10-K: Grayscale Horizen Trust (ZEN) Reports Annual Results, Navigating Volatile Digital Asset Market

Grayscale Horizen Trust (ZEN) released its annual report, detailing its financial performance and operational activities amidst a volatile digital asset market, with the trust's shares experiencing significant premiums and discounts relative to its net asset value.

Summary

• Grayscale Horizen Trust (ZEN) is a Delaware Statutory Trust formed to hold Horizen (ZEN).
• The Trust's investment objective is for the value of its Shares to reflect the value of ZEN held by the Trust, less expenses.
• The Trust has not met its investment objective, with Shares trading at substantial premiums and discounts to the net asset value (NAV).
• As of September 30, 2024, the Trust held approximately 3.8% of the ZEN in circulation.
• The Trust's shares are quoted on the OTCQX under the ticker symbol HZEN.
• The Trust does not currently operate a redemption program for its Shares.
• The Reference Rate Price, used to calculate the Trusts NAV, is now determined by Coin Metrics Real-Time Rate.
• The Trust's NAV per Share is a non-GAAP metric and is not a substitute for the Trusts Principal Market NAV per Share calculated in accordance with U.S. GAAP.
• The Trust's assets consist solely of ZEN, Incidental Rights, IR Virtual Currency, proceeds from the sale of ZEN, Incidental Rights and IR Virtual Currency pending use of such cash for payment of Additional Trust Expenses or distribution to the shareholders and any rights of the Trust pursuant to any agreements, other than the Trust Agreement, to which the Trust is a party.
• The Trust may come into possession of Incidental Rights and/or IR Virtual Currency through forks, airdrops, or similar events, but does not expect to take these into account for purposes of determining the Trusts NAV.
• The Trust has a Pre-Creation Abandonment Notice in place, abandoning any Incidental Rights or IR Virtual Currency prior to the creation of any Shares.
• The Horizen Network implemented an update in September 2023 that removed many of its privacy preserving features.
• The Horizen Network is expected to be deprecated in favor of EON 2.0 in 2025.
• The Trust's only ordinary recurring expense is the Sponsors Fee, which is 2.5% of the NAV Fee Basis Amount of the Trust.
• The Sponsor is obligated to pay all other ordinary expenses of the Trust, excluding taxes.
• The Trust may incur Additional Trust Expenses, which are paid by selling or delivering ZEN, Incidental Rights and/or IR Virtual Currency.
• The Trust's net assets were $4.767 million as of September 30, 2024, compared to $4.671 million as of September 30, 2023.
• The Trust's net increase in net assets resulting from operations was $96,000 for the year ended September 30, 2024, compared to a net decrease of $4.020 million for the year ended September 30, 2023.
• The Trust's net realized and unrealized gain on investment in ZEN was $236,000 for the year ended September 30, 2024, compared to a net loss of $3.873 million for the year ended September 30, 2023.

Sentiment

Score: 4

Explanation: The document presents a mixed picture. While there is a slight increase in net assets, the Trust has not met its investment objective, and the Shares have traded at significant premiums and discounts. The ongoing regulatory uncertainty and the volatile nature of the digital asset market add to the negative sentiment.

Positives

• The Trust's net assets increased by 2% during the year ended September 30, 2024.
• The Trust's net increase in net assets resulting from operations was positive for the year ended September 30, 2024.
• The Trust's net realized and unrealized gain on investment in ZEN was positive for the year ended September 30, 2024.

Negatives

• The Trust has not met its investment objective, with Shares trading at substantial premiums and discounts to the NAV.
• The Trust does not currently operate a redemption program for its Shares.
• The Trust's Shares have historically traded at a discount to the NAV per Share on 348 days between October 19, 2021 and September 30, 2024.
• The Trust's net decrease in net assets resulting from operations was negative for the year ended September 30, 2023.
• The Trust's net realized and unrealized loss on investment in ZEN was negative for the year ended September 30, 2023.

Risks

• The extreme volatility of digital asset prices, including ZEN, could have a material adverse effect on the value of the Shares.
• The medium-to-long term value of the Shares is subject to factors relating to the capabilities and development of blockchain technologies.
• The value of the Shares is dependent on the acceptance of digital assets, such as ZEN.
• The largely unregulated nature and lack of transparency surrounding the operations of Digital Asset Trading Platforms may adversely affect the value of the Shares.
• The lack of an ongoing redemption program and the Trusts ability to halt creations from time to time, means there is no arbitrage mechanism to keep the value of the Shares closely linked to the Reference Rate Price.
• The Shares may trade at a price that is at, above or below the Trusts NAV per Share as a result of the non-current trading hours between OTCQX and the Digital Asset Trading Platform Market.
• A determination that ZEN is a security may adversely affect the value of ZEN and the value of the Shares, and result in potentially extraordinary, nonrecurring expenses to, or termination of, the Trust.
• Regulatory changes or actions by the U.S. Congress or any U.S. federal or state agencies may affect the value of the Shares or restrict the use of ZEN.
• The Trust relies on third-party service providers, and the replacement of such service providers could pose a challenge to the safekeeping of the Trusts ZEN and to the operations of the Trust.
• The Trust may be required to disclose information, including information relating to investors, to regulators.
• Conflicts of interest may arise among the Sponsor or its affiliates and the Trust.
• The Sponsors services may be discontinued, which could be detrimental to the Trust.
• If the Custodian resigns or is removed by the Sponsor, or otherwise, without replacement, it could trigger early termination of the Trust.
• The Trust may be required, or the Sponsor may deem it appropriate, to terminate and liquidate at a time that is disadvantageous to shareholders.
• Shareholders have limited voting rights and are restricted from bringing a derivative action.
• The Sponsor is solely responsible for determining the value of the NAV and NAV per Share and any errors, discontinuance or changes in such valuation calculations may have an adverse effect on the value of the Shares.
• Extraordinary expenses resulting from unanticipated events may become payable by the Trust, adversely affecting the value of the Shares.
• The Trust may be required to indemnify the Sponsor, the Trustee, the Transfer Agent or the Custodian under the Trust Documents.
• Intellectual property rights claims may adversely affect the Trust and the value of the Shares.
• Pandemics, epidemics and other natural and man-made disasters could negatively impact the value of the Trusts holdings and/or significantly disrupt its affairs.
• There is significant uncertainty around the EON 2.0 Migration, and it is possible that developments related to the EON 2.0 Migration may adversely impact the operations of the Trust or the value of the Shares.

