September 30, 2024. This volatility poses a significant market risk to the Trust and its investors.

SEC Filing: Grayscale Litecoin Trust (LTC) [ LTCN ] - 10-Q - Nov. 01, 2024