When FTX declared bankruptcy, its estate held $3.4 billion in various cryptocurrencies, which must be liquidated to meet creditor claims. Due to the lack of expertise among those initially managing the bankruptcy, early efforts resulted in losses.
In September 2023, the estate enlisted Galaxy Digital Holdings, led by billionaire Michael Novogratz, to handle the complex task of selling, hedging, and staking these digital assets. Galaxy’s involvement aimed to optimize the liquidation process to avoid destabilizing the volatile crypto market.
This Crypto Billionaire’s Fund Could Reap More Than $1 Billion From The FTX Bankruptcy https://t.co/aVGZDgfSpT pic.twitter.com/Ru2upxsXYd
— Forbes (@Forbes) May 29, 2024
The Sale of SOL Tokens
A substantial portion of FTX’s cryptocurrency assets comprised SOL, the native token of the Solana blockchain. Approximately 60 million SOL tokens were acquired by Sam Bankman-Fried’s companies between August 2020 and May 2021. By late 2023, SOL’s price had soared from around $20 to over $100 per token. However, most of these tokens were locked, meaning they could only be sold in batches from 2025 to 2028. This posed a challenge for liquidating them quickly without significant discounts.
In March 2024, the first batch of SOL tokens, totaling between 25 million and 30 million, was auctioned at $64 per token, a 60% discount from the market price. The tokens were purchased by Galaxy Digital, Pantera Capital, Neptune Digital Assets, Brevan Howard Digital, Multicoin Capital, and the Solana Foundation. Galaxy Digital set up a special-purpose fund to acquire these tokens, raising about $620 million from investors.
The approach to selling FTX’s assets was methodical to prevent market destabilization. Spreading the sales over multiple auctions, Galaxy and other participants aimed to balance the need for liquidity with market stability. The second auction in April 2024 saw 1.8 million SOL tokens sold at prices ranging from $95 to $110 each, representing 15% to 26% markdowns. This auction also involved Galaxy Digital and Pantera, with Galaxy raising additional funds from investors.
In the final auction on May 22, 2024, 800,000 SOL tokens were sold at $102 each, approximately 42% below the market price. The buyers included Pantera and the newly established crypto exchange Figure Markets. The combined potential profits from these sales were substantial, reflecting the market’s recovery and the strategic management of the auctions.
Controversy and Criticism
Despite the approved process, some FTX creditors and customers expressed dissatisfaction with how the asset sales were conducted. Concerns were raised about potential conflicts of interest as Galaxy Digital managed asset sales and purchased the tokens. Critics argued that this dual role could lead to unfair advantages and questioned the transparency of the process.
Rob Hadick of Dragonfly Ventures noted that while it’s not uncommon for investment firms to play multiple roles in such transactions, the optics in this case were problematic. However, the Official Committee of Unsecured Creditors and the Ad Hoc Committee of Non-U.S. customers approved the sales, emphasizing that Galaxy’s participation adhered to the court-approved framework.
A spokesperson for Galaxy Digital declined to comment on specific details but reiterated that all transactions were conducted transparently and following legal guidelines. Nonetheless, some former FTX customers, like Sunil Kavuri, voiced strong objections, blaming the handling of the bankruptcy for additional financial losses.
Potential Profits and Market Reactions
Galaxy Digital’s involvement in the FTX bankruptcy could yield substantial profits. Assuming the tokens were purchased at the auction price of $64, Galaxy’s fund potentially gained a paper profit exceeding $1 billion, based on current market prices. The firm’s strategic positioning and investor backing were crucial in navigating the complex liquidation process.
Galaxy Digital’s stock has benefited from these developments, gaining 161% over the past year and reaching a market capitalization of $3.6 billion. As of March 31, 2024, the company reported a $104.1 million investment in the Galaxy Digital Crypto Vol Fund, which included Solana acquisitions from the FTX estate.
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