Executive Summary / Key Takeaways

• Grayscale Bitcoin Cash Trust (BCHG) offers investors passive exposure to Bitcoin Cash (BCH) through a traditional security structure, aiming to track the value of its underlying BCH holdings less expenses.
• The Trust's financial performance is directly tied to the volatile price movements of BCH and is impacted by its 2.50% annual Sponsor's Fee, paid in BCH, which reduces the amount of BCH held per share over time.
• Recent performance reflects significant BCH price swings: a net decrease in net assets of $53.281 million in the three months ended March 31, 2025, driven by BCH price depreciation, contrasting with a $119.991 million increase in the same period of 2024 due to appreciation.
• Shares have historically traded on OTCQX at substantial premiums and discounts to the Trust's Net Asset Value (NAV), a dynamic influenced by the lack of a redemption program and the Trust's stated intention not to seek regulatory approval for one.
• Key risks include the inherent volatility of BCH, potential loss or theft of the underlying asset, and significant regulatory uncertainty surrounding the classification of digital assets like BCH as securities, which could force liquidation.

The Passive Pursuit of Bitcoin Cash Exposure

Grayscale Bitcoin Cash Trust (BCHG), established in 2018, serves a singular purpose: to provide investors with exposure to the price movements of Bitcoin Cash (BCH) without the complexities of directly buying, storing, and securing the digital asset. As a Delaware Statutory Trust, BCHG operates as a passive investment vehicle. Its investment objective is straightforward – for the value of its shares, based on the BCH held per share, to mirror the value of the underlying BCH, net of the Trust's operational expenses and liabilities. This model positions BCHG not as an active manager seeking alpha, but as a direct proxy for the performance of BCH itself within a regulated security wrapper.

The Trust's operational history includes its qualification for public trading on the OTCQX Best Market in July 2020, providing a secondary market for investors to buy and sell shares. This listing was a significant step in enhancing accessibility, although the market price of BCHG shares has frequently diverged from the underlying value of the BCH held by the Trust, trading at both substantial premiums and discounts. The Trust primarily grows its asset base through the creation of shares in minimum baskets, exchanged for deposits of BCH by authorized participants. Notably, the Trust does not currently offer a redemption program, a factor that contributes significantly to the observed premium/discount volatility.

Within the broader landscape of digital asset investment products, BCHG occupies a niche focused specifically on Bitcoin Cash. It competes indirectly with products offering exposure to other digital assets, most notably Bitcoin trusts and ETFs like Grayscale Bitcoin Trust (GBTC) and BlackRock (BLK)'s iShares Bitcoin Trust (IBIT), as well as futures-based products like the ProShares Bitcoin Strategy ETF (BITO). While these competitors target the larger Bitcoin market, they vie for investor capital within the same digital asset investment space. BCHG's specific focus on BCH differentiates it, offering a distinct risk/reward profile tied to the performance of that particular asset.

Operational Mechanics and The Role of Technology

For a passive trust like BCHG, "technology" primarily refers to the secure infrastructure and processes enabling the holding, valuation, and transfer of the underlying digital asset. The Trust relies on Coinbase Custody Trust Company, LLC as its custodian, responsible for safeguarding the BCH and managing the private keys necessary to access the Trust's digital wallets. This secure custody arrangement is a foundational technological element, crucial for mitigating the risk of theft or loss inherent in holding digital assets. The Trust's BCH holdings are commingled, and shareholders do not have rights to specific units of BCH.

The Trust's valuation process is another critical operational and quasi-technological aspect. The fair value of the BCH held is determined daily based on the price provided by the Digital Asset Trading Platform considered the Trust's principal market, identified as Coinbase. This Principal Market NAV is calculated in accordance with U.S. GAAP. Separately, the Trust also calculates a non-GAAP NAV per Share derived from the CoinDesk Bitcoin Cash Price Index (BCX), which aggregates prices from multiple trading platforms (including Coinbase, Kraken, LMAX Digital, Bitstamp, and Crypto.com as of March 31, 2025). The difference between the market trading price of BCHG shares on OTCQX and these NAVs is a key consideration for investors, reflecting market sentiment, liquidity, and the structural inability to redeem shares directly with the Trust.

The core operational flow involves the creation of shares. Authorized Participants deliver BCH to the Trust's custodian in exchange for new shares. The amount of BCH required per share decreases over time primarily due to the payment of the Sponsor's Fee. This fee, calculated daily at an annual rate of 2.50% of the Trust's assets, is paid monthly in arrears in BCH. This mechanism means that a portion of the Trust's BCH holdings is periodically liquidated or transferred to the Sponsor, reducing the amount of BCH represented by each outstanding share. For instance, approximately 2,412 BCH were used to pay the Sponsor's Fee in the three months ended March 31, 2025, and 7,032 BCH in the nine months ended March 31, 2025. While the Sponsor assumes most ordinary operating expenses in exchange for this fee, the Trust may incur extraordinary expenses payable in BCH.

