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10-Q: GRAYSCALE DIGITAL LARGE CAP FUND LLC

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(EDGAR Online via COMTEX) -- Item 2. 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 unaudited financial statements and related notes included elsewhere in this Quarterly Report, which have been prepared in accordance with generally accepted accounting principles in the United States ("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 set forth under Part II, Item 1A. Risk Factors in this Quarterly Report or in Part I, Item 1A. Risk Factors or other sections of our Annual Report on Form 10-K for the year ended June 30, 2021 or other sections of the Information Statement.

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 held by the Fund, determined by reference to the Digital Asset Reference Rates and weightings within the Fund, less the Fund's expenses and other liabilities. To date, the Fund has not met its investment objective and the Shares quoted on OTCQX have not reflected the value of Fund Components, less the Fund's expenses and other liabilities, but have instead traded at both premiums and discounts to such value, which at times have been substantial. The Fund is not managed like a business corporation or an active investment vehicle.

The Digital Asset Reference Rate of each Fund Component is the price in U.S. dollars of such Fund Component, as determined by reference to (i) a volume-weighted average price in U.S. dollars as of 4:00 p.m., New York time, for the immediately preceding 24-hour period derived from data collected from Digital Asset Exchanges trading such Fund Component selected by the Reference Rate Provider (an "Indicative Price") or (ii) the index price in U.S. dollars as of 4:00 p.m., New York time, determined by the Reference Rate Provider by further cleansing and compiling the trade data used to determine the Indicative Price in such a manner as to algorithmically reduce the impact of anomalistic or manipulative trading (an "Index Price").

Prior to February 1, 2022 and for the periods covered by this report, the Fund valued each Fund Component for operational purposes by reference to an "Old Index Price," which, for each Fund Component, was the volume-weighted average price in U.S. dollars for a Fund Component as of 4:00 p.m., New York time, for the immediately preceding 24-hour period derived from data collected from Digital Asset Exchanges trading such Fund Component selected by the Reference Rate Provider and as further cleansed and compiled in such a manner as to algorithmically reduce the impact of anomalistic or manipulative trading. The Old Index Prices were calculated using the same methodology as the Index Prices with an additional averaging mechanism overlaid to the price produced resulting in each Old Index Price reflecting an average price for the 24-hour period.

Effective February 1, 2022, the Fund ceased using Old Index Prices for each Fund Component and began valuing the Fund Components for operational purposes by reference to Index Prices. There was no change to the Digital Asset Exchanges selected by the Reference Rate Provider to determine each Index Price or the criteria used to select such Digital Asset Exchanges.

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 (unaudited)
        Financial Highlights for the three and six months ended December 31, 2021 and
        2020
        (All amounts in the following table and the subsequent paragraphs, except Share,
        per Share, each Fund Component and price of each Fund Component amounts, are in
        thousands)
                                              Three Months Ended December 31,             Six Months Ended December 31,
                                                2021                   2020                2021                  2020
        Net realized and unrealized
        gain on investments in digital
        assets                            $         33,352       $        146,712     $       135,298       $       154,619
        Net increase in net assets
        resulting from operations         $         29,591       $        145,618     $       128,704       $       153,150
        Net assets                        $        496,947       $        252,657     $       496,947       $       252,657
        


Net realized and unrealized gain on investments in digital assets for the three months ended December 31, 2021 was $33,352, which includes a realized gain of $17,866 on the transfer of digital assets to pay the Manager's Fee and quarterly rebalance of Fund Components and net change in unrealized appreciation on investments in digital assets of $15,486. Net increase in net assets resulting from operations was $29,591 for the three months ended December 31, 2021, which consisted of the net realized and unrealized gain on investments in digital assets, less the Manager's Fee of $3,761. Net assets increased to $496,947 at December 31, 2021, a 6% increase for the three-month period. The increase in net assets resulted primarily from the price appreciation in the BTC and ETH Fund Components during the period, partially offset by the withdrawal of approximately 41 BTC, 257 ETH, 666 SOL, 72,871 ADA, 1,340 UNI, 151 LTC, 1,014 LINK and 44 BCH to pay the foregoing Manager's Fee.

