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> I'm unfamiliar with how bankruptcy works. I'm not a specialist in the area, but here's my explanation as a financial professional. When a company goes bankr
by lordnacho 4y ago
> I'm unfamiliar with how bankruptcy works.
I'm not a specialist in the area, but here's my explanation as a financial professional.
When a company goes bankrupt, it's assets and liabilities are summarized by an administrator who is hired. Typically a well known firm with lots of experience, and they will do things like find out where the assets are, possibly liquidating some of them. You may have seen that FTX has a new CEO. They are in fact empowered to run the company.
There's then something called the capital structure, basically an order in which liabilities are paid to creditors.
First of all, you want the admin to want to bother doing the work. So they come first in the queue of people.
There's then the tax man (actually, which comes first, admin or tax? Might depend on where you are).
Then there are secured creditors. For instance you might have a factory with equipment, and some loan was made against the equipment. Or you have property and a mortgage against it.
Then there are unsecured creditors, like employees owed final payments.
Depending on how complicated the firm is, the whole credit part of the capital can get super complicated, basically tranches where each junior tranche is only paid if senior tranches are fully paid.
It's unusual, but if somehow the assets exceed the liabilities, the equity holders will get the rest. Don't count on that, because it's unusual for such a firm to go bankrupt.
Now with high profile bankruptcies there are sometimes investors who will buy your position in the queue. If you get an offer the gamble is basically that it's worth your while to get out immediately and let the bankruptcy speculator deal with all the BS as well as the waiting time to get the money eventually. A friend of mine got offered this from Lehman, turned it down, got paid pretty reasonably, eventually.
- itake 4y agoThe blockfi terms said the money was always the client's money and that wallet funds are not lent out. My not-a-lawyer interpretation is I didn't 'give' the money to Blockfi and thus Blockfi doesn't owe me any money. Am I understanding this wrong?
- notch656a 4y agoIf someone has 10% of their money on a cex they are either 1) Farming it for interest 2) Collateral for trading / other asset 3) Maybe some other corner case I can't think of here -or- 4) Morons. My guess above was (1) since it was both a large amount and the losses were unexpected. I do not think it would be 'yours' except in the 4th case which would be morons storing unvested deposits on cex for any purpose but short term exchange.
- christiangenco 4y agoOP here! #1 was my motivation, though at the moment I'm definitely feeling like #4 played a role. My rationale was that crypto just sitting in cold storage could only gain value if the underlying asset appreciated which is effectively currency speculation. By storing it in a crypto "bank" my money could be working to generate actual value via. liquidity and loans akin to a real bank. If the money was earning a modest amount of interest it didn't feel like as wild of a risk. Even if the exchange rate to USD is unstable I can still see the amount of crypto going up each month.
- pavlov 4y ago> “generate actual value via liquidity and loans akin to a real bank” What’s missing from this picture is actual productive economic activity. Banks make loans to real-world businesses who use it to produce goods and services, and assuming those are desirable in the market, part of the margin on those products ends up paying the interest to the bank. Crypto lenders make loans to crypto traders who ultimately produce cash by extracting it from other traders and from new investors that bring in real cash into the system at the bottom of the pyramid. There’s nothing producing anything in the hermetic crypto bubble. When the retail interest ended, the system started running out of dollars.
- rnk 4y agoYes, you summarize the entire cycle very well. There's nothing creating wealth other than the next group of people buying some crypto thing, then that is 'invested' by buying other things that are paying interest, but eventually the cycle of new money coming in goes away.
- christiangenco 4y agoThis is helpful—thank you. It sounds like as long as there's enough money to pay the admin, the government, secured creditors, and unsecured creditors, anything left over would get split amongst individual investors like me. Is that right?
- lordnacho 4y agoI think you're among the unsecured creditors. A proper bankruptcy expert would have an authoritative answer because I think it also depends on whether client funds are segregated.