FTX Repayments Could Spark Bullish Trend in Crypto Market

K33 Research analysts believe that FTX’s expected $14+ billion cash repayments could create a "bullish overhang" for the market.

K33 Research analysts predict that FTX’s planned $14.5 billion cash repayments to creditors could drive bullish buying pressure in the crypto market. However, the timing and court approval of these payments are still uncertain with repayments expected to happen later this year. Meanwhile, smaller creditors might come out of FTX’s bankruptcy the most dissatisfied after the latest development in the company’s bankruptcy proceedings. Former FTX co-CEO Ryan Salame is fighting for a mere 18-month sentence because of his very small role and lack of knowledge about FTX’s fraudulent activities.

FTX Repayment Plan May Drive Market Surge

K33 Research analysts predict that FTX’s cash repayments to creditors could lead to bullish buying pressure in the crypto market. FTX plans to repay at least $14.5 billion in cash to users who lost funds because of the exchange’s bankruptcy.

Analysts Vetle Lunde and Anders Hesleth shared in a May 14 report that these cash repayments could create a "bullish overhang" for the market. They compared FTX’s expected $14+ billion in cash repayments with the planned crypto-based repayments of Mt. Gox and Gemini that only totals $10.6 billion combined, and pointed out that not all repayments are bearish.

The analysts argued that the FTX cash repayments will likely neutralize the selling pressure from in-kind repayments, but still acknowledged it is almost impossible to guess the net buying or selling pressure ahead of time. They also believe that the timing of these payments could be crucial when it comes to predicting their actual market impact. Gemini’s $1.7 billion in repayments is slated for early June, while Mt. Gox’s $8.9 billion is expected by its October 2024 deadline.

There is still some uncertainty around FTX’s scheduled repayment date as the court has to approve its repayment proposal. However, it seems like most FTX creditors expect repayments to be issued later this year.

On May 8, FTX stated it could repay creditors up to $16.3 billion, with those holding claim amounts below $50,000 eligible for up to 118% of the recovery, based on the price of their crypto in November of 2022. Some people are not very satisfied with the proposal, arguing that not all creditors would receive repayments equivalent to current market prices. BitGo CEO Mike Belshe is one of those dissatisfied with the process and stated that victims are not truly getting their money back.

What About Smaller Creditors?

Even more people might become dissatisfied after the latest development in the FTX bankruptcy case. A big claim against FTX EU, which was formerly known as K-DNA Financial Services, has been transferred to FTXcreditor.

According to documents filed in the U.S. Bankruptcy Court for the District of Delaware on May 15, the transfer is part of the ongoing Chapter 11 proceedings that were previously held against FTX EU. The transfer was conducted under Rule 3001(e)(2) of the Federal Rules of Bankruptcy Procedure, and was done in an attempt to make the administrative process a bit easier by consolidating all claims under a single creditor.

Unfortunately, it also presents some risks to smaller creditors, who could be overshadowed by bigger creditors and receive less favorable terms. The new single claim holder, FTXcreditor, is represented by Michael Bottjer, but the identity of the transferor is still confidential. As a result, there are some new concerns about the transparency and potential manipulation of the bankruptcy process.

Ex-FTX Co-CEO Argues for Leniency

Meanwhile, lawyers representing the former co-CEO of FTX Digital Markets, Ryan Salame, requested that he be sentenced to no more than 18 months in prison. In a filing on May 14 with the United States District Court for the Southern District of New York, Salame’s legal team argued that an 18-month sentence will be more than enough in addition to his restitution and forfeiture obligations.

Salame pleaded guilty in September of 2023 to conspiracy to operate an unlicensed money-transmitting business and engaging in campaign finance fraud. His sentencing by Judge Lewis Kaplan is scheduled to happen on May 28.

Salame’s lawyers claimed that he was completely unaware of the fraudulent activities by the central figures at Alameda and FTX. He also holds firm that he never stole from or lied to customers and was deceived into believing the companies were legitimate. The sentencing memo also pointed out that even as FTX was collapsing in 2022, Salame was still kept in the dark about the fraud by Caroline Ellison and Sam Bankman-Fried, who misled him and others about the company’s solvency.

Salame reported the fraud to the Securities Commission of the Bahamas on Nov. 9, 2022, just before Bankman-Fried resigned and FTX filed for bankruptcy. His lawyers argued that an 18-month sentence was fitting when considering his very small role in the charges he pleaded guilty to and his low likelihood of reoffending.

Salame will be the second person connected to FTX and Alameda Research to be sentenced after Bankman-Fried. He has been free on a $1 million bond since his guilty plea. As part of his plea deal, he will pay about $6 million in penalties to the U.S. government and $6 million to FTX debtors. He will also surrender two properties and a business, leaving him with no remaining assets.

Other FTX and Alameda executives who pleaded guilty like Caroline Ellison, Gary Wang, and Nishad Singh still have to face the chopping block.

What Happened with FTX?

In late 2021 and early 2022, the cryptocurrency market experienced a major downturn with Bitcoin and other major cryptos losing a lot of their value. While many platforms began shutting down, FTX stood out and continued to acquire competitors.

However, FTX's good fortune suddenly stopped in November of 2022 when CoinDesk published an article about Alameda Research, which was also founded by Sam Bankman-Fried. The article exposed that Alameda's assets were heavily tied to FTX's digital token FTT. A leaked balance sheet also revealed a very troubling lack of diversification and close ties between the two companies, showing $9 billion in liabilities against $900 million in assets and a glaring negative $8 billion balance.

The intertwined relationship between FTX and Alameda became even more concerning after it was discovered that Alameda routinely borrowed from FTX, primarily using customer deposits. Standard financial reporting was also absent as FTX never produced audited balance sheets, leaving no transparent record of its cash flow or ability to cover liabilities.

In an attempt to stabilize the situation, Binance initially agreed to buy out FTX on Nov. 8, 2022. Changpeng Zhao, the then CEO of Binance and one of FTX's early investors, decided to withdraw from the deal because of the mishandling of customer funds and ongoing U.S. investigations. This decision came at the time when the extent of FTX's financial troubles really began to surface.

The collapse of FTX happened over ten days in November of 2022, and it was likely triggered by the CoinDesk article and the leaked balance sheet. Binance's announcement to sell its FTT tokens due to the mishandled funds led to a massive drop in FTT's value, which then caused mass withdrawals from FTX customers.

Faced with billions of dollars in withdrawal demands, FTX was not able to meet its obligations. Despite Bankman-Fried trying to raise funds and cover the $8 billion gap, the situation only got worse, leading FTX to block customer withdrawals on Nov, 8 and eventually file for bankruptcy.

Later, investigations revealed that Bankman-Fried had used FTX funds for personal luxury purchases, elaborate advertising campaigns, and political donations, which made a lot of people very bitter about the company's downfall.