PART I
Item 1. Business
Overview
Tidal Commodities Trust I (“Trust”), a Delaware statutory trust organized on February 10, 2023, is a series trust currently consisting of one series: Hashdex Bitcoin ETF (f/k/a Hashdex Bitcoin Futures ETF) (“DEFI” or the “Fund”). The Fund is a commodity pool. The Fund issues shares of beneficial interest, called “Shares,” representing fractional undivided beneficial interests in the Fund. The Fund’s investment objective is for changes in the Shares’ net asset value (“NAV”) to reflect the daily changes of the price of the Nasdaq Bitcoin Reference Price - Settlement (NQBTCS) (the “Benchmark”), less expenses from the Fund’s operations. The Benchmark is designed to track the price performance of bitcoin. The Fund invests in bitcoin, bitcoin futures contracts (“Bitcoin Futures Contracts”) listed on the Chicago Mercantile Exchange Inc. (“CME”), and cash and cash equivalents. Because the Fund’s investment objective is to track the price of the Benchmark, changes in the price of the Shares may vary from changes in the spot price of bitcoin.
The Trust and the Fund operate pursuant to the Trust’s Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”), dated March 10, 2023. On January 2, 2024, the initial Form S-1 for DEFI was declared effective by the U.S. Securities and Exchange Commission (“SEC”). As noted below, the Fund is the successor to the Predecessor Fund (defined below), which commenced operations in September 2022. However, as of December 31, 2023, the Fund was not operational and had not yet begun trading on the NYSE Arca stock exchange (“NYSE Arca”). The current registration statement for DEFI was declared effective by the SEC on January 2, 2024 and registered an indeterminate number of Shares. BitGo Trust Company, Inc (the “Bitcoin Custodian”) is the custodian for the Fund’s bitcoin holdings; and U.S. Bank, N.A. is the custodian for the Fund’s cash and cash equivalents holdings (the “Cash Custodian” and together with the Bitcoin Custodian, the “Custodians”).
The Fund is the successor and surviving entity from the merger (the “Merger”) of the Hashdex Bitcoin Futures ETF (the “Predecessor Fund”) into the Fund. The Predecessor Fund was a series of the Teucrium Commodity Trust (the “Predecessor Trust”) sponsored by Teucrium Trading, LLC (“Prior Sponsor”). The Merger closed on January 3, 2024. In connection with the Merger, the Predecessor Fund shareholders received one Share for each share of the Predecessor Fund they owned prior to the Merger.
The sponsor of the Trust is Tidal Investments LLC, a Delaware limited liability company (the “Sponsor”). The principal office of the Sponsor is Milwaukee, Wisconsin and the Trust is located at 234 West Florida Street, Suite 203, Milwaukee, Wisconsin 53204. The Sponsor is registered as a commodity pool operator (“CPO”) with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). The Fund intends to be treated as a partnership for U.S. federal income tax purposes. The Sponsor has sponsored the Trust since 2023. Sponsoring the Fund is the Sponsor’s first experience in operating an exchange traded product that invests in crypto-currency futures or directly in bitcoin. The Sponsor’s responsibilities are discussed below in the section entitled “The Sponsor’s Operations.”
While investors will purchase and sell Shares through their broker-dealer, the Fund continuously offers creation baskets consisting of 10,000 Shares (“Creation Baskets”) at their net asset value (“NAV”) to certain financial institutions that have entered into an agreement with the Sponsor (“Authorized Purchasers”).
Recent Developments
Merger with Hashdex Bitcoin Futures ETF
On January 3, 2024, the Trust completed the Merger and acquisition of the Predecessor Fund, a series of the Predecessor Trust, into the Fund, a series of the Trust. The Merger was effected pursuant to an Agreement and Plan of Partnership Merger and Liquidation dated as of October 30, 2023 (the “Plan of Merger”) between the Predecessor Trust, on behalf of its Predecessor Fund series, and the Trust, on behalf of its Fund series.
Pursuant to the Plan of Merger, each Predecessor Fund shareholder received one share of the Fund for every one share of the Predecessor Fund held immediately before the commencement of trading on the NYSE Arca on the Closing Date based on the net asset value per share of the Predecessor Fund being equal to the net asset value per share of the Fund determined immediately prior to the Merger closing. The share price used for the delivery of shares of the Predecessor Fund was the net asset value per share of the Predecessor Fund determined after the close of business of NYSE Arca on January 2, 2024. Consequently, the Merger resulted in a one-for-one exchange of shares between the Predecessor Fund and the Fund. Further, the Fund acquired in the Merger all the assets of the Predecessor Fund and assumed all the liabilities of the Predecessor Fund. Effective the Merger closing, the Plan of Merger caused all of the Predecessor Fund’s shares to be cancelled and the Predecessor Fund to be liquidated.
