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This crypto winter has been particularly tough after the recent collapse of several crypto platforms has left investors frustrated about how to cash in their holdings.
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Crypto-lending platforms Voyager Digital and Celsius promised eye-popping returns to their clients—that is, until they both filed for bankruptcy in early July due to their exposure to the now-infamous Three Arrows Capital, which itself went bankrupt after the implosion of Terra LUNA and its TerraUSD (UST) stablecoin.
Voyager makes loans, “typically in the form of a specific type of cryptocurrency, to counterparties in the cryptocurrency sector to facilitate liquidity or trade settlement and interest earned on the company’s loans is passed on to customers, who earn a ‘return’ on their stored cryptocurrency,” the company explained in the bankruptcy court filing .
Celsius, which had a similar model, said in its bankruptcy filing that “these Chapter 11 cases will provide a ‘breather’ for debtors to negotiate and implement a plan that will maximize the value of the business and generate meaningful recoveries for our stakeholders.” as possible.”
According to court filings, Celsius has a $1.2 billion deficit 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 the Chapter 11 filing.
The collapse of Terra and the loss of more than $50 billion in the value of Luna and UST coins over a three-day period created a domino effect and immediate problems for many market participants, leading to the eventual “cryptopocalypse” and “many of these market participants had to stop operations, limit withdrawals or take emergency loans to survive,” according to Celsius’ bankruptcy filing.
And now retail investors appear to be left with few or no options.
Is there any way to recover your loss?
Jeffrey Blockinger, General Counsel at Web3 company Quadrata, told GOBankingRates that a user’s ability to recover assets would depend on whether the assets were segregated and the total amount of assets remaining on the balance sheets of the various companies.
“It appears that most users will end up as creditors in the bankruptcy estate and receive less than the amounts deposited on the various platforms, if anything,” he said. – The process can take a long time. Generally, the funds will be frozen until an accounting of all assets is completed and a beneficiary’s claim is determined to be valid by the probate court.”
“Celsius has already warned that funds may be irrecoverable, and Voyager has stated that certain assets are held in FDIC-backed accounts. It remains to be seen what level of protection, if any, Voyager investors will receive through these accounts. If these platforms had insurance , users would be able to get back part of their deposits, but insurance is unlikely to cover the total loss among all users, he continued.
Unfortunately for investors, the Federal Deposit Insurance Corporation (FDIC) and Federal Reserve Board on July 28 removed any hope of getting money back. Indeed, the agencies issued a joint letter demanding that crypto brokerage firm Voyager Digital stop telling clients that their investments were insured and demanding that the company remove any previous claims that insinuated that clients who invested with Voyager would receive FDIC insurance coverage for all funds delivered to and held by Voyager.
“These representations are false and misleading. Based on the information gathered to date, it appears that these representations likely misled and were relied upon by customers who placed their money with Voyager and do not have immediate access to their money,” according to the agencies.
How long can it take to get any more money back?
To add another layer of frustration, investors will have to be very patient as bankruptcy proceedings tend to be lengthy. Rahsan Boykin, General Counsel of the decentralized exchange platform Hashflow, told GOBankingRates that a typical bankruptcy proceeding can take three to four months, but it would not be surprising if a proceeding of this size and visibility took a little longer.
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” who will be the last to get their money back.
“Look at Mt. Gox as an example of what you can expect. The exchange failed in 2014 and no one has received a refund yet, he said. “We’ll see how the bankruptcy proceedings go, but it seems unlikely that they will provide any good news for customers.”
“Another aspect to watch is the role of strategic third-party players – we have seen FTX offer financial relief to distressed companies in an attempt to acquire assets at a discount,” he added.
He also shared that at this point, the best-case scenario for most users is probably only a partial refund and the ability to write off the losses on their taxes in a few years.
Can these losses be used as tax write-offs?
Jay Fraser, head of strategy at blockchain-enabled securities exchange BSTX, echoed the sentiment, telling GOBankingRates that what’s most likely to happen is that users will write off the holdings as bad debt on their taxes, but they can only do that if it’s a total loss.
“With so much of the industry-wide collapse driven by the Three Arrows standards, how much money customers get back will depend on how much money can be recovered from Three Arrows,” he said. “So far it has only been $40 million out of about $3 billion in loans. This experience, as painful as it is, could be positive for institutional leaders’ long-term use of crypto. With more guardrails and regulations closely mirroring traditional finance, risk managers can allow more exploration of crypto assets for institutional portfolios.”
How should investors approach buying crypto in the future?
While options are limited to recapture losses, experts recommend certain steps investors should take before returning to crypto.
Hayden Hughes, CEO of social crypto trading platform Alpha Impact, told GOBankingRates that to get back into crypto, you should consider Dollar Cost Averaging, which involves buying a fixed amount of investments each month.
“Use Twitter. Start following famous crypto accounts. Unlike most other industries, in crypto, information leaks out fastest on Twitter,” he said. “Celsius’ insolvency was widely rumored weeks before withdrawals were suspended. Pay attention to the traditional financial news: Since 2020, crypto has been highly correlated to the stock market. What’s bad for the stock market tends to be bad for crypto, and vice versa.”
He also recommends finding an expert trader to follow, for example by using a social trading platform, but remembering to only take trading tips from someone whose track record you know.
Watching the Fed is also crucial, he said, as there is still a lot of uncertainty in the traditional markets, due to rapidly rising interest rates, which in turn will cause stocks, crypto and other assets to continue to fall.
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“Choose your budget. Decide what part of your salary should go to investments, and what percentage crypto should occupy in your overall portfolio,” he said. “And diversify with lower-risk investments. Crypto should not be your only investment. Consider ETFS, stocks, bonds and other assets.”
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