2022 was a year marked by turmoil in the cryptocurrency industry, underscored by major collapses and the dramatic bankruptcy of FTX, a once-dominant exchange. This narrative begins with the early 2022 downfall of Terra, a stablecoin project whose implosion sent shockwaves through the market, leading to a summer riddled with bankruptcies among various crypto firms. These entities, once regarded as robust and trustworthy, succumbed to inadequate risk management practices.
Amidst this chaos, Sam Bankman-Fried, often likened to the “JP Morgan of Crypto,” emerged with a strategy purported to rescue the flailing crypto economy. Through substantial investments, Bankman-Fried aimed to stabilize these institutions in a manner reminiscent of JP Morgan’s efforts during the early 20th century financial crises. However, by November, the savior narrative began to crumble as FTX itself plunged into jeopardy, culminating in a Chapter 11 bankruptcy filing on November 11, 2022.
Fast forward to 18 months later, the situation appears remarkably different. The FTX estate has proposed a creditor cash recovery plan, promising restitution amounts ranging between $14.5 billion and $16.3 billion, which also accounts for accrued interest over the period. Remarkably, this plan stipulates that creditors holding less than $50,000 at the time of the bankruptcy are to receive a minimum of 118% of their assets, a provision covering 98% of the creditors. Those possessing more than $50,000 could receive between 118% and 142%.
The restitution plan, however, has sparked debate regarding its adequacy, especially in light of the cryptocurrency market’s 170% growth since FTX’s bankruptcy. Adding complexity to the issue, FTX has been actively auctioning off its Solana holdings at a discount, intending to boost cash reserves for fulfilling creditor payments. Despite this effort, creditors with Solana assets are facing frustrations; they are to be compensated based on the value at the time of the exchange’s collapse rather than the current higher market value of the tokens.
One of the thorniest issues has been the impracticality of repaying creditors in the specific cryptocurrencies held, such as Bitcoin or Ethereum. At the time of its collapse, FTX held only a fraction of these assets compared to what customers had deposited. Thus, compensation is being issued in cash, which may inadvertently infuse several billion dollars back into the crypto market, potentially stimulating a new bull market phase.
As the repayment plan awaits judicial approval, with expectations to finalize by the year’s end, there’s speculation that the resolution of FTX’s bankruptcy could not only close a tumultuous chapter but also catalyze a further bullish trend in the crypto market. This turn of events presents a poignant irony, as FTX’s downfall initially signaled the end of a bear cycle, yet now it might herald an extended bull market.
