10-Q: Grayscale Horizen Trust (ZEN) Reports Increase in Net Assets for Q1 2024 Amidst ZEN Price Appreciation

Grayscale Horizen Trust (ZEN) saw an increase in net assets during the first quarter of fiscal year 2024, driven by the appreciation of Horizen (ZEN) prices.

Summary

• Grayscale Horizen Trust (ZEN) is a Delaware Statutory Trust that holds Horizen (ZEN) and issues shares in exchange for ZEN.
• The Trust's investment objective is to reflect the value of ZEN held by the Trust, less expenses.
• The Trust's shares are qualified for public trading on the OTCQX U.S. Marketplace under the symbol HZEN.
• For the three months ended December 31, 2023, the Trust's net assets increased to $5.46 million from $4.671 million at September 30, 2023.
• This increase was primarily due to the appreciation of ZEN's price, which rose from $7.77 to $9.14 during the quarter.
• The Trust recorded a net realized and unrealized gain on investment in ZEN of $826,000 for the quarter.
• The Sponsor's Fee for the quarter was $37,000, payable in ZEN.
• The Trust is not currently operating a redemption program for its shares.
• The Trust is subject to various risks, including market risk, liquidity risk, and risks related to its concentration in ZEN.
• As of February 2, 2024, the fair value of ZEN was $7.95 per ZEN.

Sentiment

Score: 7

Explanation: The sentiment is cautiously positive. The Trust experienced growth in net assets due to ZEN price appreciation, but risks associated with cryptocurrency investments and the lack of a redemption program temper the overall outlook.

Positives

• The Trust experienced an increase in net assets during the quarter.
• The price of ZEN, the Trust's primary holding, appreciated during the quarter.
• The Trust recorded a net realized and unrealized gain on investment in ZEN.
• The Trust maintains disclosure controls and procedures to ensure accurate financial reporting.

Negatives

• The Trust is not currently operating a redemption program, limiting investor liquidity.
• The Trust's shares have traded at both premiums and discounts to the value of ZEN held by the Trust.
• The Trust is subject to market risk and liquidity risk due to its concentration in ZEN.

Risks

• The Trust is subject to market risk due to fluctuations in the price of ZEN.
• The Trust faces liquidity risk due to its concentration in a single asset.
• The Trust relies on third-party service providers, and disruptions to their operations could adversely affect the Trust.
• The SEC could determine that ZEN is a security, which could have material adverse consequences.
• Loss, destruction, or compromise of private keys could result in the loss of the Trust's ZEN.
• The Trust may be subject to legal proceedings and disputes in the future.

Future Outlook

The Trust may operate a redemption program in the future, subject to regulatory approval and approval by the Sponsor, but currently has no intention of seeking regulatory approval to operate an ongoing redemption program.

Industry Context

The report provides insight into the performance of a single-asset cryptocurrency trust, reflecting the volatility and potential for growth in the digital asset market. The approval of a Bitcoin ETF for Grayscale may influence the future of other Grayscale trusts.

Comparison to Industry Standards

• The document does not provide enough information to make a detailed comparison to industry standards.
• However, the report mentions other Grayscale trusts, such as Grayscale Bitcoin Trust (BTC) and Grayscale Ethereum Trust (ETH), which could be used as benchmarks for comparison.
• The performance of the Grayscale Horizen Trust (ZEN) can be compared to other single-asset cryptocurrency trusts to assess its relative performance.