The Merger did not materially modify the rights of Predecessor Fund shareholders with respect to their investment. The Fund has the same investment objective, investment strategies and investment restrictions, and substantially identical investment risks, as those had by the Predecessor Fund. Following the Merger, the Fund is now sponsored by the Sponsor, Tidal Investments LLC (f/k/a Toroso Investments LLC), and the Fund is now managed by portfolio managers employed by the Sponsor. The Fund pays the same management fee rate to the Sponsor, under the same terms, as previously paid by the Predecessor Fund to Teucrium Trading, LLC, the sponsor of the Predecessor Trust and the Predecessor Fund.
The Fund’s shares commenced trading on the NYSE Arca upon the effectiveness of the Merger under the ticker symbol “DEFI.”
Effect of Merger - Conversion to U.S. Spot Bitcoin ETF
On March 26, 2024, the Trust announced that the Fund would be permitted to have spot bitcoin holdings, and that it would track the Benchmark effective March 27, 2024. The Predecessor Fund’s name was the Hashdex Bitcoin Futures ETF, and the Fund’s name is the Hashdex Bitcoin ETF. Going forward and under normal market conditions, the Fund’s has a policy to maximize its holdings of physical bitcoin such that it is expected that at least 95% of the Fund’s assets will be invested in spot bitcoin. Up to 5% of the Fund’s assets may be invested in CME-traded bitcoin futures contracts and in cash and cash equivalents.
Fund Overview
The Fund is designed to provide investors with a means to gain price exposure to the bitcoin market. The Fund issues Shares that trade on NYSE Arca under the symbol “DEFI.” Shares can be purchased and sold by investors through their broker-dealer. Purchasing Shares of the Fund is subject to the risks of bitcoin as well as the additional risks of investing in the Fund.
The Sponsor will employ a passive investment strategy that is intended to track the changes in the Benchmark regardless of whether the Benchmark goes up or goes down. In order to track the Benchmark as closely as possible, the Fund will aim to maximize its investment in bitcoin. Because the Fund’s investment objective is to track the price of the Benchmark, the price of the Shares may vary from changes in the spot price of bitcoin. The NYSE Arca rule under which the Shares will be listed and traded prevents the Fund from utilizing leverage. ICE Data Indices, LLC calculates an approximate Fund NAV every 15 seconds throughout each day that the Fund’s Shares are traded on NYSE Arca for as long as the CME’s main pricing mechanism is open.
The Fund, the Sponsor, and their service providers, including the Custodians, will not loan or pledge the Fund’s assets, nor will the Fund’s assets serve as collateral for any loan or similar arrangement except to the extent of need to collateralize margin accounts held by the Fund’s futures commission merchants (“FCMs”).
Bitcoin Overview
Bitcoin is a digital asset or cryptocurrency that is a unit of account on the bitcoin network (“Bitcoin Network”), an open source, decentralized peer-to-peer computer network. The ownership and operation of bitcoin is determined by purchasers in the Bitcoin Network. The Bitcoin Network connects computers that run publicly accessible, or open source, software that follows the rules and procedures governing the Bitcoin Network. This is commonly referred to as the Bitcoin Protocol. Bitcoin may be held, may be used to purchase goods and services or may be exchanged for fiat currency. No single entity owns or operates the Bitcoin Network, and the value of bitcoin is not backed by any government, corporation or other entity. Instead the value of bitcoin is determined in part by the supply and demand in markets created to facilitate the trading of bitcoin. Public key cryptography protects the ownership and transaction records for bitcoin. Because the source code for the Bitcoin Network is open source, anyone can contribute to its development. At this time, the ultimate supply of bitcoin is finite and limited to 21 million “coins” with the number of bitcoin available increasing gradually as new bitcoin supplies are mined until the 21 million current protocol cap is reached. The following factors, among others, may affect the price and market for bitcoin:
The Benchmark Methodology
The Benchmark is governed by the Nasdaq Crypto Index Oversight Committee (“CIOC”), which is responsible for implementation, administration, and oversight of the Benchmark, including its cessation. The CIOC shall approve any material changes to the methodology and review the Benchmark methodology at least on an annual basis. The final Benchmark is calculated once every trading day and it is given by a weighted average across the settlement prices of the following “Core Exchanges” (as of December 29, 2023); Bitstamp, Coinbase, Gemini, itBit and Kraken.