Future Outlook

The Trust is monitoring the development of the EON 2.0 network and its potential impact on the Trust and the value of the Shares. The Sponsor currently has no intention of seeking regulatory approval to operate an ongoing redemption program.

Management Comments

• The Sponsor intends to take the position that the Trust is properly treated as a grantor trust for U.S. federal income tax purposes.
• The Sponsor believes that the security procedures in place for the Trust are reasonably designed to safeguard the Trusts ZEN.
• The Sponsor intends to evaluate each fork, airdrop or similar occurrence on a case-by-case basis in consultation with the Trusts legal advisers, tax consultants, and Custodian, and may decide to abandon any Incidental Rights or IR Virtual Currency resulting from a hard fork, airdrop or similar occurrence should the Sponsor conclude, in its discretion, that such abandonment is in the best interests of the Trust.

Industry Context

The Trust operates in the volatile digital asset market, which has seen significant price fluctuations and regulatory scrutiny. The Trust's performance is influenced by the broader trends in the digital asset industry, including the adoption of digital assets, regulatory developments, and technological advancements.

Comparison to Industry Standards

• The Trust's performance is compared to other digital asset investment vehicles, particularly those that hold spot Bitcoin or Ether, which have recently received SEC approval for exchange listing.
• The Trust's Shares have traded at significant premiums and discounts to its NAV, which is a common characteristic of closed-end digital asset investment vehicles.
• The Trust's reliance on a single digital asset, ZEN, makes it more susceptible to price volatility compared to diversified digital asset funds.
• The Trust's lack of a redemption program is a significant difference compared to exchange-traded funds (ETFs), which typically offer daily redemptions.

Legal Proceedings

• The Sponsor and an affiliate of the Trust, Grayscale Bitcoin Trust ETF, are currently parties to a lawsuit filed by Osprey Funds, LLC, alleging violations of the Connecticut Unfair Trade Practices Act. The Sponsor and Grayscale Bitcoin Trust believe this lawsuit is without merit and intend to vigorously defend against it.

Related Party Transactions

• The Sponsor receives a Sponsors Fee of 2.5% of the NAV Fee Basis Amount of the Trust, payable in ZEN monthly in arrears.
• The Sponsor is obligated to pay all other ordinary expenses of the Trust, excluding taxes.
• The Sponsor's indirect parent company, DCG, holds 34.49% of the Shares representing ownership in the Trust, as of November 18, 2024.
• The Sponsor and Grayscale Securities, which acts as Authorized Participant and distributor and marketer for the Shares, are affiliated parties that share a common indirect parent company, DCG.
• DCG is a minority interest holder in Coinbase, Inc., which operates Coinbase, one of the Digital Asset Trading Platforms included in the Reference Rate and the Trusts principal market, and which is the parent company of the Custodian, representing less than 1.0% of its equity.

Stakeholder Impact

• Shareholders are exposed to the risks of the volatile digital asset market and the potential for the Shares to trade at a discount to the NAV.
• Shareholders may be subject to tax liabilities without an associated distribution from the Trust.
• Shareholders have limited voting rights and are restricted from bringing a derivative action.
• Shareholders may be adversely affected by the lack of independent advisers representing investors in the Trust.
• Shareholders cannot be assured of the Sponsors continued services, the discontinuance of which may be detrimental to the Trust.
• Shareholders may be adversely affected by the lack of full insurance and limited rights of legal recourse against the Trust, Trustee, Sponsor, Transfer Agent and Custodian.

Next Steps

• The Trust will continue to monitor the development of the EON 2.0 network and its potential impact on the Trust and the value of the Shares.
• The Sponsor will continue to evaluate each future fork or airdrop on a case-by-case basis in consultation with the Trusts legal advisers, tax consultants and Custodian.

Key Dates

Keywords

Horizen, ZEN, Grayscale, Digital Asset, Cryptocurrency, Blockchain, Investment Trust, OTCQX, NAV, Digital Asset Trading Platform