Hundreds of thousands of people around the world have been unable to access their funds after turmoil in the crypto industry took down some of its leading players. Along with FTX, crypto lenders Celsius, Voyager Digital, BlockFi, and Genesis Global Capital, as well as hedge fund Three Arrows Capital (3AC), all collapsed, leaving investors — from small traders to financial institutions — at the mercy of bankruptcy proceedings, Wired reported. These collapses, and the difficult situations that investors have found themselves in, have helped drive the growth of digital marketplaces for trading bankruptcy claims, which give speculators willing to wait out the legal cases a chance at large returns and cut-price exposure to crypto. Some, like Open Exchange, which is headed by the former founders of bankrupt hedge fund 3AC, are even trying to tokenize these claims, turning crypto failures into new tokens that holders can either sell off or post as collateral. Some claim holders accuse the marketplaces and buyers of taking advantage of distressed sellers. But with their money locked away, potentially for years, others are having to take the hard decision to sell their claims now for a fraction of their paper value. Buying claims in crypto bankruptcies is seen as a way to invest in crypto at a discount. Although each creditor’s claim is valued in dollars on the date of the bankruptcy filing, not denominated in crypto, the balance sheets of these firms are made up largely of crypto assets. Therefore, if crypto were to appreciate in price, claim holders would receive a greater return. In the case of Mt. Gox, the judge even decided that claim holders should share fully in the rise in crypto prices, meaning they are set to make a return of over 100 percent on their claims when redistribution begins on October 31. However, purchasing claims is not for the faint of heart, says Thomas Braziel, founder of 507 Capital, an investment company that specializes in distressed debt, which holds a large position in the Mt. Gox bankruptcy and others. Not only do creditors sometimes misrepresent the value of their claims, intentionally or otherwise — some people “fib around the edges,” says Braziel — but some claims turn out to be entirely fraudulent. Read more.
Don't miss the "Issues Impacting Unsecured Creditors in Crypto Bankruptcies" session at the Annual Spring Meeting in April. Are you registered?