Grayscale Ethereum Classic Trust (ETC) SEC 10-K Report

Grayscale Ethereum Classic Trust (ETC), a Delaware Statutory Trust formed to hold Ethereum Classic (ETC), has released its 2024 10-K report. The Trust aims to provide investors with exposure to ETC through shares that represent ownership in the Trust. The report details the Trust's financial performance, business operations, strategic initiatives, and the challenges and risks it faces in the volatile digital asset market.

Financial Highlights

• Net realized and unrealized gain (loss) on investment: $36,254 thousand, driven by ETC price appreciation from $21.99 per ETC as of December 31, 2023, to $25.13 per ETC as of December 31, 2024.
• Net increase (decrease) in net assets resulting from operations: $29,097 thousand, which consisted of the net realized and unrealized gain on investment in ETC, less the Sponsor’s Fee of $7,157.
• Net assets: $283,055 thousand as of December 31, 2024, an 11% increase for the year, resulting from ETC price appreciation, partially offset by the withdrawal of approximately 285,150 ETC to pay the Sponsor’s Fee.

Business Highlights

• Trust Overview: Grayscale Ethereum Classic Trust (ETC) is designed to hold Ethereum Classic (ETC) and provide investors with exposure to ETC through shares that represent ownership in the Trust.
• ETC Network and Operations: Ethereum Classic operates on a decentralized network, allowing for peer-to-peer transactions and smart contract execution. The network maintains a proof-of-work consensus mechanism, differentiating it from Ethereum, which has transitioned to proof-of-stake.
• Market Position: As of December 31, 2024, Ethereum Classic was the 35th largest digital asset by market capitalization, with a 24-hour trading volume of approximately $76.7 million and an aggregate market value of $3.8 billion.
• Trust Holdings: The Trust holds approximately 8% of the ETC in circulation, but this position does not enable the Trust to influence the development of the Ethereum Classic Network.
• Share Trading and Premiums/Discounts: Shares of the Trust are quoted on OTCQX under the ticker symbol 'ETCG'. The shares have historically traded at both premiums and discounts to the Trust's net asset value (NAV), with a maximum premium of 458% and a maximum discount of 77% observed between May 2018 and December 2024.
• Custody and Security: The Trust's ETC is secured by Coinbase Custody Trust Company, LLC, using cold storage mechanisms to protect private key shards. This enhances security and minimizes credit risk compared to other financial products.
• Incidental Rights and IR Virtual Currency: The Trust may acquire Incidental Rights and IR Virtual Currency through forks or airdrops. However, these are generally abandoned unless they can be safely and practically managed.
• ETC Creation and Supply: ETC is created through a mining process with a current block reward of 2.6 ETC. The total supply is capped at 210 million ETC, with approximately 150 million ETC in circulation as of December 31, 2024.
• Network Upgrades: The Ethereum Classic Network undergoes periodic upgrades to maintain interoperability with Ethereum and enhance network capabilities. Recent upgrades include the Phoenix hardfork and the Thanos upgrade.
• Regulatory Environment: The digital asset industry faces increasing regulatory scrutiny, particularly following the collapse of FTX in 2022. The SEC has taken actions against major trading platforms, impacting the digital asset market.
• Future Outlook: The Trust aims to provide a cost-effective and convenient way for investors to gain exposure to ETC. However, the lack of a redemption program and regulatory challenges may continue to affect the trading price of the shares relative to the Trust's NAV.

Strategic Initiatives

• Corporate Reorganization: The Trust underwent a significant internal corporate reorganization on January 1, 2025, where Grayscale Investments, LLC merged with Grayscale Operating, LLC, resulting in Grayscale Operating, LLC succeeding to all rights and obligations of the former entity. This reorganization is not expected to materially impact the Trust's operations.
• Redemption Program: The Trust has not accepted redemption requests from shareholders and has no current plans to seek regulatory approval for a redemption program, indicating a strategic focus on maintaining its current operational structure.
• Capital Management: The Trust has not maintained a cash balance since inception, relying on the sale of ETC to cover expenses, specifically the Sponsor's Fee. The Trust's shares have been quoted on OTCQX, and the price has varied significantly from the Trust's NAV per Share, often trading at a discount. The Trust's parent company, DCG, has an authorization to purchase up to $200 million worth of shares across various Grayscale investment products, although no purchases were made under this authorization from January 1, 2022, through March 3, 2025. The Trust has distributed 13,993,800 shares to accredited investors under Rule 506(c) of Regulation D, receiving an aggregate of 13,235,272.04722510 ETC in exchange.
• Future Outlook: The Trust's future outlook includes the continuation of its current operational model without a redemption program, unless regulatory approval is obtained. The reorganization involving Grayscale Operating, LLC and Grayscale Investments Sponsors, LLC is expected to streamline operations without altering the rights or obligations under existing contracts. The Trust will continue to focus on maintaining its ETC holdings and managing expenses through the sale of ETC, with no immediate plans for changes in its capital management strategy.

Challenges and Risks

• Market Risks: The company faces significant market risks due to the extreme volatility of digital asset prices, including Ethereum Classic (ETC), which could materially affect the value of the Shares. The digital asset market is subject to rapid changes and lacks standardized regulation, leading to potential market manipulation and fraud. The emergence of new digital assets and technologies could also negatively impact the demand for ETC.
• Operational Risks: Operational risks include the reliance on third-party service providers for essential functions. Any disruption or replacement of these providers could pose challenges to the safekeeping of the Trust’s ETC and the overall operations of the Trust. Additionally, the Trust's lack of an ongoing redemption program and the ability to halt creations may result in the Shares trading at a substantial premium or discount to the NAV per Share.
• Regulatory Risks: Regulatory risks are heightened by potential changes in U.S. and foreign regulations that could restrict the use of ETC or affect the operation of digital asset markets. The classification of ETC as a security could lead to significant expenses or termination of the Trust. Recent regulatory actions against major digital asset trading platforms have increased scrutiny and could lead to further market instability.
• Emerging Risks: New and emerging risks include the potential for forks or clones of the Ethereum Classic Network, which could adversely affect the value of the Shares. The digital asset market's reliance on stablecoins, which are subject to their own regulatory and operational risks, could also impact the market for ETC.
• Management's Discussion and Analysis: Management acknowledges the challenges posed by the volatile digital asset market and the potential impact of regulatory changes. The Trust does not actively manage its holdings to mitigate volatility, which could lead to significant fluctuations in the value of the Shares. Management is focused on monitoring regulatory developments and maintaining relationships with service providers to ensure operational stability.
• Market Risk Disclosures: The Trust is exposed to market risks related to the price volatility of ETC and the broader digital asset market. The lack of regulation and transparency in digital asset trading platforms increases the risk of fraud and manipulation, which could adversely affect the value of the Shares. The Trust's performance is also subject to risks associated with the liquidity of digital asset markets and the potential for significant price fluctuations.

SEC Filing: Grayscale Ethereum Classic Trust (ETC) [ ETCG ] - 10-K - Mar. 07, 2025