Article Rewritten:
Title: FTX’s Bankruptcy Auctions: A Profitable Opportunity for Crypto Traders
When FTX filed for bankruptcy, savvy cryptocurrency traders smelled a lucrative opportunity. Sam Bankman-Fried’s cryptocurrency empire had lost billions of dollars in customer funds but still held various cryptocurrencies worth $3.4 billion. These assets needed to be sold to satisfy creditors’ claims, and they were likely to be sold well below market prices.
Most companies responsible for managing bankruptcy assets have little to no experience with cryptocurrencies, and early attempts to liquidate funds sometimes resulted in embarrassing losses amounting to tens of thousands of dollars. In September 2023, bankrupt FTX enlisted the help of billionaire Michael Novogratz’s Galaxy Digital Holdings’ asset management division to assist in managing its massive cryptocurrency reserves, including selling, hedging, and staking cryptocurrencies. This process allowed token holders to earn passive income by validating transactions added to the blockchain network.
FTX held approximately one-third of its cryptocurrencies in the form of SOL, the native token of the Solana blockchain advocated by SBF. According to the Solana Foundation, from August 2020 to May 2021, Bankman-Fried’s company purchased nearly 60 million SOL tokens, with most of them being locked up. By late August, the trading price of SOL was around $20 per token, but by the end of the year, its price had increased fivefold, surpassing $100. It seemed that if FTX could quickly cash out its SOL and other assets, it could fully satisfy its customers’ claims (calculated in USD value on the application date), something rarely achieved in major bankruptcy cases.
It is worth noting that most of the tokens owned by SBF were locked, meaning they could only be sold in monthly batches between 2025 and 2028. Such long-term vesting plans typically mean tokens must be auctioned at a significant discount to compensate buyers for the immense risks associated with cryptocurrency volatility. However, the potential returns could be enormous. Galaxy’s trading division was one of the buyers in FTX’s asset auction.
In the fall of 2023, the debtors faced a daunting task. Rapidly selling billions of dollars’ worth of SOL would disrupt an already volatile market. With the cryptocurrency market just beginning to recover from the devastation caused by FTX’s collapse, it chose to separate the sales through multiple auctions after considering advice from Galaxy Asset Management.
The first batch of SOL tokens (ranging from 25 million to 30 million) was sold at the end of March for over 60% below the market price, at $64 per token. The auctioned tokens were purchased by a few companies, including hedge funds Pantera Capital and Neptune Digital Assets.
According to an insider familiar with the transaction, undisclosed buyers also included Brevan Howard Digital, venture capital firm Multicoin Capital, and the Solana Foundation. The Solana Foundation is a non-profit organization based in Zug, Switzerland, initially founded by developers creating the blockchain, dedicated to the development and security of the Solana network.
However, Galaxy, led by Novogratz, was also one of the first buyers of locked SOL. According to Bloomberg, Galaxy Trading purchased tokens for a special purpose fund representing investors, raising around $620 million and charging a 1% management fee. Assuming Galaxy’s fund traded at the discounted price of $64, it would ultimately acquire 96,875,000 SOL tokens. Pantera, also participating in the bidding, created a similar fund to purchase up to $250 million worth of SOL. Based on current prices, Galaxy’s fund is estimated to have made a paper profit of $1.03 billion from the 97 million tokens it expects to acquire.
In the second auction held in late April, FTX sold 1.8 million SOL tokens at prices ranging from $95 to $110 per token, 15% to 26% below the market price. According to The Block, Galaxy Trading once again raised funds from investors for this auction, with a minimum commitment cap of $5 million. Pantera also participated. The final batch of SOL was sold on May 22, attracting Pantera and the newly established cryptocurrency exchange Figure Markets. Figure purchased 800,000 tokens at $102 per token, approximately 42% below the recent market price of $177. The potential total profit from the second auction amounts to over $130 million, based on the current price.
When details of the first auction emerged, many FTX creditors and other bidders were surprised. “It looks really bad when the buyer and seller of your house are involved in the same transaction,” said an anonymous insider familiar with the sales.
“Multiple stages of sales or liquidation activities involving investment banks, as in this case, are not uncommon,” said Rob Hadick, a general partner at Dragonfly, a venture capital firm focused on cryptocurrencies. “However, it is clearly not ideal and raises concerns for the creditor committee… Legitimate concerns include unfair access to information and unstable price discovery.”
A spokesperson for Galaxy declined to comment on the specifics of SOL token sales and its dedicated fund, directing Forbes to contact FTX. It is currently unclear how much Novogratz’s Galaxy will profit from FTX’s bankruptcy restructuring. Galaxy Digital’s stock trades in Toronto and has risen 161% in the past 12 months, with a current market value of $3.6 billion. According to the company’s first-quarter financial report as of March 31, Galaxy held $104.1 million of investments in the Galaxy Digital Crypto Vol Fund, which acquired a significant amount of SOL from FTX’s assets this quarter.
FTX’s official Unsecured Creditor Committee, composed of former major clients and market makers of the exchange, has approved the token sales. An FTX spokesperson issued a statement supporting Galaxy’s dual role in the bankruptcy restructuring:
“The bankruptcy court has approved the retention of Galaxy Asset Management, subject to review by interested parties (with no objections received), including the ability of Galaxy to transact with Galaxy-related entities… The prices paid by Galaxy-related entities for Solana are the same or higher as those paid by other buyers, and all Solana sales have been approved by the Unsecured Creditor Committee and the Non-U.S. Customer Special Committee. The sales made to Galaxy under the court-approved framework do not involve any conflicts of interest, and any reports suggesting otherwise are false.”
Despite this, some FTX creditors and customers are still complaining. Sunil Kavuri, a former FTX client who invested over $2 million in the exchange and is a member of the unofficial “Non-U.S. Customer Special Committee” consisting of over a thousand former FTX clients, said, “I think the people responsible for handling the bankruptcy assets have caused losses of over $10 billion. So, it’s more than what SBF initially caused us to lose… The biggest loss is Solana.”
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