Net realized and unrealized gain on investments in digital assets for the three months ended December 31, 2020 was $146,712, which includes a realized gain of $426 on the transfer of digital assets to pay the Manager's Fee and net change in unrealized appreciation on investments in digital assets of $146,286. Net increase in net assets resulting from operations was $145,618 for the three months ended December 31, 2020, which consisted of the net realized and unrealized gain on investments in digital assets, less the Manager's Fee of $1,094. Net assets increased to $252,657 at December 31, 2020, a 194% increase for the three-month period. The increase in net assets resulted from the contribution of approximately 1,054 BTC, 6,094 ETH, 1,061 BCH, 2,441,699 XRP, and 3,443 LTC with a total value of $21,199 to the Fund in connection with Share creations during the period, partially offset by the withdrawal of approximately 51 BTC, 298 ETH, 52 BCH, 119,274 XRP and 167 LTC to pay the foregoing Manager's Fee.

Net realized and unrealized gain on investments in digital assets for the six months ended December 31, 2021 was $135,298, which includes a realized gain of $31,570 on the transfer of digital assets to pay the Manager's Fee and quarterly rebalances of Fund Components and net change in unrealized appreciation on investments in digital assets of $103,728. Net increase in net assets resulting from operations was $128,704 for the six months ended December 31, 2021, which consisted of the net realized and unrealized gain on investments in digital assets, less the Manager's Fee of $6,594. Net assets increased to $496,947 at December 31, 2021, a 35% increase for the six-month period. The increase in net assets resulted from the contribution of approximately 13 BTC, 77 ETH, 13 BCH, 47 LTC, 310 LINK and 20,953 ADA with a total value of $935 to the Fund in connection with Share creations during the period, partially offset by the withdrawal of approximately 86 BTC, 519 ETH, 666 SOL, 143,630 ADA, 1,340 UNI, 311 LTC, 2,062 LINK and 90 BCH to pay the foregoing Manager's Fee.

Net realized and unrealized gain on investments in digital assets for the six months ended December 31, 2020 was $154,619, which includes a realized gain of $473 on the transfer of digital assets to pay the Manager's Fee and net change in unrealized appreciation on investments in digital assets of $154,146. Net increase in net assets resulting from operations was $153,150 for the six months ended December 31, 2020, which consisted of the net realized and unrealized gain on investments in digital assets, less the Manager's Fee of $1,469. Net assets increased to $252,657 at December 31, 2020, a 680% increase for the six-month period. The increase in net assets resulted from the contribution of approximately 4,458 BTC, 25,774 ETH, 4,486 BCH, 10,327,654 XRP and 14,566 LTC, with a total value of $67,133 to the Fund in connection with Share creations during the period, partially offset by the withdrawal of approximately 79 BTC, 457 ETH, 80 BCH, 183,002 XRP and 257 LTC to pay the foregoing Manager's Fee.

Off-Balance Sheet Arrangements

The Fund is not a party to any off-balance sheet arrangements.

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.

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 Quarterly 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
                                               21
        --------------------------------------------------------------------------------
                                                 Three Months Ended December 31,               Six Months Ended December 31,
                                                  2021                     2020                2021                    2020
        BTC:
        Opening balance                                7,083                    6,267               7,340                   2,891
        Creations                                          -                    1,054                  13                   4,458
        Portfolio rebalancing1, 2, 3                    (432 )                      -                (657 )                     -
        Manager's Fee, related party                     (41 )                    (51 )               (86 )                   (79 )
        Closing balance                                6,610                    7,270               6,610                   7,270
        Accrued but unpaid Manager's Fee,
        related party                                      -                        -                   -                       -
        Net closing balance                            6,610                    7,270               6,610                   7,270
        








        ETH:
        Opening balance                          41,481          36,234          45,288          16,713
        Creations                                     -           6,094              77          25,774
        Portfolio rebalancing1, 2, 3               (569 )             -          (4,191 )             -
        Manager's Fee, related party               (257 )          (298 )          (519 )          (457 )
        Closing balance                          40,655          42,030          40,655          42,030
        Accrued but unpaid Manager's Fee,
        related party                                 -               -               -               -
        Net closing balance                      40,655          42,030          40,655          42,030
        








        SOL:
        Opening balance                                           -       -             -       -
        Creations                                                 -       -             -       -
        Portfolio rebalancing1                              106,015       -       106,015       -
        Manager's Fee, related party                           (666 )     -          (666 )     -
        Closing balance                                     105,349       -       105,349       -
        Accrued but unpaid Manager's Fee, related party           -       -             -       -
        Net closing balance                                 105,349       -       105,349       -
        








        ADA:
        Opening balance                       11,206,827               -                -               -
        Creations                                      -               -           20,953               -
        Portfolio rebalancing1, 2                393,666               -       11,650,299               -
        Manager's Fee, related party             (72,871 )             -         (143,630 )             -
        Closing balance                       11,527,622               -       11,527,622               -
        Accrued but unpaid Manager's Fee,
        related party                                  -               -                -               -
        Net closing balance                   11,527,622               -       11,527,622               -
        








