10-K: Franklin Bitcoin ETF Reports Strong First Year Performance Amidst Volatile Crypto Market

Franklin Bitcoin ETF (EZBC) concluded its first full fiscal year on March 31, 2025, reporting a significant 17.34% increase in Net Asset Value per Share, closely tracking Bitcoin's price appreciation, despite navigating a highly volatile digital asset landscape and operational complexities inherent to the nascent crypto ETF market.

Summary

• Franklin Bitcoin ETF (EZBC), a series of Franklin Templeton Digital Holdings Trust, completed its first full fiscal year ended March 31, 2025, with net assets increasing to approximately $410,857,343.
• The Fund's Net Asset Value (NAV) per Share rose from $40.95 at March 31, 2024, to $48.05 at March 31, 2025, representing a 17.34% increase.
• This performance directly correlates with a 17.51% increase in the price of Bitcoin, from $70,596.99 per unit on March 31, 2024, to $82,956.00 per unit on March 31, 2025.
• The Fund held 4,956.3464 bitcoins with a fair value of $411,158,674 as of March 31, 2025.
• Net realized and unrealized gain on investment in bitcoin for the year ended March 31, 2025, was approximately $109,872,131.
• The Sponsor's fee, after a waiver, amounted to $720,559 for the fiscal year ended March 31, 2025.
• The Fund operates as a passive investment vehicle, aiming to reflect Bitcoin's price performance before expenses, and does not actively manage its Bitcoin holdings.
• Shares are issued and redeemed in Creation Units of 50,000 shares exclusively for cash, with Authorized Participants bearing transaction and network fees.
• The Sponsor waived a portion of its 0.19% annual fee, resulting in a 0.00% fee for the first $10.0 billion of assets from January 12, 2024, to August 2, 2024.
• The Fund is classified as a grantor trust for U.S. federal income tax purposes, meaning income, gains, losses, and deductions flow through to shareholders.
• As of June 3, 2025, there were 8,700,000 outstanding shares.
• The aggregate market value of shares held by non-affiliates was $451,045,000 as of September 30, 2024.

Sentiment

Score: 7

Explanation: The document presents a generally positive financial performance for the Fund's first year, with significant gains tracking Bitcoin's appreciation. However, it extensively details numerous and substantial risks inherent to digital assets and the nascent regulatory environment, which temper the overall positive sentiment. The operational structure and fee waiver are positives, but the inherent volatility and limited recourse for losses are significant concerns.

Positives

• The Fund's NAV per Share increased by 17.34% for the fiscal year ended March 31, 2025, closely tracking Bitcoin's 17.51% price appreciation.
• Net realized and unrealized gains on Bitcoin investments totaled $109,872,131 for the fiscal year, demonstrating strong asset performance.
• The Sponsor implemented a fee waiver from January 12, 2024, to August 2, 2024, reducing the fee to 0.00% for the first $10.0 billion of assets, benefiting early investors.
• The Fund maintains robust cybersecurity measures, adopting the NIST framework and engaging third-party firms for assessments and penetration testing.
• The Fund's structure as a grantor trust for U.S. federal income tax purposes means it is not subject to entity-level income tax, with tax consequences flowing through to shareholders.
• The Fund has established relationships with multiple reputable Authorized Participants (Citadel Securities LLC, Goldman Sachs & Co. LLC, Jane Street Capital, LLC, J.P. Morgan Securities LLC, and Virtu Americas LLC) and Bitcoin Trading Counterparties (Jane Street, Virtu), enhancing liquidity and operational stability.
• The Fund's assets are held in segregated cold storage accounts by Coinbase Custody, a fiduciary under New York Banking Law, enhancing security.
• The Prime Broker (Coinbase Inc.) aims to title FBO accounts to enable FDIC deposit insurance on Fund cash on a pass-through basis, where applicable and up to limits.

