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Sept. 1, 2022, 9:02 a.m. EDT

10-K: GRAYSCALE DIGITAL LARGE CAP FUND LLC

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(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with, and is qualified in its entirety by reference to, our audited financial statements and related notes included elsewhere in this Annual Report, which have been prepared in accordance with U.S. GAAP. The following discussion may contain forward-looking statements based on assumptions we believe to be reasonable. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Annual Report, particularly in "Item 1A. Risk Factors" and "Forward-Looking Statements."

Fund Overview

The Fund is a passive entity that is managed and administered by the Manager and does not have any officers, directors or employees. The Fund holds Fund Components and, from time to time on a periodic basis, issues Creation Baskets in exchange for deposits of Fund Components. As a passive investment vehicle, the Fund's investment objective is for the value of the Shares to reflect the value of the Fund Components, determined by reference to their respective Digital Asset Reference Rates and weightings within the Fund, less the Fund's expenses and other liabilities. The Fund is not managed like a business corporation or an active investment vehicle. As of June 30, 2022, 2021, and 2020, the Fund had unlimited Shares authorized and 15,867,400, 15,837,800 and 6,029,000 Shares issued and outstanding, respectively.







                                                                 As of June 30,
                                                   2022              2021               2020
        Number of Shares authorized              Unlimited         Unlimited         Unlimited
        Number of Shares outstanding              15,867,400        15,837,800          6,029,000
        Number of Shares freely tradable(1)       14,295,870         5,825,506          2,542,541
        Number of beneficial holders owning
        at least 100 Shares(2)                            25               131                 42
        Number of holders of record(2)                    25               131                 42
        


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For the years ended June 30, 2022, 2021 and 2020, the Fund determined which Fund Components to hold pursuant to the Target Coverage Ratio Methodology. Effective July 1, 2022, the Manager replaced the Target Coverage Ratio Methodology as the fund construction criteria and adopted the DLCS Methodology. Prior to the adoption of the DLCS Methodology, the Digital Asset Reference Rates used to value the Fund Components were Index Prices or, in the case of AVAX and DOT, an Old Indicative Price. In connection with the adoption of the DLCS Methodology, the Manager changed the Digital Asset Reference Rates used to value the Fund Components and as of the date of this Annual Report, each of the Digital Asset Reference Rates are Indicative Prices.

All references in this section to the Digital Reference Rates are to the Digital Asset Reference Rates in effect prior to the adoption of the DLCS Methodology. In addition, all references to the Digital Asset Holdings and Digital Asset Holdings per Share of the Fund in this section have been calculated based on the digital assets held by the Fund pursuant to the Target Coverage Ratio Methodology.

Critical Accounting Policies and Estimates

Investment Transactions and Revenue Recognition

The Fund considers investment transactions to be the receipt of Fund Components for Share creations and the delivery of Fund Components for Share redemptions or for payment of expenses in Fund Components. At this time, the Fund is not accepting redemption requests from shareholders. The Fund records its investment transactions on a trade date basis and changes in fair value are reflected as net change in unrealized appreciation or depreciation on investments. Realized gains and losses are calculated using the specific identification method. Realized gains and losses are recognized in connection with transactions including settling obligations for the Manager's Fee in the Fund Components.

Principal Market and Fair Value Determination

To determine which market is the Fund's principal market for each Fund Component (or in the absence of a principal market, the most advantageous market) for purposes of calculating the Fund's NAV, the Fund follows FASB ASC 820-10, which outlines the application of fair value accounting. ASC 820-10 determines fair value to be the price that would be received for each Fund Component in a current sale, which assumes an orderly transaction between market participants on the measurement date. ASC 820-10 requires the Fund to assume that each Fund Component is sold in its principal market to market participants or, in the absence of a principal market, the most advantageous market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact.

