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Hot New Market in Crypto? Carcass of trading ftx.

Hot New Market in Crypto? Carcass of trading ftx.

After the FTX cryptocurrency exchange filed for bankruptcy last year, Thomas Brazil, an investor who specializes in collapsed businesses, began brokering an unusual type of transaction: a market to profit from the collapse of FTX.

Mr. Brazil put one of his clients in touch with a large financial firm that had lost approximately $100 million when FTX collapsed. Last December, the company agreed to sell its claim in the FTX bankruptcy – essentially an proceeds from the collapsed exchange – for 6 cents on the dollar, betting that it would have to wait years for FTX to begin to unravel. It was better to collect some fast cash than that. To pay back creditors.

Then the FTX claims market exploded. Mr. Brazile recently brokered the sale of a $19 million FTX claim for 68 cents on the dollar, he said, collecting about $100,000 in commission. Some claims are selling for more than 70 cents, as investors have become optimistic that FTX's new leadership will recover a large portion of the nearly $8 billion that founder Sam Bankman-Fried was convicted of stealing from clients.

“The market is crazy,” said Mr. Brazile, a partner at the investment firm 117 Partners. “It's very hot.”

The initial disappointment over FTX's failure has given way to a strange life for the bankrupt exchange: a trading frenzy that has intensified in recent weeks as major financial firms look for opportunities in the wreckage of one of the worst trading collapses in decades. Have been. The story of FTX has completely changed, as investors who once used the platform to make risky crypto bets now gamble on the company's chances in bankruptcy court – and plow any profits back into the reviving crypto market. Let's send it.

For speculators, the math is simple: They're betting that if they buy a $10 million claim at, say, 50 cents on the dollar, they'll make a substantial profit if more than $5 million is ultimately paid back by the bankruptcy estate. Is. In total, FTX claims have changed hands between $1 billion and $1.5 billion since the bankruptcy began, according to Exclaim, a company that connects buyers and sellers.

Most of the claims represent crypto and cash holdings that FTX customers stored on the exchange when it filed for bankruptcy in November 2022. Some claims have a face value of only a few million dollars, while others are worth tens of millions. In recent weeks, about $100 million worth of claims have been bought, according to market participants.

Court records show the market has attracted a number of well-known hedge funds and investment firms, including Farallon Capital, Silver Point Capital, Hudson Bay, Contrarian Capital Management and Canyon Partners.

But it has also attracted investors with a more checkered history in the finance industry. In June, a court-appointed investigator in Delaware accused Mr. Brazile of falsifying bank records and misusing funds from a bankruptcy estate he was managing. Mr. Brazil's lawyers responded by objecting to those findings regarding his “actual or potential criminal liability.”

Another person involved in the claims market is a former top FTX executive who worked closely with Mr Bankman-Fried. Ramnik Arora, one of FTX's leading fund-raisers, recently launched a online claims trading platform FTX began buying some small claims for clients and for itself, according to corporation records and two people familiar with the matter. Mr. Arora was scheduled to testify for the prosecution at Mr. Bankman-Fried's criminal fraud trial in October, but was ultimately not called as a witness; He has not been accused of any wrongdoing.

An FTX spokesperson declined to comment.

Claims trading is nothing new, especially in complex bankruptcies that take years to unfold. But recent bankruptcy filings by high-profile crypto firms, including lending companies Genesis Global, Celsius Network and BlockFi, have created a cottage industry of brokers that specialize in matching buyers and sellers.

The market gives creditors stuck in court proceedings a chance to withdraw money immediately instead of waiting for years for payment. The compromise is that they have to accept much less than the face value of the claim – and potentially even less than the bankruptcy estate may ultimately be awarded.

Still, hundreds of crypto investors are taking that deal. Over the past 18 months, Exclaim has processed $70 million in Genesis trades and $4 million in Celsius trades, according to Andrew Glantz, the firm's chief strategy officer.

The bankruptcy of FTX has generated the most interest so far. After the company failed, John Ray, a veteran of corporate turnarounds who handled the unwinding of Enron, took over from Mr. Bankman-Fried. In court filings and testimony in Congress, Mr. Wray called FTX the worst corporate mess ever, raising fears that it may be impossible to get the money back.

But the recovery process has been faster than expected. Mr. Wray estimated in August that FTX had recovered $7 billion, though given the number of outstanding claims it was unclear how much of that money would return to creditors.

Nevertheless, it is claimed to have increased in value once trading for only a few cents on the dollar. “Our first trades were in the teens,” said Jay Conklin, managing partner of hedge fund Park Walk, who began working with institutional investors to buy and sell claims shortly after the collapse of FTX. “There are deals in the 70s now,” Mr. Conklin said.

One of the most vocal campaigners for the claims market is Mr Brazile, who lives in the Italian seaside town of Forte dei Marmi, and has become a familiar face on the crypto conference circuit. Some time ago, he said, he convinced popular podcaster Scott Galloway, To buy $2.5 million FTX claim, Mr. Galloway discussed investing on one of his shows.

“He turned out to be lucky – we bought him a basket when he was 20,” Mr Brazile said. “He's going to make at least three or four times his money.”

In the event of bankruptcy, the claim transfer is typically filed with the court within a few weeks of closing. The filing almost always identifies the buyer, but the identity of the seller is often redacted for privacy reasons.

There are risks everywhere. Brokers operate with limited oversight, and no one controls who can buy claims or arrange deals. Some matchmakers require sellers to give a specific time period to find a buyer, which may limit a creditor's ability to purchase a claim.

Bradley Max, director of claims broker Cherokee Acquisitions, said some sellers have trouble negotiating deals on their own because they have to follow “know your customer” rules that allow buyers to avoid transactions with bad actors. Install for.

“Nobody wants to buy into the FTX claims of Vladimir Putin or someone like him,” said Mr. Max, whose firm runs a online forum For trading claims.

It is also unclear how much FTX will ultimately pay. As of this fall, lawyers and other professionals working on the bankruptcy case had collected more than $300 million in fees — money subtracted from the pool of money that flows back to creditors.

And in recent months, the Internal Revenue Service has filed claims for $24 billion, arguing that FTX owes the government “income taxes, employment taxes and penalties” from 2018 to 2022. (The IRS did not respond to a request for comment.)

The IRS is generally paid before all other creditors in a bankruptcy, so a large tax claim can significantly reduce the funds available to clients. But the amount actually owed to FTX remains in dispute, with a hearing scheduled for early next year.

For now, speculators are not worried.

“A stupid, stupid thing,” Mr. Brazil said of the IRS's efforts to claim billions of dollars of unpaid taxes. “No basis in facts.”

Kirsten Noyes And Sheelagh McNeil Contributed to research.

https://static01.nyt.com/images/2023/12/19/multimedia/00ftx-claims-Thomas-cwfb/00ftx-claims-Thomas-cwfb-facebookJumbo.jpg

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