Negatives

• The Fund's NAV increase was slightly less than Bitcoin's price appreciation due to the Sponsor's fee, even after waivers.
• The Fund is a passive investment vehicle and does not actively manage Bitcoin holdings, meaning it cannot capitalize on price fluctuations or mitigate declines.
• The Fund's reliance on cash creations and redemptions, unlike in-kind models, may lead to operational inefficiencies and potential deviations between Share price and NAV.
• Shareholders bear transaction costs, including Bitcoin network fees, for sales of Bitcoin necessary to pay the Sponsor's fee and other Fund expenses not assumed by the Sponsor.
• Shareholders may incur tax liability without an associated distribution from the Fund, as sales of Bitcoin to cover expenses are taxable events.
• The Fund's assets are concentrated solely in Bitcoin and cash, exposing it to extreme volatility and potential total loss of value if Bitcoin prices decline significantly.
• The Bitcoin Custodian's liability is limited to the greater of fees paid in the prior 12 months or the value of assets in the custodial account, with an aggregate liability cap of $100,000,000 per cold storage address, and the Prime Broker's indemnity obligations are limited to $2,000,000, potentially leaving losses uncovered.
• In the event of insolvency or bankruptcy of the Prime Broker or Bitcoin Custodian, the Fund's assets may be considered part of their bankruptcy estate, risking treatment as unsecured creditors and potential total loss.
• The Fund's use of Trade Credits from the Trade Credit Lender creates a security interest and lien on the Fund's Trading and Vault Balances, risking liquidation of assets if Trade Credits are not repaid on time.
• The Fund is an 'emerging growth company' and may take advantage of reduced disclosure requirements, which could make Shares less attractive to some investors.
• Shareholders have limited voting rights and restricted ability to bring derivative actions, with almost all control vested in the Sponsor and Trustee.
• The Sponsor may amend the Declaration of Trust, including increasing fees, without Shareholder consent, potentially prejudicing substantial Shareholder rights.
• The lack of full insurance for Bitcoin holdings and limited legal recourse against service providers expose the Fund and Shareholders to significant loss risks.
• The Bitcoin Custodian and Prime Broker (Coinbase affiliates) serve multiple competing Bitcoin products, raising concerns about potential resource allocation issues or favoritism that could adversely affect the Fund.
• The Fund's reliance on a limited number of Authorized Participants creates a risk of decreased liquidity if these participants withdraw or prioritize competing products.