The Fund only receives Fund Components from the Authorized Participant and does not itself transact on any Digital Asset Markets. Therefore, the Fund looks to the Authorized Participant when assessing entity-specific and market-based volume and level of activity for Digital Asset Markets. The Authorized Participant transacts in a Brokered Market, a Dealer Market, Principal-to-Principal Markets and Exchange Markets, each as defined in the FASB ASC Master Glossary. The Authorized Participant, as a related party of the Manager, provides information about the Digital Asset Markets on which it transacts to the Fund. In determining which of the eligible Digital Asset Markets is the Fund's principal market for each Fund Component, the Fund reviews these criteria in the following order:

The Fund determines its principal market for each Fund Component (or in the absence of a principal market the most advantageous market) annually and conducts a quarterly analysis to determine (i) if there have been recent changes to each Digital Asset Market's trading volume and level of activity in the trailing twelve months, (ii) if any Digital Asset Markets have developed that the Fund has access to, or (iii) if recent changes to each Digital Asset Market's price stability have occurred that would materially impact the selection of the principal market and necessitate a change in the Fund's determination of its principal market for each Fund Component.

The cost basis of the investment in each Fund Component recorded by the Fund for financial reporting purposes is the fair value of the Fund Component at the time of transfer. The cost basis recorded by the Fund may differ from proceeds collected by the Authorized Participant from the sale of the corresponding Shares to investors.

Investment Company Considerations

The Fund is an investment company for GAAP purposes and follows accounting and reporting guidance in accordance with the FASB ASC Topic 946, Financial Services -Investment Companies. The Fund uses fair value as its method of accounting for digital assets in accordance with its classification as an investment company for accounting purposes. The Fund is not a registered investment company under the Investment Company Act. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates and these differences could be material.







        Review of Financial Results
        Financial Highlights for the Years Ended June 30, 2022, 2021, and 2020
        (All amounts in the following table and the subsequent paragraphs, except Share
        and per Share amounts, and each Fund Component and price of each Fund Component,
        are in thousands)
                                                              For the Year Ended June 30,
                                                         2022            2021            2020
        Net realized and unrealized (loss) gain on
        investments in digital assets                 $  (183,177 )   $   263,317     $    (3,629 )
        Net (decrease) increase in net assets
        resulting from operations                     $  (194,391 )   $   256,330     $    (4,347 )
        Net assets                                    $   173,852     $   367,308     $    32,374
        


Net realized and unrealized loss on investment in digital assets for the year ended June 30, 2022 was ($183,177), which includes a realized gain of $7,780 on the transfer of digital assets to pay the Manager's Fee, a realized gain of $39,069 as a result of the quarterly rebalance of digital assets, and net change in unrealized depreciation on investment in digital assets of ($230,026). Net decrease in net assets resulting from operations was ($194,391) for the year ended June 30, 2022, which consisted of the net realized and unrealized loss on investment in digital assets, plus the Manager's Fee of $11,214. Net assets decreased to $173,852 at June 30, 2022, a 53% decrease for the year. The decrease in net assets resulted from the decrease in digital asset prices during the period as well as the withdrawal of 166 BTC, 1,015 ETH, 282,861 ADA, 2,007 SOL, 1,962 DOT, 532 AVAX, 606 LTC, 4,091 UNI, 4,042 LINK and 172 BCH to pay the foregoing Manager's Fee, partially offset by the contribution of approximately 13 BTC, 77 ETH, 20,953 ADA, 47 LTC, 310 LINK, and 13 BCH with a total value of $935 to the Fund in connection with Share creations.

Net realized and unrealized gain on investment in digital assets for the year ended June 30, 2021 was $263,317, which includes a realized gain of $4,649 on the transfer of digital assets to pay the Manager's Fee, a realized gain of $2,644 as a result of the quarterly rebalance of digital assets, and net change in unrealized appreciation on investment in digital assets of $256,024. Net increase in net assets resulting from operations was $256,330 for the year ended June 30, 2021, which consisted of the net realized and unrealized gain on investment in digital assets, less the Manager's Fee of $6,987. Net assets increased to $367,308 at June 30, 2021, a 1,035% increase for the year. The increase in net assets resulted from the contribution of approximately 4,669 BTC, 27,048 ETH, 10,327,654 XRP, 4,697 BCH, 15,310 LTC and 253 LINK with a total value of $78,604 to the Fund in connection with Share creations, partially offset by the withdrawal of 171 BTC, 1,015 ETH, 186,462 XRP, 172 BCH, 582 LTC, and 947 LINK to pay the foregoing Manager's Fee.

