Users of failed crypto exchanges and funds are selling their claims for a fraction of their paper value, creating a thriving market for bankruptcy claims.
The 2022 crypto meltdown affected some of the most prominent digital asset firms, leading to the collapse of dozens of high-profile crypto companies. With billions of companies closing, investors have started selling off their assets for cents on the dollar.
Alexander is one such investor. recently interview with wired, he said he had hundreds of thousands of dollars worth of crypto locked up in FTX. Faced with utility bills and other expenses, the crypto investor made the difficult decision to sell his claims against FTX at a huge discount.
Alexander sold his claims to Cherokee Acquisition, an investment fund that also operates Claims Market, one of the largest public bankruptcy claim markets. He received less than 20 cents on the dollar for his FTX claim, he claimed, but at least it allowed him to be “done with it and move on”.
Claim trading is the buying and selling of claims held by creditors against debtors in a bankruptcy proceeding. The market provides an opportunity for sellers to recoup some of their losses and for buyers to make a profit.
More specifically, it allows sellers to get immediate access to cash at a price offered at significant discounts. On the other hand, buyers can earn a higher return if the value ultimately returned to the creditors exceeds the amount they paid for the claims.
Bankruptcy claims markets have become a thriving market thanks to recent bankruptcies in the crypto sector. According to estimates by Open Exchange and Exclaim, there are currently between $20 billion and $30 billion locked up in crypto bankruptcies.
“We’re giving people the power to make a choice they might not have had,” said Matthew Sedigh, founder of Exclaim. He added that Exclaim focused exclusively on crypto bankruptcies last year and has since attracted more users and generated more revenue than in the previous two years.
High-profile crypto firms set to collapse in 2022
Several major crypto companies collapsed last year amid a broad market decline that began with the explosion of the Terra ecosystem, wiping out more than $40 billion worth of crypto market cap.
The fallout from Terra’s decentralized stablecoin UST prompted a series of bankruptcies, including the implosion of major crypto lenders like Celsius and BlockFi, and even the collapse of cryptocurrency exchange FTX.
Three Arrows Capital, Core Scientific, Voyager, Babel Finance, HodlKnot and Zipmex were some of the other high-profile crypto companies that filed for bankruptcy last year. 2023 also started with a bang with the collapse of crypto lender Origin.
The crypto meltdown also spread to the mainstream banking system, taking down crypto-friendly bank Silvergate, which announced earlier this month that it had decided to cease its operations and liquidate its subsidiary.
After Silvergate, including two other banks Silicon Valley Bank and Signature Bank, both of which had some exposure to crypto firms, also announced their closures.