Crypto Clients Are Selling Claims at a Loss to Avoid Waiting for Bankruptcy

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FTX investor Mark Miller discusses the fallout from FTX after losing $25,000 in the collapse.

Some clients with escrow accounts at bankrupt cryptocurrency companies are now choosing to take a big loss on their investments to avoid facing the uncertainties of endless bankruptcies.

At least hundreds of customers burned by the collapses of FTX, Celsius Network LLC and Voyager Digital Ltd. are looking to sell their cryptocurrency claims at deep discounts so they don’t have to wait months or even years to see what they could recoup as platforms run through Chapter 11.

Customers and other creditors, holding about $1 billion in FTX claims and about $100 million in Celsius claims, have expressed interest in selling them through an online marketplace run by Cherokee Acquisition, a bankruptcy claims broker and buyer. , the company said.

John Ray, CEO of FTX Cryptocurrency Derivatives Exchange, during a House Financial Services Committee hearing investigating the collapse of FTX in Washington, DC on Tuesday, Dec. 13, 2022. House lawmakers were expected to get (Photographer: Al Drago/Bloomberg via Getty Images/Getty Images)

Nearly 500 users of FTX, Celsius and Voyager have posted claims worth around $126 million for sale on Xclaim Inc., a bankruptcy claims negotiation startup that recently shifted its business to focus on providing a platform to buy and sell crypto claims. Xclaim has so far listed approximately $91.7 million in claims from FTX customers, the company said.

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These investors take the loss in advance to avoid going through a bankruptcy procedure that does not necessarily guarantee them a better outcome or that they do not have time to find out.

“[Bankruptcy] takes more time than people can handle,” said Vladimir Jelisavcic, founder and director of Cherokee Acquisition. “Some people need or want money now.”

FTX founder Sam Bankman-Fried departs after his arraignment in New York on December 22, 2022. New York Judge Gabriel Gorenstein ordered Bankman-Fried released on $250 million bond pending his spectrum criminal fraud trial (Photo by Ed Jones/AFP via Getty Images/Getty Images)

Xclaim founder and chief executive Matt Sedigh said the company receives calls from creditors every day. Since most FTX users live overseas, about two-thirds of FTX claims submitted come from creditors based in China, Hong Kong and Taiwan, Sedigh said.

On the other side of trades, hedge funds and distressed debt investors make calculated bets. Fund managers including Contrarian Capital Management LLC, Invictus Global Management and digital asset investment firm NovaWulf Digital Management purchased claims from creditors of Celsius or Voyager, according to court documents.

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Professional asset managers have the capital and the time to overcome bankruptcies, and they said they buy tokens that they believe have high potential. Other considerations include analyzing the quality of the tokens they buy in case they are not reimbursed by a dollar bankruptcy.

The price of claims may change from day to day. Bankruptcy claims for Voyager fell to 40 cents on the dollar on Xclaim after FTX collapsed in early November, and the deal to buy Voyager fell apart. They had previously traded as low as 64 cents, Sedigh said. Celsius claims also dipped from highs of around 29 cents on the dollar to 19 cents shortly after FTX filed for bankruptcy.

FTX attorney James Bromley, right, arrives in bankruptcy court in Wilmington, Delaware, U.S., Tuesday, Nov. 22, 2022. A bankruptcy filing by FTX Group showed the fallen cryptocurrency exchange and a number of affiliates had a b (Photographer: Sarah Silbiger/Bloomberg via Getty Images/Getty Images)

Sales have so far only accounted for a fraction of the money owed to FTX, Celsius and Voyager customers. How much FTX creditors could recover in bankruptcy is unknown, and the case is more complicated because the company lacked reliable financial information and its founders face criminal investigations.

Xclaim and Cherokee Acquisition said their platforms allow cryptocurrency clients to reap higher returns because they make the historically opaque process of trading claims transparent, creating competition among potential buyers.

NOIA Capital, a Luxembourg-based investment company, bought FTX claims by offering sellers two options. The company would pay 5% up-front of the value of receivables, with 20% payments when accounts are paid off in bankruptcy, or 2.5% up-front, with 35% of future proceeds, said Muhammed Yesilhark, Chief Investment Officer of NOIA.

Yesilhark said the types of debt holders are varied and include companies that have been funded by FTX, as well as high net worth individuals who are “willing to just close this chapter of [their] life and move on.”

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Ezra Serrur, who launched his hedge fund management firm Serrur & Co. in June, said selling accounts not only allows clients to get money back immediately, but also locks in a loss to reduce risk. tax payable. Serrur was an investment analyst at distressed debt hedge fund DSC Meridian Capital LP before founding his eponymous hedge fund.

Buyers, on the other hand, have the capital to buy debt and can leverage expertise at the intersection between cryptocurrency and Chapter 11 to invest in digital assets with significant advantage, Serrur said. .

“There is an opportunity, if you are willing to go through the paperwork, the file and understand the details,” Serrur said.

Some customers have decided to keep their accounts. Josh Ragusa, a Voyager customer in California, said: “[I’d] rather take my chances with my holdings in hopes that I can get my wallet back and the digital currency will run its course again.”

“Hope is a powerful drug,” Ragusa said.

But for others, the venture into crypto has been an expensive but valuable lesson.

One client who sold his claims to Serrur’s fund was Dylan Jones. The California resident collected 16.5 cents on the dollar on his $165,205 Celsius claim via Xclaim. Jones said he opened his account because Celsius had promised high returns he thought were “unmatched anywhere else”.

He said he was not surprised to see big losses in the cryptocurrency market. If he kept those claims, he said he could see a return of between 10 and 20 cents based on the assets Celsius said he was able to secure.

“My crypto investments were always limited to an amount of money that I was willing to lose if the experiment imploded, as it did,” Jones said. He said he regretted “not listening to my inner conscience when the market got tough.”

“It was a life lesson learned in that there are very few get-rich-quick opportunities without huge risk,” he said.

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