This crypto winter has been particularly harsh following the recent collapse of several crypto platforms which have left investors frustrated about how to recoup their assets.
Crypto lending platforms Voyager Digital and Celsius promised eye-popping yields to their customers — that is until they both filed for bankruptcy in early July due to their exposure to the now infamous Three Arrows Capital, which itself went bankrupt after the implosion of Terra LUNA and its TerraUSD (UST) stablecoin.
Voyager provides loans, “typically in the form of a specific type of cryptocurrency, to counterparties in the cryptocurrency sector to facilitate liquidity or trade settlement and interest earned from the company’s loans is passed along to customers, who earn a “yield” on their stored cryptocurrency,” the company explained in the bankruptcy court filing.
Celsius, which had a similar model, said in its bankruptcy filing that “these chapter 11 cases will provide a “breathing spell” for the debtors to negotiate and implement a plan that will maximize the value of its business and generate meaningful recoveries to our stakeholders as quickly as possible.”
According to the court filing, Celsius has a $1.2 billion deficit on its balance sheet and owes users $4.7 billion. The company says it has $167 million in cash on hand, “which will provide ample liquidity to support certain operations during the restructuring process,” according to a statement announcing the Chapter 11 proceedings.
The collapse of Terra and the loss of more than $50 billion in values of the Luna and UST coins over a three-day period created a domino effect and immediate issues for many market participants, leading to the eventual “cryptopocalyse,” and “many of these market participants had to halt operations, limit withdrawals, or take emergency bailout loans to survive,” according to Celsius’ bankruptcy filing.
And now, retail investors seem to be left with little to no options.
Is There Any Way to Recoup Your Loss?
Jeffrey Blockinger, General Counsel at Web3 company Quadrata, told GOBankingRates that a user’s ability to recoup assets will depend on whether the assets were segregated and the total amount of assets remaining on the balance sheets of the various companies.
“It appears that most users will end up as creditors of the bankruptcy estate and receive less than the amounts that were deposited on the various platforms, if anything,” he said. “The process can take a long time. Generally, the funds will be frozen until an accounting of all assets is complete, and a user’s claim is determined to be valid by the bankruptcy court.”
“Celsius has already warned that funds may be unrecoverable and Voyager has stated that certain assets are held in FDIC-covered accounts. It remains to be seen what level of protection, if any, the Voyager investors will receive through these accounts. If these platforms had insurance users might be able to recover some amount of their deposits but insurance is unlikely to cover the total losses among all users,” he continued.
Unfortunately for investors, on July 28, the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board, removed any hope of getting money back. In fact, the agencies issued a joint letter demanding that the crypto brokerage firm Voyager Digital needed to stop telling clients their investments were insured and demanded that the company removed any previous claims insinuating that customers who invested with Voyager would receive FDIC insurance coverage for all funds provided to, and held by, Voyager.
“These representations are false and misleading. Based on the information gathered to date, it appears that these representations likely misled and were relied upon by customers who placed their funds with Voyager and do not have immediate access to their funds,” according to the agencies.
How Long Could It Take to Get Even Some Money Back?
Adding another layer of frustration, investors will have to be very patient as bankruptcy proceedings tend to be long. Rahsan Boykin, General Counsel of decentralized exchange platform Hashflow, told GOBankingRates that a typical bankruptcy proceeding can take three to four months, however, it would not be surprising if a proceeding of this size and visibility took some time longer.
Boykin added that there isn’t much users can do to recover their funds at the moment, as both Voyager and Celsius consider customers to be “unsecured creditors” who will be the last ones to get their money back.
“Look at Mt. Gox as an example of what to expect. The exchange failed in 2014, and no one has been reimbursed yet,” he said. “We’ll see how the bankruptcy proceedings play out, but it seems unlikely they will yield any good news for customers.”
“Another aspect to watch is the role of third-party strategic players — we have seen FTX offer financial relief to distressed companies in an effort to acquire assets at a discount,” he added.
He also shared that at this point, the best-case scenario for most users is probably only partial reimbursement and the ability to write off the losses on their taxes in a few years.
Can These Losses Be Used As Tax Write-Offs?
Jay Fraser, Head of Strategy at blockchain-enabled securities exchange BSTX, echoed the sentiment, telling GOBankingRates that what will most likely happen is users will write off their holdings as bad debt on their taxes, but they can only do so if it’s a total loss.
“With so much of the industry-wide collapse driven by the Three Arrows defaults, how much money customers get back will depend on how much money can be recovered from Three Arrows,” he said. “So far, that’s only been $40 million of about $3 billion in loans. This experience, as painful a lesson as it is, could be a positive for the long-term adoption of crypto by institutional managers. With more guardrails and regulation that closely mirrors traditional finance, risk managers could allow more exploration of crypto assets for institutional portfolios.”
How Should Investors Approach Buying Crypto in the Future?
While the options are limited to recoup losses, experts recommend certain steps investors should take before getting back into crypto.
Hayden Hughes, CEO of crypto social trading platform Alpha Impact, told GOBankingRates that to get back into crypto, consider Dollar Cost Averaging, which involves buying a fixed amount of investments every month.
“Use Twitter. Start following well-known crypto accounts. Unlike most other industries, in crypto, information percolates fastest on Twitter,” he said. “Celsius’ insolvency was widely rumored weeks before withdrawals were suspended. Pay attention to the traditional finance news: Since 2020, crypto has been highly correlated to the stock market. What’s bad for the stock market tends to be bad for crypto, and vice versa.”
He also recommends finding an expert trader to follow, for example, using a social trading platform, but to remember to only take trading tips from someone whose track record is known to you.
Watching the Fed is also crucial, he said, as there’s still a lot of uncertainty in the traditional markets, due to rapidly increasing interest rates, which in turn would lead to stocks, crypto and other assets continuing to drop.
“Decide on your budget. Determine what portion of your salary should go towards investments, and what percentage crypto should occupy in your overall portfolio,” he said. “And diversify with lower risk investments. Crypto should not be your only investment. Consider ETFS, stocks, bonds and other assets.”
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