Compared to competitors like GBTC or IBIT, BCHG's operational technology for custody and valuation is broadly similar, relying on established third-party custodians and market data providers. The key difference lies in the underlying asset and the scale of operations. Larger trusts may benefit from slightly better terms with service providers or greater efficiency due to volume, but the fundamental technological approach to secure digital asset holding and market-based valuation is consistent across Grayscale's products and many spot-based crypto ETFs. Despite lacking proprietary, quantifiable technology differentiators, BCHG's competitive edge here is not in revolutionary technology, but in applying established, secure practices to the specific asset, BCH.

Competitive Dynamics and Market Positioning

BCHG operates in a competitive landscape shaped by investor demand for digital asset exposure and the evolving regulatory environment. While direct, BCH-specific investment products are limited, BCHG competes for investor capital against a range of crypto-focused investment vehicles.

Compared to Grayscale Bitcoin Trust, the largest crypto trust, BCHG is significantly smaller in terms of assets under management. GBTC benefits from Bitcoin's larger market capitalization and broader investor recognition, leading to higher trading volumes and potentially better liquidity. GBTC has historically commanded a dominant market share in the crypto trust space.

More recently, the approval of spot Bitcoin ETFs, such as BlackRock's iShares Bitcoin Trust, has intensified competition. These ETFs often feature lower expense ratios (IBIT's is 0.25% vs. BCHG's 2.50% annual fee) and benefit from the infrastructure and distribution networks of major financial institutions. IBIT has rapidly accumulated significant AUM and market share since its launch. While IBIT focuses solely on Bitcoin, its success highlights a potential shift in investor preference towards lower-cost, more traditional ETF structures, which could draw capital away from single-asset trusts like BCHG, even those focused on different cryptocurrencies.

Futures-based ETFs like BITO offer another avenue for crypto exposure, albeit with different price tracking characteristics due to their reliance on futures contracts rather than direct spot holdings. BITO's strategy appeals to a different segment of investors, but it still represents a competing option for capital allocation within the crypto investment universe.

BCHG's competitive advantages stem primarily from its regulated structure providing access to BCH exposure through a traditional brokerage account, bypassing the complexities of direct ownership. Its use of established custody solutions like Coinbase Custody offers a layer of security and perceived trustworthiness. However, its disadvantages are significant: the high 2.50% annual fee is substantially higher than many newly launched spot Bitcoin ETFs, its focus on BCH limits its appeal compared to Bitcoin-focused products, and the lack of a redemption mechanism contributes to the persistent premium/discount issue, which can be detrimental to investors entering or exiting the Trust.

Competitive analysis suggests BCHG holds a relatively small market share (estimated 1-2% in crypto trusts) and has experienced slower growth (estimated 20-30% annual revenue growth in 2023 vs. 45-55% for GBTC and 120% for IBIT) compared to larger Bitcoin-focused peers. Its operating margins (estimated 60-65%) also appear to trail those of larger, more efficient competitors (estimated 70-75% for GBTC, 75-80% for IBIT). While BCHG's niche focus and regulatory wrapper provide a degree of moat, its higher fee structure and the structural premium/discount challenge make it vulnerable to competition, particularly from lower-cost, more liquid ETF alternatives.

Financial Performance and Asset Dynamics

The financial performance of BCHG is overwhelmingly dictated by the price fluctuations of Bitcoin Cash and the impact of the Sponsor's Fee. As a passive holding vehicle, the Trust does not generate revenue from operations other than the implicit revenue from the value of its assets from which the fee is drawn. Its "expenses" are primarily the Sponsor's Fee.

For the three months ended March 31, 2025, the Trust reported a net decrease in net assets resulting from operations of $53.281 million. This was largely driven by a net realized and unrealized loss on investment of $52.384 million, reflecting the depreciation in the price of BCH from $435.89 at December 31, 2024, to $302.12 at March 31, 2025. The Sponsor's Fee for the period was $897,000. During this quarter, the Trust's net assets decreased by 30%. This decrease was a result of the BCH price drop and the withdrawal of approximately 2,412 BCH for the fee, partially offset by the contribution of approximately 3,940 BCH (valued at $1.645 million) from share creations.

Comparing this to the same period in the prior year (three months ended March 31, 2024), the picture was starkly different. The Trust saw a net increase in net assets from operations of $119.991 million, fueled by a net realized and unrealized gain of $120.596 million. This gain corresponded to a significant appreciation in the BCH price, from $260.22 at December 31, 2023, to $655.00 at March 31, 2024. The Sponsor's Fee was lower at $605,000. Net assets increased by 157% in that period, driven by the price surge and contributions from share creations (approximately 8,410 BCH valued at $3.056 million), despite the withdrawal of approximately 1,880 BCH for the fee.

