FTX’s bankruptcy proved to be quite lucrative for hedge funds

Marking the culmination of one of the wildest bankruptcy stories of the 2020s (besides maybe Hertz), FTX creditors are poised to get all of their money back… and then some. On Monday, CNBC reported that “98% of FTX’s creditors will get 119% of the amount of their allowed claim as of November 2022, when the exchange filed for bankruptcy protection.” In total, FTX owes its creditors approximately $11.2 billion, and it has recovered between $14.7 billion and $16.5 billion to distribute.

So, how did FTX find that ~$15 billion? By “HODLing” its existing assets, primarily. FTX’s bankruptcy in November 2022 marked the bottom of a year-long crypto bear market that saw bitcoin collapse from ~$64,000 to ~$16,000 per coin, but when the company filed for bankruptcy, customers’ coins were frozen on the platform.

It wasn’t until almost a year later, in September 2023, when Judge John Dorsey approved an order allowing the bankrupt exchange to sell up to $200 million in its cryptocurrency assets per week, as well as engage in hedging and staking agreements to help it minimize price volatility. At the time, FTX owned $3.4 billion in cryptocurrencies, including $1.16 billion in Solana and $560 million in bitcoin, and bitcoin had already climbed from $16,000 when FTX filed for bankruptcy to $26,000 ten months later. By March 2024, bitcoin had once again topped $60,000, and Solana was up almost 1,000% from six months prior, climbing from $20 to $199.

Basically, FTX’s sales benefited from a fortuitous bull market, and that bull market didn’t stop with crypto. FTX also had a slew of venture investments, including purchasing an 8% stake in Anthropic for $500 million in 2021, before the AI boom. FTX later sold two-thirds of that stake for $884 million, delivering a more than 100% return on investment, including the shares that it still holds.

While FTX is technically returning 119% of creditors’ claims, many still lost money in same-currency terms. FTX’s crypto assets were “dollarized” based on their prices in dollars at the time of bankruptcy, so while its two largest crypto positions, solana and bitcoin, climbed more than 900% and 300% after November 2022, creditors are being repaid in dollar terms, not same-currency crypto tokens. There were two real winners of these bankruptcy proceedings: funds that bought FTX’s positions at discounted prices, and investors who purchased creditors’ claims for pennies on the dollar.

To raise the money to repay creditors, FTX sold much of its crypto holdings at discounts, including ~two-thirds of its Solana tokens that it offloaded at a 63% discount to market prices in April 2024. Mike Novogratz’s Galaxy Digital and asset manager Pantera raised $620 million and up to $250 million, respectively, just to buy FTX’s tokens. Not a bad trade!

After FTX filed for bankruptcy, large funds such as Attestor Limited, Farallon Capital, and Baupost Group began buying up creditors’ claims at discounts to face value, all amassing stakes worth more than $200 million by March 2024, with Attestor buying claims as early as March 2023, when they were trading at 20% of face value. Another investor, bankruptcy claim broker Thomas Breziel, began investing even earlier, buying an $8 million claim for $240,000, or ~3% of its stated value, in November 2022. Every trade has a winner and loser, and as you could expect, many of the sellers of these discounted claims have attempted to back out of their agreements as the likelihood of repayment increased, leading buyers such as Attestor, hedge fund Olympus Peak, and credit fund Silver Point to file lawsuits against their counterparties.

My thoughts on the whole thing are pretty simple: anyone crazy enough to invest in FTX claims during a crypto bear market, while the company’s entire management team is facing the possibility of years in prison for a multibillion-dollar fraud, deserves every penny.