The motivations for claim sales are different but complementary. The seller needs cash immediately to meet an invoice, wants to book a loss for tax purposes, or believes he can get a greater return by investing his money elsewhere. On the other hand, the buyer is betting that the value ultimately returned to the creditor will exceed the amount paid for the bond.
Debt sales are typically conducted behind closed doors and between financial institutions. However, over the past few years, public markets for bankruptcy bonds such as Xclaim and the Claims Market have emerged, bringing some transparency to opaque markets and allowing nearly anyone with a claim to list them. Now
Xclaim founder Matthew Sedigh said:
The growth of these marketplaces has been catalyzed in no small part by the bankruptcy of the cryptocurrency sector. Between $20 billion and $30 billion is currently trapped in cryptocurrency bankruptcy, according to estimates by Open Exchange and Xclaim.
In late 2022, Xclaim changed direction to focus exclusively on cryptocurrency bankruptcies. Since then, with more than $200 million in claims totaled through January, the marketplace has attracted more users and generated more revenue than in his previous two years combined, he said. says Sedigh.
Purchasing a claim in a cryptocurrency bankruptcy is seen as a way to invest in cryptocurrencies at a discounted price. Each creditor’s receivables are valued in dollars on the bankruptcy filing date and are not denominated in cryptocurrencies, although the balance sheets of these companies consist primarily of crypto assets. Therefore, if the cryptocurrency price rises, claim holders will receive greater returns. In the case of Mt. Gox, the judge even ruled that bondholders should share the full rise in cryptocurrency prices.
But buying claims isn’t for the faint of heart, says Thomas Brazier, founder of 507 Capital, an investment firm that specializes in bad debt, which has a big stake in the Mt Gox bankruptcy and others. . Not only can creditors, intentionally or not, misrepresent the value of a claim, some people not only “cheating at the last minute”, but some claims are outright fraudulent. It turns out to be
In other instances, a buyer may discover that a claim is subject to clawback because the original owner made an undisclosed withdrawal shortly before bankruptcy that ate away the expected profits. In bankruptcy, funds withdrawn in the 90 days prior to filing are returned to the property later.
For these reasons, Muhammed Yesilhark, chief investment officer at wealth management firm NOIA Capital, says thorough due diligence is essential. “If we can’t find three or four of him vouching for a seller in the industry, we won’t get involved. “It’s not like buying toilet paper on Amazon.”