Risks

• Extreme volatility in Bitcoin's trading prices, which could lead to a material adverse effect on the value of the Shares, potentially resulting in total or substantial loss.
• Digital assets are bearer instruments, meaning loss, theft, destruction, or compromise of associated private keys could result in permanent loss of the asset.
• The value of Shares depends on the acceptance of Bitcoin in a new and rapidly evolving industry.
• Changes in the governance of a digital asset network may not receive sufficient support from users and miners, negatively affecting growth and response to challenges.
• Temporary or permanent forks in the Bitcoin network could adversely affect the value of the Shares.
• The Index used to value the Fund's Bitcoin has a limited performance history and could experience calculation or other errors, failing to track the global Bitcoin price.
• The liquidity of the Shares may be affected by the withdrawal of Authorized Participants.
• Security threats to the Fund's account at the Bitcoin Custodian could disrupt operations and result in loss of assets or damage to reputation.
• Bitcoin transactions are irrevocable, and stolen or incorrectly transferred bitcoins may be irretrievable.
• Termination of the Custodian Agreement or Prime Broker Agreement, or failure of the Bitcoin Custodian or Prime Broker to provide services, could necessitate finding a replacement, posing safekeeping challenges and affecting operations.
• Loss of a critical banking relationship for, or the failure of a bank used by, the Prime Broker could adversely impact the Fund's ability to create or redeem Creation Units or cause losses.
• Regulatory uncertainty in U.S. digital asset markets, with adverse legislative or regulatory developments potentially harming Bitcoin or Share value.
• The Fund or Sponsor being subjected to regulation as a money services business (MSB) or money transmitter, leading to extraordinary expenses or decreased liquidity.
• Regulatory changes or interpretations could obligate the Fund or service providers to register and comply with new regulations, resulting in extraordinary expenses.
• Uncertainty regarding the treatment of digital currency for U.S. federal, state, and local income tax purposes.
• The Fund's passive investment strategy means it will be adversely affected by a general decline in Bitcoin price without active management to mitigate impacts.
• The amount of the Fund's assets represented by each Share will decline over time due to the Sponsor's fee and other expenses, requiring Bitcoin price increases to maintain Share value.
• The value of Shares may be influenced by factors unrelated to Bitcoin's value, such as operational problems, security vulnerabilities, or service provider defaults.
• The Fund's use of cash creations and redemptions, in contrast to in-kind transactions, may adversely affect arbitrage efficiency and lead to premiums or discounts to NAV.
• Shareholders lack the rights normally associated with ownership of other types of shares, including voting rights and the ability to elect directors.
• The Sponsor may amend the Declaration of Trust without Shareholder consent, including increasing fees or prejudicing substantial Shareholder rights.
• Shareholders do not have the protections associated with ownership of shares in an investment company registered under the Investment Company Act or protections afforded by the CEA.
• The Sponsor and its management have limited history operating investment vehicles like the Fund, potentially leading to inadequate experience in navigating crypto complexities.
• Lack of full insurance and Shareholders' limited rights of legal recourse against the Fund and service providers expose them to the risk of loss of Bitcoin for which no entity is liable.
• If Trade Credits are unavailable or exhausted, the Fund may face delays in buying/selling Bitcoin, and failure to repay Trade Credits on time could lead to asset liquidation by the Trade Credit Lender.
• The Prime Broker routes orders through Connected Trading Venues, and their loss or failure could adversely affect the Prime Broker's business and cause Fund losses.
• The Fund may be terminated and liquidated at a time disadvantageous to Shareholders.
• The Declaration of Trust limits Shareholders' voting rights and ability to participate in shareholder derivative actions, and includes non-exclusive jurisdiction and jury trial waiver clauses.
• The Sponsor is solely responsible for determining NAV, and errors or changes in valuation calculations may adversely affect Share value.
• Extraordinary expenses resulting from unanticipated events may become payable by the Fund, adversely affecting Share value.
• Shareholders could incur a tax liability without an associated distribution from the Fund.
• A hard fork of the Bitcoin blockchain could result in Shareholders incurring a tax liability.
• Potential conflicts of interest may arise among the Sponsor or its affiliates and the Fund, as the Sponsor has no fiduciary duties to the Fund or its Shareholders.
• Investment vehicles advised or managed by affiliates of the Sponsor may hold interests in Coinbase Global (parent of Prime Broker/Bitcoin Custodian), potentially creating conflicts of interest.
• Uncertainty of the Sponsor's continued services, which could lead to Fund termination if a substitute sponsor is not appointed.
• The Bitcoin Custodian could resign or be removed by the Sponsor, potentially triggering early dissolution of the Fund.
• Coinbase serves as Bitcoin custodian and prime execution agent for several competing products, raising concerns about adequate resourcing and potential favoritism.
• Lack of independent advisers representing investors in the Fund.
• Shareholders and Authorized Participants lack the right under the Custodian Agreement to assert claims directly against the Bitcoin Custodian.
• The underlying assets of the Fund may be deemed to include plan assets for ERISA purposes, potentially leading to prohibited transactions or fiduciary liability for U.S. Tax-Exempt Shareholders.

Future Outlook

The Fund's future success is subject to risks and uncertainties, including changes in Bitcoin prices and market conditions, regulatory changes, and global economic developments. The Sponsor does not intend to update forward-looking statements unless required by federal securities laws. The Fund will remain an emerging growth company until it meets certain revenue, debt, or filer status thresholds, allowing it to take advantage of reduced reporting requirements.

Management Comments

• The Sponsor believes that the security procedures in place for the Fund, including but not limited to, offline storage, or cold storage, multiple encrypted private key shards, and other measures, are reasonably designed to safeguard the Fund's bitcoins.
• The Sponsor believes that it is applying the proper legal standards in determining that bitcoin is not a security in light of the uncertainties inherent in the Howey and Reves tests.
• The Sponsor has analyzed applicable tax laws and regulations and their application to the Trust and the Fund as of March 31, 2025 and 2024, and does not believe that there are any uncertain tax positions that require recognition of a tax liability.

Industry Context

The Franklin Bitcoin ETF operates within the rapidly evolving digital asset industry, which has experienced extreme volatility, as evidenced by Bitcoin's 77% drawdown from its peak in the 2021-2022 cycle. The industry faces ongoing regulatory uncertainty, with increased scrutiny following events like the FTX bankruptcy in November 2022. The emergence of central bank digital currencies (CBDCs) and new payment initiatives from financial institutions pose competitive threats to Bitcoin's role as a medium of exchange or store of value. The approval of several spot Bitcoin exchange-traded products in January 2024 has intensified competition, with the Fund's ability to attract assets potentially impacted by competitors' lower expense ratios. The document highlights the industry's dependence on the internet, the open-source nature of Bitcoin's protocol, and the significant electricity consumption of mining activities, which could lead to environmental concerns and regulatory restrictions.

