In one week, cryptocurrency has gone from one of the hottest commodities to almost worthless as one of the biggest exchanges has gone bankrupt, cause investors to review their investments in the volatile market.
Cryptocurrency is one of the hottest commodities in stock exchanges. Since it was developed in 2009, many exchanges and markets have formed around the volatile market. In essence, with the limited number of coins on the market, the trade and selling creates a value not unlike a stock market share. With the number of bit coins and other cyber currency being traded around, the value of these to fluctuate wildly.
But in recent weeks, the cryptocurrency field suffered a massive backlash that sent prices tumbling. FTX, one of the biggest exchanges in the world, filed for Chapter 11 bankruptcy that could easily turn into Chapter 7. As a result, many of the sponsorships they had signed would be discontinued or ripped up. A Class action lawsuit against the company as well as those who promoted it is in the works, seeking close to $11 Billion in damages.(1)
FTX’s business model is partially what led to their collapse and potentially more crypto exchanges as a result. FTX essentially used what was a Ponzi scheme to invest their money in everything they could get their hands on. In three years, the CEO of FTX, Sam Bankman-Fried was able to build up a massive empire in the Cryptocurrency markets.
On November 7th, the FTX was worth over $32 Billion dollars. By the end of the week, with a potential buyout falling through the floor, Fried’s worth was near zero. The bankruptcy filings FTX was revealed to have had several billion dollars in debt obligation to over 100k creditors. How this happened is up to regulators and lawyers to work out, but in the words of one observer, this echoed similarly to Bernie Madoff’s infamous Ponzi scheme.(2)
Perhaps the biggest issue with cryptocurrency when it goes bankrupt is that none of the invested money is easily recoverable if at all. This is because the investment is not liquid or backed by the Federal Deposit Insurance Commission (FDIC). In July 2022, two Crypto exchanges Voyager and Celsius filed for Chapter 11 Bankruptcy protection. The bankruptcies of Voyager and Celsius highlight the unique risks that cryptocurrency holders and investors face when trusting crypto firms with their funds. These two incidents alone could lead to well over $1 billion in investor losses.
Voyager filed for Chapter 11 bankruptcy protection on July 1, 2022. The company said customers should get all U.S. dollar deposits returned but can’t say what portion of their crypto holdings will be returned to customers. It claimed it held $1.3 billion in customer crypto assets on its platform as of the bankruptcy filing.
Celsius Network, a large cryptocurrency lending platform, filed for bankruptcy protection on July 13, 2022. The filing came about a month after Celsius paused all withdrawals, swaps, and transfers among customer accounts. In a filing with the U.S. Bankruptcy Court in New York, Celsius shared that it owes roughly $1.2 billion more than it has on hand.(3)
This crash has a severe knock-on effect in both the crypto space, and in areas where their money has created an awkward bottleneck. In the crypto space, other exchanges and companies are beginning to feel the crackdown in the unregulated space with BlockFi, another significant cryptocurrency exchange contemplating bankruptcy too. As a result of these, many governments are looking to regulate what was once an unregulated field.
