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This crypto winter has been particularly harsh after the recent crashes of many crypto platforms have left investors frustrated about how to recover their assets.
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Crypto-lending platforms Voyager Digital and Celsius promised amazing returns to their clients — that is, until both filed for bankruptcy in early July due to their exposure to the now infamous Three Arrows Capital, which itself went bankrupt after the collapse of Terra LUNA and the stablecoin TerraUSD (UST).
Voyager provides loans, “usually in the form of a specific type of cryptocurrency, to counterparties in the crypto sector to facilitate liquidity or trade settlement and the interest earned on the company’s loans is passed on to clients, who earn a ‘return’ on their cryptocurrency stock,” the company explained in a filing. bankruptcy court.
Celsius, which had a similar model, said in its bankruptcy filing that “these Chapter 11 cases will provide a ‘breathing period’ for debtors to negotiate and implement a plan that will maximize the value of its business and maximize the recovery of our stakeholders as quickly as possible.”
According to the court filing, Celsius has a deficit of $1.2 billion 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 Chapter 11 proceedings.
The collapse of Terra and the loss of more than $50 billion in Luna and UST coin values over a three-day period led to a domino effect and immediate problems for many market participants, ultimately leading to the “cryptocurrency world” and “many of these participants having to Market stop operations, limit withdrawals, or take out emergency rescue loans to survive,” according to Celsius bankruptcy filing.
And now, retail investors seem to have few or no options.
Is there a way to make up for your loss?
Jeffrey Blockinger, general counsel for Web3 Quadrata, told GOBankingRates that a user’s ability to recover assets will depend on whether assets have been separated and the total amount of assets remaining on the balance sheets of different companies.
“It appears that most users will end up as bankruptcy estate creditors and will receive less than the amounts deposited on the various platforms, if any,” he said. “The process can take a long time. Generally, the funds will be frozen until all assets are accounted for and the bankruptcy court determines the user’s claim as valid.”
Celsius has already warned that the funds may be non-refundable and Voyager has stated that some assets are held in covered FDIC accounts. It remains to be seen what level of protection, if any, Voyager investors will have through these accounts. The platforms have insurance, users may be able to recover some of their deposit amount but the insurance is unlikely to cover the total losses among all users.”
Unfortunately for investors, on July 28, the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve removed any hope of getting the money back. In fact, the agencies issued a joint letter demanding that crypto brokerage Voyager Digital need to stop telling clients that their investments are insured and asking the company to remove any previous claims that clients who invested with Voyager would receive and keep FDIC insurance coverage for all funds provided to Voyager.
These representations are false and misleading. Based on the information collected so far, it appears that these statements were likely misleading and were relied upon by customers who put their money into Voyager and do not have immediate access to their money, according to the agencies.
How long can it take to get some money back?
Adding another layer of frustration, investors will have to be very patient as bankruptcy procedures tend to be lengthy. Rasan Boykin, general counsel of the decentralized exchange platform Hashflow, told GOBankingRates that typical bankruptcy proceedings can take anywhere from three to four months, however, it would not be surprising if a procedure of this scale and visibility took some time.
Boykin added that there’s not much users can do to get their money back at the moment, as both Voyager and Celsius consider customers “unsecured creditors” and will be the last to get their money back.
“Look at Gox Mountain as an example of what to expect. The exchange failed in 2014, and no one has been compensated yet,” he said. “We will see how the bankruptcy proceedings play out, but it seems unlikely that it will yield any good news for clients.”
“Another aspect to watch is the role of strategic third-party players – we’ve seen FTX provide financial relief to distressed companies in an effort to acquire assets at a discount,” he added.
As he shared, at this point, the best case scenario for most users is likely to be partial payment and being able to write off losses from their taxes in a few years.
Can these losses be used as a tax write-off?
Jay Fraser, head of strategy at blockchain-enabled stock exchange BSTX, echoed the sentiment, telling GOBankingRates that what is likely to happen is that users will write off their holdings as bad debts on their taxes, but they can only do so if the total. Loss.
“With a lot of industry-wide collapse due to defaults at Three Arrows, the amount of money customers recover will depend on how much money can be recovered from Three Arrows,” he said. “So far, this has only been $40 million out of about $3 billion in loans. This experience, while a painful lesson, could be positive for long-term crypto adoption by enterprise managers. With more barriers and regulation that Closely mirroring traditional finance, risk managers can allow institutional portfolios to explore crypto assets further.”
How should investors approach buying cryptocurrencies in the future?
While options are limited to making up for losses, experts recommend some steps that investors should take before returning to cryptocurrency.
Hayden Hughes, CEO of crypto social trading platform Alpha Impact, told GOBankingRates that to return to cryptocurrency, consider the average dollar cost, which includes buying a fixed amount of investments each month.
“Use Twitter. Start following well-known crypto accounts. Unlike most other industries, in crypto, information leaks faster on Twitter. Celsius bankruptcy was widely rumored weeks before withdrawals were suspended. Watch out for traditional finance news: since 2020 Crypto has been closely associated with the stock market. What is bad for the stock market tends to be bad for cryptocurrencies, and vice versa.”
He also recommends finding an expert trader to follow, for example, using a social trading platform, but remember to take trading tips only from someone whose track record is known to you.
He said that watching the Fed is also very important, as there is still a lot of uncertainty in the traditional markets, due to the rapid increase in interest rates, which in turn will lead to the continued decline of stocks, cryptocurrencies and other assets.
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“Select your budget. Determine the portion of your salary that should go toward investments, and the percentage that cryptocurrency should occupy in your total portfolio.” Diversify with low-risk investments. Crypto shouldn’t be your only investment. Consider ETFS, stocks, bonds, and other assets.”
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