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This crypto winter has been particularly harsh after the recent collapse of several crypto platforms has left investors frustrated about how to recoup their assets.
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Crypto lending platforms Voyager Digital and Celsius promised fantastic returns to their clients – until both filed for bankruptcy in early July due to their exposure to the now-infamous Three Arrows Capital, which itself went bankrupt following the collapse of Terra LUNA and its TerraUSD (UST) stablecoin .
Voyager makes loans, “usually in the form of a specific type of cryptocurrency, to counterparties in the cryptocurrency sector to facilitate liquidity or trade settlement, and the interest earned on the company’s loans is passed on to clients, who earn a ‘yield’ on their stored cryptocurrency,” she explained. company in a bankruptcy court filing.
Celsius, which had a similar model, said in its bankruptcy filing that “these Chapter 11 cases will provide a ‘respite’ for the debtors to negotiate and implement a plan that will maximize the value of its business and generate a significant return for our shareholders as soon as possible.” .”
According to the court filing, Celsius has a deficit of $1.2 billion on its balance sheet and owes customers $4.7 billion. The company says it has $167 million in cash, “which will provide sufficient liquidity to support certain operations during the restructuring process,” according to a statement announcing the Chapter 11 filing.
The collapse of Terra and the loss of more than $50 billion worth of Luna and UST coins in a three-day period created a domino effect and immediate problems for many market participants, leading to the eventual “cryptocalyx” and “many of these market participants having to halt operations , limit withdrawals or take out emergency loans to survive,” Celsius’ bankruptcy filing states.
Retail investors now seem to be left with little or no options.
Is there a way to recover your loss?
Jeffrey Blockinger, general counsel at Web3 Quadrata, told GOBankingRates that a customer’s ability to recover assets will depend on whether the assets were separated and the total amount of assets left on the balance sheets of the different companies.
“It appears that most users will end up as creditors of the bankruptcy estate and receive less than the amounts deposited on the various platforms, if anything,” he said. “The process can take a long time. Generally, the funds will be frozen until the accounting of all assets is completed and the bankruptcy court determines that the beneficiary’s claim is valid.”
“Celsius has already warned that funds may be irrecoverable, and Voyager has stated that certain assets are held in FDIC-backed accounts. It remains to be seen what level of protection, if any, Voyager investors will receive through these accounts. If these platforms had insurance, users could get some of their deposits back, but the 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 a refund. In fact, the agencies released a joint letter demanding that crypto brokerage firm Voyager Digital stop telling clients that their investments are insured and demanding that the firm remove any previous claims that insinuated that clients investing in Voyager would receive FDIC insurance for all funds submitted and held by Voyager.
“These representations are false and misleading. Based on the information gathered to date, it appears that these statements were likely misleading and were relied upon by clients who placed their funds with Voyager and do not have immediate access to their funds,” the agencies said.
How long can 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 take a long time. Rahsan Boykin, general counsel at decentralized exchange platform Hashflow, told GOBankingRates that a typical bankruptcy proceeding can take three to four months, however, it would not be surprising for a proceeding of this size and visibility to take longer.
Boykin added that there’s not much customers can do to recover their funds right now, as both Voyager and Celsius consider customers “unsecured creditors” who will be the last to get their money back.
“Look at Mount Gox as an example of what to expect. The replacement failed in 2014, and no one has been compensated yet,” he said. “We will see how the bankruptcy process plays out, but it seems unlikely that it will bring good news for customers.”
“Another aspect to watch out for is the role of strategic third-party players – we’ve 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 beneficiaries is probably only partial reimbursement and the ability to write off tax losses for 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 users are most likely to write off their holdings as bad debt on their taxes, but they can only do so if it’s a total loss.
“With such an industry-wide collapse caused by Three Arrows’ default, how much money customers get back will depend on how much money can be recovered from Three Arrows,” he said. “So far it’s only been $40 million out of about $3 billion in loans. This experience, as painful a lesson as it is, could be positive for the long-term adoption of crypto by institutional managers. With more hedges and regulation closely mirroring traditional finance, risk managers could allow more exploration of crypto assets for institutional portfolios.”
How should investors approach buying crypto in the future?
While opportunities to recoup losses are limited, experts recommend certain steps investors should take before getting back into cryptocurrencies.
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 investment each month.
“Use Twitter. Start following well-known crypto accounts. Unlike most other industries, in the crypto industry, information travels the fastest on Twitter,” he said. “Celsius’ insolvency was widely discussed in the weeks before the withdrawal was suspended. Pay attention to traditional financial news: since 2020, cryptocurrencies have been heavily linked to the stock market. What’s bad for the stock market is usually bad for crypto, and vice versa.”
He also recommends finding an expert trader to follow, for example using a social trading platform, but remember to only take trading advice from someone whose experience you know.
The Fed’s watch is also key, he said, as there is still a lot of uncertainty in traditional markets, due to rapidly rising interest rates, which in turn would lead to further declines in stocks, crypto and other assets.
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“Decide on your budget. Determine what portion of your salary should go to investments and what percentage crypto should occupy in your overall portfolio,” he said. “And diversify investments with lower risk. Crypto should not be your only investment. Consider ETFS, stocks, bonds and other assets.”
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