Hedge-fund investors and lawyers making thousands of dollars per hour are sifting through the wreckage left behind by HODLers. When FTX collapsed, funds such as Baupost Group and Oaktree Capital Management hunted out claims held by customers with assets stuck on the exchange. One such client, Galois Capital, sold its FTX claims at an 84% discount. Crypto lender Genesis’s claims have been reportedly sold at 65% to 75% discounts; buyers include Jefferies LLC.

Expect more to come after Bitcoin’s latest drop, down more than 20% from its February peak reached when traders were piling in despite a regulatory crackdown, a string of bankruptcies and the impact of rising interest rates. As investors look for a safe haven from recession fears, it remains clear that crypto isn’t one; it’s down 75% from its 2021 high.

“There’s value in the carcass,” says Thomas Braziel, founder of 507 Capital, an investment firm named after a section of the U.S. bankruptcy code. He cut his teeth making double-digit returns on Bitcoin’s first big exchange bust, Mt. Gox – a story covered on the Bloomberg Crypto podcast – buying his first claim at a 62% discount. Today, he has a lot more choice, with FTX, Voyager Digital Ltd., Celsius Network LLC and Three Arrows Capital’s bankruptcies all working their way through the courts. One still needs at least a little bit of faith to wade into the $20 billion crypto-claims market (excluding discounts and double-counting), but it remains the preserve of MBA types and number-crunchers, not cypher-punks.

The job of Braziel and his peers sounds simple: They bid to acquire bankruptcy claims from holders at a steep discount to reflect the time, effort and expectation in getting any money back (Jefferies has reportedly estimated a recovery rate of 10% to 35% at FTX after fees). Sellers get the immediacy of cash; buyers get any upside from their doggedness in following the process to the end. Braziel refutes the imagery of the predatory or ambulance-chasing vulture — he says he encourages claims-holders not to sell unless they have to. The idea is that today’s burning dumpster is tomorrow’s hotel, just as 2008’s Washington Mutual Inc failure became $3 billion mortgage lender Mr Cooper Group Inc. 

The reality is somewhat riskier — as Braziel puts it, it’s like taking an 11-foot pole to an investment that nobody would touch with a 10-foot one. Maybe someone could look at Silvergate and see a WaMu in there. And maybe even FTX has some assets of value under the hood, like its stake in Robinhood Markets Inc. But crypto’s bubble produced shenanigans beyond the ken of even those who worked on Enron Inc.’s demise. FTX’s assets included its own made-up token, FTT, and other highly volatile ones like Solana and Serum. Working out the upside for penny stocks held by an exchange that used emojis in accounting is no mean feat. Even the outlook for Bitcoin is hard to gauge when low-risk Treasury bills today yield about 5%.

Bridging the gaps between buyers and sellers might also get harder as a result of the current market jitters around Silicon Valley Bank, which has plunged following a surprise announcement Wednesday that it was issuing $2.25 billion of shares to bolster its capital after significant losses on its investment portfolio, and has put itself up for sale after the capital increase failed according to CNBC. That’s likely to increase risk aversion even in areas unrelated to the lender’s own woes.

Regulatory crackdowns are also something to keep in mind, considering Voyager’s sale to Binance, an exchange under very high scrutiny. And there’s also the risk that more voices are competing for the claims in creditors’ back pocket — sometimes with unrealistic promises. The sight of 3AC’s founders jumping on the claims bandwagon with a new exchange targeting crypto creditors desperate to get back into trading is dispiriting but not surprising. Even a 12-foot pole looks too short for that one.

Crypto’s rising body count and interest from bankruptcy specialists suggests we are still in the grip of a credit bubble being unwound, and not a bold new dawn of animal spirits. That’s probably just as well, given where last round of euphoria led. With central bankers openly wondering whether crypto has any value at all, this market really is one for the brave.

More From Bloomberg Opinion:

• The Menace of Central Banks’ Crypto Dreams: Marcus Ashworth

• Crash Course: Cryptocurrencies Vs. Reality: Timothy L. O’Brien

• Matt Levine’s Money Stuff: The SEC Comes for Crypto Custody

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.

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