As the saga and long shadow of FTX continues to dominate crypto discourse, the recent news that the long-awaited bankruptcy distribution had been approved was – justifiably so – a headline generating event. Nearly 2 years after the implosion of the exchange and 1 year after the conviction of Samuel Bankman-Fried on criminal charges, the unlocking of between $14 and $16 billion from the bankruptcy estate has market analysts revising price targets upwards. With reports that 98% of FTX creditors will receive approximately 119% of allowed bankruptcy claims there is understandable optimism for what these distributions will mean for the wider crypto marketplace.
One important caveat that needs to be identified up front is that these distributions, including the widely reported 119% of claims figure, are based on the claims filed in November 2022. During the time since bankruptcy bitcoin has risen approximately 260%, matching a wide-ranging rise in asset prices during that same period. In other words, investors whose holdings/deposits at FTX were denominated in bitcoin or other cryptoassets will have missed out on the recent bull market and still only recoup a percentage of what would have been earned had the exchange not collapsed to due to criminal activities of Bankman-Fried.
That, and two other reasons are why these distributions will not cause the surge in prices that some market watchers are predicting.
Distributions Will Occur Over Time
Acknowledging the fact that the bankruptcy estate has missed previously established deadlines during the bankruptcy process, the estimated date (set by the court) for the plan to be implemented is October 31st. Once an effective date is reached, the debtors (FTX) will have 60 days to make distributions to a class of creditors known as the convenience class; in case of this distribution that class includes any individual customer claims under $50,000. The total amount to be distributed to this class is approximately $1.2 billion, with the payment schedule still to be determined after the effective date has been established. While $1.2 billion might seem like a large number to retail investors, when compared to the daily trading volume of bitcoin and cryptoassets this total amount is relatively small.
Larger creditors, also known as the entitlement class, are likely to begin receiving distributions during early 2025. These creditors hold approximately $9 billion in claims and will receive payments in the form of initial payments as well interest payments on the unpaid portion of claims until the claims are paid in full. In addition, payments will also be distributed from a $12.7 billion settlement between the FTX estate and CFTC. In totality, the FTX estate estimates a recovery rate of between 129% and 143% for this creditor class.
In other words, even with the billions that are owed and due to be distributed to FTX creditors 1) the investors most likely to reallocate into crypto first (retail) are receiving a relatively small amount, and 2) the larger investors will only begin receiving incremental distribution at some point in 2025.
Large Creditors Might Not Cycle Into Crypto
The timeline for distributions is worth monitoring, but in terms of price impact market analysts and policy experts might be more interested in the likelihood of these dollars being redeployed into the crypto sector. Based on a report from Fortune in March, these expectations might be overly optimistic. Drilling into the report the largest individual holders of FTX claims are hedge funds Attestor, Baupost, and Farallon, with combined holdings of approximately $1.3 billion. Additionally, approximately 50% of total claims – between $6 billion and $7 billion in total, are linked to distressed asset firms.
Due to this concentration the likelihood of these redistributions being deployed into cryptoassets, either immediately or at all, are lower than might otherwise be expected. Reasons for this include that 1) asset managers might have achieved the level of exposure to crypto that is desired, 2) limited partner agreements can make crypto reallocation difficult, and 3) the run-up in prices makes redeployment at current prices less appealing from a risk-return perspective.
Put simply, billions of the redistributions from the FTX estate will be headed to asset management firms specializing in distressed assets – not die-hard crypto funds or investors – and these funds are limited in the ability and interest to aggressively redeploy these distributions into cryptoassets.
FTX will continue to dominate crypto conversations for years to come, but the recent announcement of billions being redistributed to creditors might not give the crypto market the sugar high some investors expect.