When liquidators of collapsed crypto exchange FTX revealed they had located $5 billion in assets this week, one might assume that any bankruptcy claims would jump in price.

They barely budged, according to Matt Sedigh, the founder and CEO of Xclaim, a marketplace for buying and selling bankruptcy claims.

“[It] had very minimal impact on our marketplace, where you would think that if you find $5 billion, it certainly enhances the value. It didn’t by much, it increased prices by about a penny,” Sedigh said.

FTX claims are currently trading on the Xclaim marketplace for as much as 15.5 cents on the dollar for pristine claims, which are those that have all the appropriate supporting documentation. Other claims tend to trade around 2% to 3% lower.

Last week, FTX claims were sitting at about 13.5 cents on the dollar. The pricing is dynamic, often moving with the market’s views of how quickly the bankruptcy proceedings might be resolved.

Trading crypto bankruptcy claims

Bankruptcy claims are an incredibly illiquid asset class. Sedigh designed the marketplace to help solve this problem, enabling claimants to cash out quickly by selling to another party rather than waiting for a lengthy bankruptcy process to conclude. 

Xclaim currently offers bidding on claims for four crypto bankruptcy cases: Celsius, FTX, BlockFi and Voyager. They are trading at as much as 18.5 cents, 15.5 cents, 32.5 cents and 41 cents on the dollar respectively for pristine claims. 

Two components tend to drive their valuations, Sedigh said. 

First, the valuation of underlying assets divided by the number of creditors expected to receive payments. Second, the timeline of claims, Sedigh said. 

A long road ahead for FTX

The best comparison with FTX may be the Bernie Madoff case, which has been an extremely long bankruptcy process. 

Madoff was handed a 150-year prison sentence after he pleaded guilty to running a multibillion-dollar Ponzi scheme that lost many investors’ life savings. The bankruptcy case was filed in 2008 and payments are still being made to creditors. 

“Any FTX customer who’s looking for cash, or expecting cash in the next two years, I would feel very strongly saying that they’re unlikely to see that,” Sedigh said. “Prices will go up if they find more assets, or if they gain more certainty. Prices will go down if those assets are worthless and litigation would extend the timeline.” 

Who has an appetite for distressed assets ?

Despite this, there’s still an appetite to buy claims. As claims trading is an unregulated industry, Xclaim has doubled its buyer base by allowing individuals to register “buy” claims, Sedigh said. 

Many of the buy-side clients are crypto traders themselves, representing the bull side of the market. Finding sellers of claims can be harder because the contact information for holders is currently nonpublic. 

“The way we’ve been engaging with them is it is actually marketing for us when we accomplish a trade,” Sedigh said. “Every single trade needs to be recorded with the court, so every time a trade occurs, our name is popping up on the docket and people that are motivated to collect what they are owed will find opportunities, like ours, to cash out.” 

The claims market is not regulated and the hunt for value in crypto claims has attracted individual investors as well as institutional players, Sedigh said. “Anyone that remains a crypto bull or bear can come in and trade.”

Sellers of claims tend to be institutional investors such as crypto hedge funds with external shareholders or investors who want to close out positions, offset the hit against taxes and move on.

Singapore-based crypto trader QCP Capital has at least $97 million with FTX and has been trying to sell its claim, The Block reported last month. Other firms known to have assets on FTX include Multicoin Capital, Genesis Block HK, Nickel Digital Asset Management and Galois Capital. The impact on Genesis Block HK was so significant that the firm shut down its over-the-counter trading business in December after almost 10 years of operation.

Since July, XClaim has processed about $152 million worth of claims across the four bankruptcy cases and registered upward of 200 claims, Sedigh said. 

“We have registered many more buyers, particularly because of FTX, because they believe there’s an opportunity there, but the trading hasn’t been as fast as the other cases, at least not to date,” Sedigh said.

Disclaimer: Beginning in 2021, Michael McCaffrey, the former CEO and majority owner of The Block, took a series of loans from founder and former FTX and Alameda CEO Sam Bankman-Fried. McCaffrey resigned from the company in December 2022 after failing to disclose those transactions.

Source: The Block