Galois’ trapped crypto in FTX shows boom in ‘vulture’ firms that have reaped $100m

When Kevin Zhou, co-founder of Galois Capital, said on Twitter last week that he will shut down the crypto hedge fund after losing millions in the bankruptcy of FTX, he made an unusual confession: “I am proud to say that although we lost almost half our assets to the FTX disaster and then sold the claim for cents on the dollar, we are among the few who are closing shop with an inception-to-date performance, which is still positive.”

Notably, Zhou – who has said the firm had up to $45 million trapped on FTX – said the company “sold the claim for cents on the dollar.” In fact, it was for just 16 cents per dollar, according to the Financial Times.

His comment refers to a booming industry that has capitalised on the bankruptcies of crypto companies including FTX, Celsius, Voyager, Genesis and BlockFi: capital firms that buy the claims of customers whose crypto is trapped for a steep discount on the face value of what customers believe they’re owed.

The first few claim transfers in the FTX case came in January. One of them was an account whose face value was $810,000. It was transferred to Cherokee Acquisition of New York. The account holder’s name was redacted from the record.

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Some of the transfers have been massive. On January 31, Stephen Sokolowski of the crypto-mining company Prohashing sold a $4 million claim in the Genesis bankruptcy to Jefferies Leveraged Credit Products of New York. Sokolowski confirmed the sale to DL News but declined to comment further.

Other transfers have been small – one claim out of New York to Cedar Glade Capital was only for $2,400, for instance.

These transfers are the tip of an iceberg. Cherokee has made over 200 transfers worth about $100 million from crypto exchanges and other bankruptcies, said Bradley Max, the firm’s director. Dozens of companies buy claims but Cherokee is probably one of the largest. Of the 20 most recent claim transfers in the Celsius case, 14 involved Cherokee.

Cherokee has an online platform that functions like an exchange for crypto bankruptcy claims. Max says there are about 40 investors in the exchange who regularly bid to buy claims. They tend to be SEC registered hedge funds and high-net-worth family offices, he says.

Cherokee’s Claims Market exchange contains charts of historical pricing for assets trapped on crypto exchanges, too. Back in November, a claim on FTX was sold for just 6% of its face value. The most recent price was 16% – the same value Galois got.

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The most valuable claims, however, are those of Genesis, which currently fetch 36% of face value.

And while prices for FTX and Genesis are currently rising – presumably because the assets inside those wrecked companies turn out to be more promising as time passes – not all claims are equal. BlockFi claims are currently only worth 14%.

Customers who lost money tend to be sceptical about selling their claims for such steep cuts.

“Cherokee … is buying out everybody’s crypto,” one source, who claims to have lost six figures on Celsius, told DL News. “They were willing to pay 25% of its value.” The source was not interested in selling. “All these companies that are swooping in and buying up all these little people’s crypto and giving people pennies on the dollar.”

In a Reddit forum dedicated to Celsius Network, where former customers debate updates on the bankruptcy, plenty of users seem convinced that if they can continue to hold on, they’ll ultimately get much more than what Cherokee is offering.

“God damn vultures coming out the woodwork,” wrote one pseudonymous user, Aromatic_Mention_491.

Max, understandably, disagrees with that framing: “We are providing a liquidity option for those who want or need that liquidity.”

“They are offering 25-30%. This is so far removed from being ‘too good to be true.’ The offers are so bad as to be farcical,” another replied.

So why would a sophisticated institutional investor like Galois roll over for just a 16% payout?

Max declined to comment on Galois specifically, saying that some customers “want to take a present value payment and invest in something else, rather than a forced investment in an FTX bankruptcy case.”

Customers may not understand that they’re probably not going to get ‘their’ crypto back

“Present value” refers to the mathematical concept that allows an investor to estimate whether it is more valuable to take a lower payment now, and invest it in something more profitable, or leave the investment where it may reach a greater “future value.”

Galois was contacted for comment.

Bankruptcy administrations are fraught with uncertainty. They take years to process, while lawyers’ fees eat away at the remaining assets. Assets that may or may not actually exist. Weird legal wrinkles can crop up, such as the potential “claw back” of any withdrawals that took place within the 90 days prior to the bankruptcy filing.

And customers may not understand that they’re probably not going to get “their” crypto back. They’re just going to get cash, or a cash equivalent, distributed proportionately according to the size of their claim, after creditor preferences are resolved, Max says.

“The crypto aspect of it is not that meaningful,” Max told DL News. “Lehman Brothers, the Icelandic banks, they have all types of different asset classes, commodities, derivatives, bonds, loans, it’s the same thing with crypto. The assets are governed by the bankruptcy code.”