FTX Debt Trading Booms, Investors Compete to Buy

Several well-known investment firms are in talks to acquire FTX's debt, including some large asset management companies. Meanwhile, some smaller investment institutions have begun purchasing debt from hedge funds looking for a quick exit. These transactions may be completed at prices lower than the final distribution amount in the bankruptcy process.

As a former cryptocurrency trading giant, FTX left about 1 million creditors after filing for bankruptcy protection last month, with a total debt amounting to billions of dollars. According to court documents, FTX owes as much as $3.1 billion to just the top 50 creditors. While many creditors choose to wait for the bankruptcy process to complete, which could take several years, there are also some creditors who have started seeking to quickly exit through debt brokers and buyers.

Currently, selling debt means incurring significant losses, as the sale price of the debt is only a few percent of its face value. Debt purchasers need to have enough patience to wait for the progress of the bankruptcy proceedings, hoping to eventually recover more funds.

A investor focused on complex cryptocurrency trading stated: "The market shows strong interest in these debt securities, but many people do not fully understand the associated risks. Some even lack a basic understanding of cryptocurrency concepts."

This investor is experienced in dealing with complex crypto assets and has acquired the debts of several collapsed digital asset companies. He emphasizes that purchasing such debts requires immense patience, as legal disputes in some cases may take years to fully resolve.

Hedge Fund Clients Face Predicament

FTX had attracted numerous institutional investors, including crypto hedge funds, with its deep liquidity. Some asset management companies have publicly revealed that they have large amounts of funds stuck on the FTX platform. For example, the head of a crypto asset management company stated on social media that the company's "vast majority" of assets are trapped on FTX.

Industry insiders say that most fund companies hope to extricate themselves as soon as possible and are unwilling to face lengthy legal proceedings. Some FTX clients even expressed a desire to complete the sale of their claims by the end of the year in order to apply loss deductions when filing taxes.

Currently, the trading prices of FTX claims in the market are generally low. Some investors have stated that they have acquired several FTX claims at a price of 5-6% of face value, with nominal values of 2 million, 3 million, and 8 million dollars respectively. At the same time, they are negotiating for a claim worth about 100 million dollars and have contacted an overseas fund involved in a 23 million dollar claim. The asking prices of these funds are usually close to 10% of the face value.

Debt Assessment: More Art than Science

The assessment of the future value of bankruptcy claims is more like an art than an exact science. While a rough calculation can provide a general understanding of available assets and liabilities, substantial returns often depend on judicial arguments and legal strategies.

One legal strategy that some investors are betting on is that the court will recognize client assets as held in trust based on trust law. This means that assets held in trust will have preferential rights, and the relevant clients can expect to be prioritized for repayment.

However, not all claims are related to customer assets. There are also some complex employment contracts in the market that contain terms that may be difficult to enforce. For example, an employment contract allegedly from FTX promised a wage guarantee for up to 9 years, but legal experts believe that U.S. courts are unlikely to enforce such terms, which renders the related claims nearly worthless in bankruptcy claims.

As the FTX bankruptcy case progresses, the dynamics of the debt trading market continue to change. Investors need to carefully assess risks and have a deep understanding of the peculiarities of the cryptocurrency industry in order to seek opportunities in this complex market.