Newest Wall Street trend: hedge funds taking over crypto claims

There is good news for anyone who still has an outstanding customer account with FTX from which they hope to recover money in the future. Wall Street is so convinced that the various crypto companies that went bankrupt last year (aka FTX, Celsius and Genesis Global) will be restarted at a certain point. Because of this conviction, a new trade has emerged. Creditors receive a proposal: wait for payment (if it ever comes), or sell your debt for 50 to 60 percent of the current value to hedge funds

Scott Galloway

It all started in September of this year with a YouTube appearance by Scott Galloway, the well-known professor and podcaster (together with Kara Swisher he has one of the most famous podcasts in the United States when it comes to news and tech, called Pivot).

Scott told how a company had contacted him to purchase FTX debt for 20 cents on the dollar. Suppose you are talking about a creditor with a former FTX customer account of 1 million dollars, then you can buy that claim for 200,000 dollars.

Scott said he agreed to it because he was confident that John Ray, the new CEO of FTX who was tasked with handling the bankruptcy, will likely restart the company in 2024 or 2025.

John Ray has already recovered $7 billion in assets, but it is still unclear how they will get those funds to the company’s former clients.

SBF

A month after that performance, in October 2023, there was the trial and conviction of Sam Bankman-Fried, the former founder of FTX, and afterwards that immense rally of Bitcoin (in November and December) and almost all other cryptocurrencies.

Last week the New York Times also broke the story of the FTX debt, as several hedge funds have now also gotten wind of the trade.

Investors are spending hundreds of millions on FTX bankruptcy claims, betting that its new leadership will recover funds that Sam Bankman-Fried misappropriated (New York Times) https://t.co/8Dil17slQt pic.twitter.com/Bfj8G2pBgp

— CP-CITE-UPR (@CITEtecnologias) December 20, 2023

Released official documents show that the following hedge funds are buying FTX, Celsius and Genesis Global debt: Farallon Capital, Silver Point Capital, Hudson Bay, Contrarian Capital Management and Canyon Partners. By now, the ‘crypto claims market’ is worth several hundreds of millions.

Thomas Braziel, a partner at the investment firm 117 Partners, a company that specializes in getting those hedge funds into contact with people who used to have FTX accounts commented: “the market is insane. It’s so hot.”

He was also the one who put Scott in touch with FTX creditors, especially in the New York and Washington DC area.

“Scott got lucky — we bought him a basket in like the low 20s. He’s going to make at least three or four times his money.”

70 cents per dollar

Wall Street is actually counting on a Bitcoin EFT to be approved next year and that the crypto market will bounce back again thanks to the halving (normally in April 2024). That is why they believe that it is better to take over the debts of those former crypto companies now, and if Bitcoin sets a new all-time high for example (end of 2024 or 2025 for example), to then restart FTX.

The market seems to follow because whereas claims that once traded for just a few cents have in the past few months surged in value. “Our first trade was in the low teens,” explained  Jay Conklin of hedge fund Park Walk, which began working with institutional investors to buy and sell claims shortly after FTX’s collapse. “Now there are deals in the 70s