Looking at the nine-month periods ending March 31, 2025, and 2024, the trend is consistent. For the nine months ended March 31, 2025, net assets decreased by $38.589 million from operations, primarily due to a $35.883 million net realized and unrealized loss as BCH price fell from $391.88 (June 30, 2024) to $302.12 (March 31, 2025), alongside a $2.706 million Sponsor's Fee. Net assets decreased by 13% overall, with contributions of approximately 53,481 BCH ($21.697 million value) partially offsetting the price drop and fee payments (approximately 7,032 BCH). In contrast, the nine months ended March 31, 2024, saw a $106.266 million increase in net assets from operations, driven by a $107.751 million net realized and unrealized gain as BCH price rose from $302.01 (June 30, 2023) to $655.00 (March 31, 2024), less a $1.485 million Sponsor's Fee. Net assets increased by 119%, supported by contributions (approximately 8,410 BCH valued at $3.056 million) despite fee payments (approximately 5,696 BCH).

Liquidity for the Trust is minimal, as it holds no cash balance and is not expected to record cash flow from operations.

Expenses are paid in BCH, requiring the Trust (via the Sponsor) to potentially sell BCH if needed for extraordinary costs, though this has not occurred in the reported periods. The Trust is not leveraged and has no debt.

Outlook and Key Risks

The outlook for BCHG is inextricably linked to the future price performance of Bitcoin Cash and the evolution of the digital asset regulatory landscape. As a passive vehicle, its success in meeting its investment objective (tracking BCH value) depends on the efficiency of the market for its shares relative to the underlying asset value, which is heavily influenced by the lack of a redemption mechanism. The Trust has stated it currently has no intention of seeking regulatory approval for an ongoing redemption program, suggesting the premium/discount dynamic is likely to persist.

Key risks for investors are substantial and numerous. The most significant is the inherent volatility of BCH itself. Its price has a limited history and is subject to a wide array of factors, including global supply and demand, market liquidity, theft from trading platforms, competition from other digital currencies, and macroeconomic conditions. Any significant decline in BCH price will directly and negatively impact the value of BCHG shares.

Custody risk is also critical. While using a reputable custodian like Coinbase Custody, the risk of loss or theft of the underlying BCH remains. The irrevocability of BCH transactions means incorrectly transferred or stolen BCH may be unrecoverable. There is no guarantee the custodian's insurance would cover all potential losses.

Regulatory risk looms large over the entire digital asset space, including BCH. The uncertainty regarding whether digital assets, including BCH, could be deemed securities by the SEC or other regulators poses a material threat. If BCH were classified as a security, it could become significantly more difficult to trade, clear, and custody, negatively impacting its liquidity and value. Furthermore, such a classification could potentially lead to the Trust being considered an unregistered investment company under the Investment Company Act of 1940, which could necessitate the Trust's liquidation. The SEC's ongoing efforts to develop a regulatory framework, while potentially bringing clarity, also introduce uncertainty regarding future requirements and their impact on existing products like BCHG.

Operational risks, including reliance on third-party service providers and potential technical vulnerabilities within the Bitcoin Cash network, also exist. While the Trust is not currently a party to the specific litigation mentioned involving its Sponsor and GBTC, the possibility of future legal or regulatory proceedings affecting the Trust or the broader digital asset market remains.

Conclusion

Grayscale Bitcoin Cash Trust offers a straightforward, albeit high-cost, method for investors seeking exposure to Bitcoin Cash within a regulated security structure. Its performance is a direct reflection of BCH's volatile price movements, amplified by the ongoing impact of the 2.50% annual Sponsor's Fee which erodes the per-share BCH holdings over time. The Trust's passive nature, reliance on third-party custody and valuation mechanisms, and the absence of a redemption program define its operational and market characteristics.

The competitive landscape is intensifying, with larger, lower-cost Bitcoin-focused products potentially drawing investor attention. While BCHG's niche focus and regulatory compliance offer some differentiation, its high fee and the persistent premium/discount challenge are notable disadvantages. Investors in BCHG are fundamentally making a directional bet on the price of Bitcoin Cash, while also accepting the structural risks and costs associated with the Trust's specific wrapper. The significant regulatory uncertainty surrounding digital assets remains a critical overhang, with the potential for future developments to materially impact the Trust and the value of its underlying asset. For investors, understanding the direct link to BCH volatility, the impact of the fee, the premium/discount dynamic, and the regulatory risks is paramount.