        UNI:
        Opening balance                                           -       -             -       -
        Creations                                                 -       -             -       -
        Portfolio rebalancing1                              213,332       -       213,332       -
        Manager's Fee, related party                         (1,340 )     -        (1,340 )     -
        Closing balance                                     211,992       -       211,992       -
        Accrued but unpaid Manager's Fee, related party           -       -             -       -
        Net closing balance                                 211,992       -       211,992       -
        








        LTC:
        Opening balance                          25,349          20,480          26,185           9,447
        Creations                                     -           3,443              47          14,566
        Portfolio rebalancing1, 2, 3             (1,332 )             -          (2,055 )             -
        Manager's Fee, related party               (151 )          (167 )          (311 )          (257 )
        Closing balance                          23,866          23,756          23,866          23,756
        Accrued but unpaid Manager's Fee,
        related party                                 -               -               -               -
        Net closing balance                      23,866          23,756          23,866          23,756
        








        LINK:
        Opening balance                                     166,050       -       153,328       -
        Creations                                                 -       -           310       -
        Portfolio rebalancing1,2, 3                          (4,669 )     -         8,791       -
        Manager's Fee, related party                         (1,014 )     -        (2,062 )     -
        Closing balance                                     160,367       -       160,367       -
        Accrued but unpaid Manager's Fee, related party           -       -             -       -
        Net closing balance                                 160,367       -       160,367       -
        








        BCH:
        Opening balance                                     7,279       6,307       7,380       2,910
        Creations                                               -       1,061          13       4,486
        Portfolio rebalancing1, 2, 3                         (313 )         -        (381 )         -
        Manager's Fee, related party                          (44 )       (52 )       (90 )       (80 )
        Closing balance                                     6,922       7,316       6,922       7,316
        Accrued but unpaid Manager's Fee, related party         -           -           -           -
        Net closing balance                                 6,922       7,316       6,922       7,316
        








        XRP:
        Opening balance                               -       14,519,233               -        6,697,006
        Creations                                     -        2,441,699               -       10,327,654
        Portfolio rebalancing4                        -                -               -                -
        Manager's Fee, related party                  -         (119,274 )             -         (183,002 )
        Closing balance                               -       16,841,658               -       16,841,658
        Accrued but unpaid Manager's Fee,
        related party                                 -                -               -                -
        Net closing balance                           -       16,841,658               -       16,841,658
        Number of Shares:
        Opening balance       15,867,400       13,170,200       15,837,800        6,029,000
        Creations                      -        2,222,600           29,600        9,363,800
        Closing balance       15,867,400       15,392,800       15,867,400       15,392,800
        








                                                                   As of December 31,
                                                                2021                2020
        Prices of digital assets on principal market
        BTC                                                $     45,867.86     $     29,185.05
        ETH                                                $      3,644.75     $        744.99
        SOL1                                               $        168.25                 N/A
        ADA2                                               $          1.29                 N/A
        UNI1                                               $         16.83                 N/A
        LTC                                                $        144.08     $        124.49
        LINK3                                              $         19.07                 N/A
        BCH                                                $        420.63     $        341.98
        XRP4                                                           N/A     $          0.22
        NAV per Share                                      $         31.32     $         16.41
        Digital Asset Reference Rates based on the Old
        Index Prices5
        BTC                                                $     47,172.21     $     28,788.57
        ETH                                                $      3,730.30     $        740.77
        SOL1                                               $        172.57                 N/A
        ADA2                                               $          1.34                 N/A
        UNI1                                               $         17.80                 N/A
        LTC                                                $        148.49     $        126.00
        LINK3                                              $         19.90                 N/A
        BCH                                                $        430.21     $        349.11
        XRP4                                                           N/A     $          0.22
        Digital Asset Holdings per Share based on the
        Old Index Prices5                                  $         32.18     $         16.22
        


(1)

For accounting purposes, the Fund reflects creations and the Fund Components receivable with respect to such creations on the date of receipt of a notification of a creation but does not issue Shares until the requisite number of Fund Components is received. At this time, the Fund is not accepting redemption requests from shareholders. Subject to receipt of regulatory approval from the SEC and approval by the Manager in its sole discretion, the Fund may in the future operate a redemption program. The Fund currently has no intention of seeking regulatory approval to operate an ongoing redemption program.

As of December 31, 2021, the Fund had a net closing balance with a value of $510,589,735, based on the Old Index Prices (non-GAAP methodology). As of . . .

Feb 10, 2022

COMTEX_402132453/2041/2022-02-10T09:06:29

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