Forbes: Killing Two Birds with One Stone, How Much Can Galaxy Earn from FTXs Bankruptcy and Liquidation?

Original author: Nina Bambysheva, Forbes reporter

Original translation: Luffy, Foresight News

When FTX filed for bankruptcy, savvy crypto traders smelled a lucrative opportunity. Sam Bankman-Fried’s (SBF) crypto empire was wiped out of billions of dollars in customer funds, but still held $3.4 billion worth of various cryptocurrencies, an estate that had to be sold to satisfy creditors, likely at well below market prices.

Most of the companies responsible for managing bankrupt assets had little experience with cryptocurrencies, and early attempts to integrate funds sometimes resulted in embarrassing losses of tens of thousands of dollars. In September 2023, bankrupt FTX tapped the asset management arm of billionaire Michael Novogratzs Galaxy Digital Holdings to help manage its massive cryptocurrency reserves, including selling, hedging, and staking cryptocurrencies. This process allows token holders to earn passive income by verifying transactions added to the blockchain network.

Michael Novogratz, Founder, Galaxy Digital

About a third of FTX’s cryptocurrency is held in the form of SOL, the native token of the Solana blockchain championed by SBF. According to the Solana Foundation, Bankman-Fried’s company purchased nearly 60 million SOL between August 2020 and May 2021, most of which are locked up. In late August 2023, SOL was trading at around $20 per coin, but by the end of the year, its price had risen fivefold to over $100. It seems that if FTX could quickly cash out its SOL and other assets, it would be able to meet its customers’ claims in full (calculated in dollar terms on the filing date), something creditors rarely do in major bankruptcies.

It’s important to note that most of the tokens owned by SBF are locked, meaning they can only be sold in monthly batches between 2025 and 2028. Multi-year vesting plans like this usually mean that tokens must be auctioned at a significant discount to compensate buyers for the huge risk they take due to the volatility of cryptocurrencies. However, the potential rewards could be huge. Galaxy’s trading desk was one of the buyers in the FTX asset auction.

In the fall of 2023, the debtor faced a difficult task. Selling billions of dollars worth of SOL quickly would have destabilized an already volatile market, which was only just beginning to recover from the damage caused by the FTX crash, so, following the advice of Galaxy Asset Management, it chose to split the sale through multiple auctions.

The first batch of SOL tokens (between 25 million and 30 million) were sold at the end of March for $64 each, more than 60% below the market price of SOL at the time. The auctioned tokens were purchased by a handful of companies, including hedge funds Pantera Capital and Neptune Digital Assets.

According to a source familiar with the deal, previously undisclosed buyers also include Brevan Howard Digital, venture capital firm Multicoin Capital and the Solana Foundation, a nonprofit based in Zug, Switzerland, founded by developers who originally created the blockchain and dedicated to the development and security of the Solana network.

But Novogratzs Galaxy was also one of the first buyers of FTXs locked SOL. According to Bloomberg, Galaxy Trading purchased tokens on behalf of investors for a special purpose fund that raised about $620 million and charged a 1% management fee. Assuming Galaxys fund trades at a discounted price of $64, it will end up with 9,687,500 SOL tokens. Pantera, which also participated in the bidding, has created a similar fund to buy up to $250 million worth of SOL. At current prices, the Galaxy Funds estimated purchase of 9.7 million tokens has already made a paper profit of $1.03 billion.

In a second auction held in late April, FTX Assets reportedly sold 1.8 million SOL with winning bids ranging from $95 to $110 per token (15% to 26% below the market price). Galaxy Trading again raised funds for this auction from investors, with the minimum commitment capped at $5 million, The Block reported. Pantera also participated in the auction. The last batch of SOL sales ended on May 22, attracting Pantera and newly established cryptocurrency exchange Figure Markets. Figure bought 800,000 tokens at $102 each, about 42% below the tokens recent market price of $177. What is the total potential profit from the second auction? At current prices, it will be more than $130 million.

When details of the first auction emerged, many FTX creditors, as well as other bidders, were taken aback. “When both the buyer and seller of your house are involved in the same transaction, it looks very bad,” said a source with knowledge of the sale who spoke on the condition of anonymity.

“It’s not uncommon for investment banks to be involved in multiple parts of a sale or liquidation, as happened here,” said Rob Hadick, general partner at Dragonfly, a venture capital firm focused on cryptocurrencies. “That being said, it’s obviously bad and will raise concerns for the creditors committee…Issues like unfair access to information and unrobust price discovery are legitimate concerns.”

A Galaxy spokesperson declined to comment on the specifics of the SOL token sale and its dedicated fund, referring Forbes to FTX. It is unclear how much Novogratzs Galaxy will profit from FTXs bankruptcy reorganization. Galaxy Digitals shares, which are traded in Toronto, have risen 161% over the past 12 months and currently have a market value of $3.6 billion. According to the companys first-quarter financial statements, as of March 31, Galaxy held a $104.1 million investment in the Galaxy Digital Crypto Vol Fund, which acquired a large amount of SOL from FTX assets during the quarter.

FTX’s official unsecured creditors committee, which is made up of the exchange’s former major customers and market makers, has approved the token sale, and an FTX spokesperson issued a statement supporting Galaxy’s dual role in the bankruptcy reorganization:

“The Bankruptcy Court approved Galaxy Asset Management’s reserve terms, which were subject to review by interested parties (no objections received), including Galaxy’s ability to transact with Galaxy affiliates… Galaxy affiliates paid the same or higher price for Solana than other buyers, and all Solana sales were approved by the Official Committee of Unsecured Creditors and the Ad Hoc Committee of Non-U.S. Customers. Sales to Galaxy under the Court-approved framework do not present a conflict of interest, and any reports of objections are false.”

Still, some FTX creditors and customers are complaining. Listen to Sunil Kavuri, a former FTX customer who invested more than $2 million in the exchange and is a member of an unofficial “Customer Ad Hoc Committee” of more than a thousand former FTX customers: “I think those who are handling the bankruptcy estate have lost more than $10 billion. So more than what SBF originally caused us to lose,” Kavuri said. “The biggest loss is Solana.”

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This article is sourced from the internet: Forbes: Killing Two Birds with One Stone, How Much Can Galaxy Earn from FTXs Bankruptcy and Liquidation?

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