Net realized and unrealized loss on investment in digital assets for the year ended June 30, 2020 was ($3,629), which includes a realized loss of ($147) on the transfer of digital assets to pay the Manager's Fee, net change in unrealized depreciation on the Manager's Fee payable of $57 and net change in unrealized depreciation on investment in digital assets of ($3,539). Net decrease in net assets resulting from operations was ($4,347) for the year ended June 30, 2020, which consisted of the net realized and unrealized loss on investment in digital assets, plus the Manager's Fee of $718. Net assets increased to $32,374 at June 30, 2020, a 43% increase for the year. The increase in net assets resulted from the contribution of approximately 1,424 BTC, 8,231 ETH, 3,298,241 XRP, 1,433 BCH and 4,652 LTC with a total value of $14,099 to the Fund in connection with Share creations, partially offset by the withdrawal of 78 BTC, 450 ETH, 180,308 XRP, 100 BCH and 254 LTC to pay the foregoing Manager's Fee.

Cash Resources and Liquidity

The Fund has not had a cash balance at any time since inception. When selling Fund Components and/or Forked Assets to pay Additional Fund Expenses, the Manager endeavors to sell the exact number of Fund Components and/or Forked Assets needed to pay expenses in order to minimize the Fund's holdings of assets other than the Fund Components. As a consequence, the Manager expects that the Fund will not record any cash flow from its operations and that its cash balance will be zero at the end of each reporting period. Furthermore, the Fund is not a party to any off-balance sheet arrangements.

In exchange for the Manager's Fee, the Manager has agreed to assume most of the expenses incurred by the Fund. As a result, the only ordinary expense of the Fund during the periods covered by this Annual Report was the Manager's Fee. The Fund is not aware of any trends, demands, conditions or events that are reasonably likely to result in material changes to its liquidity needs.







        Selected Operating Data
        (All Fund Component balances are rounded to the nearest whole number)
                                                                For the Year Ended June 30,
                                               2022                       2021                        2020
                                           (All Fund Component balances are rounded to the nearest whole number)
        BTC:
        Opening balance                              7,340                       2,891                       1,545
        Creations                                       13                       4,669                       1,424
        Portfolio
        rebalancing(1)(2)(3)(4)                       (956 )                       (49 )                         -
        Manager's Fee, related party                  (166 )                      (171 )                       (78 )
        Closing balance                              6,231                       7,340                       2,891
        Accrued but unpaid Manager's
        Fee, related party                               -                           -                           -
        Net closing balance                          6,231                       7,340                       2,891
        ETH:
        Opening balance                             45,288                      16,713                       8,932
        Creations                                       77                      27,048                       8,231
        Portfolio
        rebalancing(1)(2)(3)(4)                     (4,990 )                     2,542                           -
        Manager's Fee, related party                (1,015 )                    (1,015 )                      (450 )
        Closing balance                             39,360                      45,288                      16,713
        Accrued but unpaid Manager's
        Fee, related party                               -                           -                           -
        Net closing balance                         39,360                      45,288                      16,713
        ADA:
        Opening balance                                  -                           -                           -
        Creations                                   20,953                           -                           -
        Portfolio rebalancing(2)(3)(4)          11,178,491                           -                           -
        Manager's Fee, related party              (282,861 )                         -                           -
        Closing balance                         10,916,583                           -                           -
        Accrued but unpaid Manager's
        Fee, related party                               -                           -                           -
        Net closing balance                     10,916,583                           -                           -
        SOL:
        Opening balance                                  -                           -                           -
        Creations                                        -                           -                           -
        Portfolio rebalancing(3)(4)                113,223                           -                           -
        Manager's Fee, related party                (2,007 )                         -                           -
        Closing balance                            111,216                           -                           -
        Accrued but unpaid Manager's
        Fee, related party                               -                           -                           -
        Net closing balance                        111,216                           -                           -
        DOT:
        Opening balance                                  -                           -                           -
        Creations                                        -                           -                           -
        Portfolio rebalancing(4)                   330,149                           -                           -
        Manager's Fee, related party                (1,962 )                         -                           -
        Closing balance                            328,187                           -                           -
        Accrued but unpaid Manager's
        Fee, related party                               -                           -                           -
        Net closing balance                        328,187                           -                           -
        AVAX:
        Opening balance                                  -                           -                           -
        Creations                                        -                           -                           -
        Portfolio rebalancing(4)                    89,506                           -                           -
        Manager's Fee, related party                  (532 )                         -                           -
        Closing balance                             88,974                           -                           -
        