The Benchmark was launched by Nasdaq, Inc (“Nasdaq”) on June 9, 2021 and is designed to track the price performance of bitcoin. Specifically, the Benchmark attempts to track the average bitcoin spot price by capturing the notional value of bitcoin USD transactions reported by selected public data sources as measured by Nasdaq. The Benchmark applies a rules-based pricing methodology to a diverse collection of pricing sources to provide a reference price for bitcoin and the pricing methodology is designed to account for variances in price across a wide range of sources which have been vetted according to criteria identified in the methodology document. The Benchmark is owned and administered by Nasdaq and may be changed from time to time. Detailed rules on the Benchmark administration and governance may be found at Nasdaq’s website. The Benchmark does not track the overall performance of all digital assets generally, nor the performance of any specific digital asset other than bitcoin. The Benchmark is calculated and published once a day on business days at 3:00 p.m., New York Time by CF Benchmarks Limited (https://www.cfbenchmarks.com/data/indices/NQBTCS) or other Nasdaq designated calculation agent.
According to the Benchmark methodology, any deviations from the Benchmark methodology are made in the sole judgment and discretion of Nasdaq so that the Benchmark continues to achieve its objective. Nasdaq will provide transparency over the decisions affecting the compilation of the reference rate and any related determination process, including contingency measures in the event of absence of or insufficient inputs, market stress or disruption, failure of critical infrastructure, or other relevant factors. Any contingency measures that are not directly addressed in the Benchmark methodology shall be subject to CIOC governance processes.
The Sponsor, in its sole discretion, may cause the Fund to track a benchmark other than the Benchmark at any time, with prior notice to investors. The Sponsor may change the Fund’s benchmark if investment conditions change or the Sponsor believes that another benchmark or standard better aligns with the Fund’s investment objective and strategy. The Sponsor, however, is under no obligation whatsoever to make such a change in any circumstance.
To the extent CIOC implements a material change to the calculation of the Benchmark, the Sponsor will issue a press release describing such change and its date of implementation which press release will be filed with the SEC on Form 8-K.
To the extent the Sponsor determines that in the best interest of the Fund to replace the Benchmark with another benchmark reference price or index, the Sponsor shall issue a press release describing the replacement of the Benchmark and new benchmark at least 60 days in advance of such replacement and will file such press release under Form 8-K with the SEC.
Bitcoin Futures Contracts
The CME currently offers two Bitcoin Futures Contracts, one contract representing 5 bitcoin (“BTC Contracts”) and another contract representing 0.10 bitcoin (“MBT Contracts”). The Fund will invest up to 5% of its assets in bitcoin BTC Contracts and MBT Contracts to the extent necessary to achieve exposure to the bitcoin futures market. Because the Fund’s investment objective is to track the price of the Benchmark by investing in bitcoin and Bitcoin Futures Contracts, changes in the price of the Shares may vary from changes in the spot price of bitcoin.
The Fund will maintain long positions in BTC Contracts and MBT Contracts to achieve exposure to the bitcoin futures market. As discussed under “the Fund’s Investment Strategies,” the Sponsor expects to invest the Fund’s assets in spot bitcoin and will utilize Bitcoin Futures Contracts to hedge the cash balance that the Sponsor deems necessary to meet the Fund’s liquidity needs for the cash payment of Share redemption settlements and of other applicable expenses borne by the Fund. The Fund may purchase MBT Contracts if the Fund has proceeds remaining from the sale of a Creation Basket that are less than the price of a BTC contract. BTC and MBT will count toward an aggregate position limit.
BTC Contracts began trading on the CME Globex trading platform on December 15, 2017 under the CME ClearPort ticker symbol “BTC” and are cash settled in U.S. dollars. MBT Contracts began trading on the CME Globex trading platform on May 3, 2021 under the CME ClearPort ticker symbol “MBT” and are also cash settled in U.S. dollars. The daily settlement prices for MBT Contracts are derived directly from the settlements in the BTC Contracts. BTC Contracts and MBT Contracts are listed for trading in serial months of six (6), quarterly in serial quarters of four (4). Additionally, when the listing schedule includes only a single futures contract set to expire in December, an extra December contract will be listed for the subsequent year. This ensures that at any given time, there are at least two December contracts available for trading.