Comparison to Industry Standards

• The Fund's annual expense ratio of 0.19% (gross) is competitive within the newly launched spot Bitcoin ETF market, though some competitors may offer lower expense ratios, potentially impacting the Fund's ability to attract and retain assets.
• Unlike traditional commodity ETFs (e.g., gold and silver) that typically use in-kind creations and redemptions, the Fund exclusively uses cash creations and redemptions, which the Sponsor believes is generally less efficient and could lead to greater operational risk and potential deviations between Share price and NAV.
• The Fund's Bitcoin custody arrangements with Coinbase Custody, a regulated entity under New York Banking Law, align with industry best practices for institutional digital asset custody, emphasizing segregated cold storage.
• The Fund's reliance on Coinbase as both Bitcoin Custodian and Prime Broker, a leading market player, is common among U.S. spot Bitcoin ETFs, but also introduces concentration risk if Coinbase faces operational or regulatory issues.
• The Fund's performance, with a 17.34% NAV increase closely tracking Bitcoin's 17.51% appreciation, indicates effective tracking of its underlying asset, which is a key performance metric for passive ETFs.

Corporate Governance

Legal Proceedings

• As of June 27, 2025, the Trust and the Fund are not subject to any material legal proceedings, nor are any material legal proceedings threatened against them.

Related Party Transactions

• Franklin Holdings, LLC (the Sponsor) and Franklin Distributors, LLC (the Marketing Agent) are affiliates and considered related parties to the Trust and the Fund.
• Franklin Resources, Inc. (FRI) is the ultimate parent company of the Sponsor and Marketing Agent, and is also considered a related party.
• The Fund pays the Sponsor a unitary fee for services, and any expenses payable to the Marketing Agent are covered by this Sponsor's fee.
• The Seed Capital Investor, Franklin Resources, Inc., engaged in initial share purchase and redemption transactions to seed the Fund's operations.
• As of March 31, 2025, no shares of the Fund were held by a related party.

Stakeholder Impact

• **Shareholders**: Directly impacted by Bitcoin price volatility, Sponsor fees, and operational efficiencies. Benefit from the fee waiver and potential for capital appreciation. Face risks from limited legal recourse, potential for NAV divergence, and tax liabilities without distributions.
• **Employees**: The Trust and Fund do not have direct employees; functions are performed by the Sponsor's officers and employees of service providers. Their compensation and well-being are tied to the Sponsor's overall business.
• **Customers (Authorized Participants)**: Bear transaction fees and network costs for creations/redemptions. Their ability to arbitrage is crucial for the Fund's price tracking. Face risks if banking relationships or trading venues fail.
• **Suppliers/Service Providers (BNYM, Coinbase, CSC Delaware Trust Company)**: Receive fees for their services, which are largely covered by the Sponsor's fee. Face liability limitations in their agreements with the Fund. Their operational stability is critical to the Fund's functioning.
• **Creditors (Trade Credit Lender)**: The Trade Credit Lender (Coinbase Credit, Inc.) has a security interest in the Fund's Bitcoin holdings to secure repayment of Trade Credits, providing a mechanism for debt recovery.

Next Steps

• Shareholders will be notified via prospectus supplement, periodic reports, and/or the Sponsor's website if the Sponsor decides to waive all or a portion of its fee in the future.
• The Cboe BZX Exchange is seeking In-Kind Regulatory Approval to amend its listing rules to permit the Fund to create and redeem Shares through in-kind transactions, which could be a future operational change.

Key Dates

Keywords

Bitcoin ETF, EZBC, Franklin Templeton, SEC Filing, 10-K, Cryptocurrency, Digital Assets, Bitcoin Price, NAV, Investment Fund, Passive Investment, Coinbase Custody, Prime Broker, Authorized Participants, Financial Performance, Risk Factors, Regulatory Uncertainty, Grantor Trust, Fee Waiver, Market Volatility, Blockchain, Custody, Trading, Financial Reporting