Legal Proceedings

• The Sponsor and an affiliate of the Trust, Grayscale Bitcoin Trust (BTC), are currently parties to certain legal proceedings.
• On November 18, 2022, the Sponsor received a letter on behalf of Fir Tree Master Fund, L.P. and certain of its affiliates (together, Fir Tree) demanding access to certain of the Sponsors and the Grayscale Bitcoin Trusts books and records pursuant to Section 3819 of the Delaware Statutory Trust Act and certain provisions under the Trust Agreement.
• On December 6, 2022, Fir Tree filed a suit in Delaware Chancery Court (the Fir Tree Action) against the Sponsor and Grayscale Bitcoin Trust alleging that the Sponsor and Grayscale Bitcoin Trust violated Fir Trees information rights and seeking to compel access to the requested books and records.
• On January 13, 2023, the Sponsor received a letter on behalf of 210K Capital, LP (210K Capital) demanding access to certain of the Sponsors and Grayscale Bitcoin Trusts books and records pursuant to Section 3819 of the Delaware Statutory Trust Act and certain provisions under the Trust Agreement.
• On March 6, 2023, 210K Capital filed a suit in Delaware Chancery Court (the 210K Capital Action and, together with the Fir Tree Action, the Demands) against the Sponsor and Grayscale Bitcoin Trust alleging that the Sponsor and Grayscale Bitcoin Trust violated 210K Capitals information rights and seeking to compel access to the requested books and records.
• On July 10, 2023, the Sponsor, Fir Tree, and 210K Capital entered into a Settlement Agreement which resolved the Demands, in which the Sponsor and Grayscale Bitcoin Trust agreed to voluntarily produce certain books and records in response to the Demands without any admission of liability or fault, without conceding the shareholders entitlement to any information, and without the payment of any money.
• On September 21, 2023, Fir Tree and 210K Capital filed stipulations of dismissal for the Demands.
• On January 30, 2023, Osprey Funds, LLC (Osprey) filed a suit in Connecticut Superior Court against the Sponsor alleging that statements the Sponsor made in its advertising and promotion of Grayscale Bitcoin Trust violated the Connecticut Unfair Trade Practices Act, and seeking statutory damages and injunctive relief.
• On October 23, 2023, the Court denied the Sponsors motion to dismiss.
• On November 6, 2023, the Sponsor filed a motion for reargument of the Courts order denying the Sponsors motion to dismiss.
• In October 2021, NYSE Arca filed a proposal with the SEC pursuant to Rule 19b-4 under the Exchange Act for a rule change to list the Shares of Grayscale Bitcoin Trust on NYSE Arca as an exchange-traded product, and in June 2022, the SEC issued a final order disapproving NYSE Arcas proposed rule change.
• In June 2022, the Sponsor filed a petition for review of the SECs final order in the United States Court of Appeals for the District of Columbia Circuit.
• In August 2023, the D.C. Circuit Court of Appeals granted the Sponsors petition and vacated the SECs order as arbitrary and capricious.
• Ultimately, on January 10, 2024, the SEC approved NYSE Arcas 19b-4 application to list the shares of the Grayscale Bitcoin Trust on NYSE Arca as an exchange-traded product.
• On March 6, 2023, Alameda Research, Ltd. (Alameda) filed a suit against the Sponsor, DCG, Michael Sonnenshein and Barry Silbert in the Court of Chancery of the State of Delaware alleging various breach of contract and fiduciary duty claims, including that the defendants had breached the terms of the trust agreements of Grayscale Bitcoin Trust and Grayscale Ethereum Trust (ETH) for failing to reduce the Sponsors fees and operate a redemption program (the Initial Complaint).
• On December 8, 2023, the Sponsor filed a motion to dismiss the Amended Complaint and its supporting brief.
• On January 19, 2024, Alameda voluntarily dismissed the action without prejudice, thereby terminating the action.

Related Party Transactions

• Grayscale Investments, LLC (Grayscale or the Sponsor) acts as the Sponsor of the Trust and is a wholly owned subsidiary of Digital Currency Group, Inc. (DCG).
• As of December 31, 2023 and September 30, 2023, 3,567,534 and 3,607,534 , Shares of the Trust were held by related parties of the Trust, respectively.
• The Sponsors parent, an affiliate of the Trust, holds a minority interest in Coinbase, Inc., the parent company of the Custodian, that represents less than 1.0 % of Coinbase, Inc.s ownership.
• In accordance with the Trust Agreement governing the Trust, the Trust pays a fee to the Sponsor, calculated as 2.5 % of the aggregate value of the Trusts assets, less its liabilities (which include any accrued but unpaid expenses up to, but excluding, the date of calculation), as calculated and published by the Sponsor or its delegates in the manner set forth in the Trust Agreement (the Sponsors Fee).
• On March 2, 2022, the Board of the Sponsor (the Board) approved the purchase by DCG, the parent company of the Sponsor, of up to $ 10 million worth of Shares of the Trust.

Stakeholder Impact

• Shareholders benefit from the potential appreciation of ZEN and the Trust's efforts to provide a cost-effective investment vehicle.
• Employees of the Sponsor and service providers are impacted by the Trust's operations and financial performance.
• The Custodian is responsible for safeguarding the Trust's assets.
• Authorized Participants facilitate the creation and potential redemption of shares.

Key Dates

Keywords

Grayscale Horizen Trust, Horizen, ZEN, Digital Asset, Cryptocurrency, Trust, OTCQX, Financial Report, Net Assets, Sponsor's Fee