        Accrued but unpaid Manager's
        Fee, related party                             -                   -                   -
        Net closing balance                       88,974                   -                   -
        LTC:
        Opening balance                           26,185               9,447               5,049
        Creations                                     47              15,310               4,652
        Portfolio
        rebalancing(1)(2)(3)(4)                   (1,901 )             2,010                   -
        Manager's Fee, related party                (606 )              (582 )              (254 )
        Closing balance                           23,725              26,185               9,447
        Accrued but unpaid Manager's
        Fee, related party                             -                   -                   -
        Net closing balance                       23,725              26,185               9,447
        UNI:
        Opening balance                                -                   -                   -
        Creations                                      -                   -                   -
        Portfolio rebalancing(3)(4)              236,778                   -                   -
        Manager's Fee, related party              (4,091 )                 -                   -
        Closing balance                          232,687                   -                   -
        Accrued but unpaid Manager's
        Fee, related party                             -                   -                   -
        Net closing balance                      232,687                   -                   -
        LINK:
        Opening balance                          153,328                   -                   -
        Creations                                    310                 253                   -
        Portfolio
        rebalancing(1)(2)(3)(4)                    9,391             154,022                   -
        Manager's Fee, related party              (4,042 )              (947 )                 -
        Closing balance                          158,987             153,328                   -
        Accrued but unpaid Manager's
        Fee, related party                             -                   -                   -
        Net closing balance                      158,987             153,328                   -
        BCH:
        Opening balance                            7,380               2,910               1,577
        Creations                                     13               4,697               1,433
        Portfolio
        rebalancing(1)(2)(3)(4)                     (907 )               (55 )                 -
        Manager's Fee, related party                (172 )              (172 )              (100 )
        Closing balance                            6,314               7,380               2,910
        Accrued but unpaid Manager's
        Fee, related party                             -                   -                   -
        Net closing balance                        6,314               7,380               2,910
        XRP:
        Opening balance                                -           6,697,006           3,579,073
        Creations                                      -          10,327,654           3,298,241
        Portfolio rebalancing(5)                       -         (16,838,198 )                 -
        Manager's Fee, related party                   -            (186,462 )          (180,308 )
        Closing balance                                -                   -           6,697,006
        Accrued but unpaid Manager's
        Fee, related party                             -                   -                   -
        Net closing balance                            -                   -           6,697,006
        








                                                             As of June 30,
                                              2022                2021                2020
        Prices of digital assets on
        principal market:
        BTC                              $     18,895.01     $     34,764.81     $      9,134.09
        ETH                              $      1,019.72     $      2,243.98     $        224.96
        ADA(2)                           $          0.44                 N/A                 N/A
        SOL(3)                           $         31.98                 N/A                 N/A
        DOT(4)                           $          6.81                 N/A                 N/A
        AVAX(4)                          $         16.24                 N/A                 N/A
        LTC                              $         51.43     $        141.61     $         41.15
        UNI(3)                           $          4.82                 N/A                 N/A
        LINK(1)                          $          6.04     $         19.28                 N/A
        BCH                              $         99.92     $        520.99     $        221.14
        XRP(5)                                       N/A                 N/A     $          0.18
        NAV per Share                    $         10.96     $         23.19     $          5.37
        Digital Asset Reference
        Rates:(6)
        BTC                              $     18,883.90     $     34,759.99     $      9,156.26
        ETH                              $      1,018.72     $      2,243.96     $        226.56
        ADA(2)                           $          0.44                 N/A                 N/A
        SOL(3)                           $         31.97                 N/A                 N/A
        DOT(4)                           $          6.85                 N/A                 N/A
        AVAX(4)                          $         16.60                 N/A                 N/A
        LTC                              $         51.27     $        141.54     $         41.16
        UNI(3)                           $          4.80                 N/A                 N/A
        LINK(1)                          $          6.03     $         19.26                 N/A
        BCH                              $         99.63     $        520.47     $        221.60
        XRP(5)                                       N/A                 N/A     $          0.18
        Digital Asset Holdings per
        Share(7)                         $         10.95     $         23.19     $          5.37
        


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Sep 01, 2022

COMTEX_413518870/2041/2022-09-01T09:01:53

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