Throughout history, societies have often frowned on bankruptcy, viewing it in moral terms as a breach of trust and responsibility to each other.
But, having lived through and reported on a variety of financial crises, I’ve become quite thankful for the court-driven process by which modern capitalism deals with this unpleasant problem. Even though it imposes what can seem like arbitrary, asymmetric burdens on those left holding debtors’ bags, at such times bankruptcy gives badly needed breathing room for market confidence to recover.
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With the dust settling following the messy collapse of some key crypto players in 2022, I’m reminded of that idea. Recently the estates of FTX, Celsius, Genesis, Voyager and others have been making varying degrees of progress in their efforts to return value to creditors, showing how bankruptcy can be a useful circuit breaker.
Much like those automated trading-halt triggers that many stock exchanges employ when selling gets out of hand, the freeze in payment demands and margin calls breaks the cycle of panic that sets off bank runs and self-perpetuating market collapses. Bankruptcy buys all of us time to let the market shift from fear to greed, so a price recovery can start to mitigate the losses.
Only once the market contagion is contained can investors more soberly assess the value of an estate’s assets. Invariably, as trustees bring in professional management and embark on asset sales to recoup funds, they discover the panic was overblown and that some parts of the balance sheet are undervalued. Meanwhile, if the bankrupt entity has a portfolio of liquid exchange-based assets – or is holding them in custody for others, as with many failed crypto entities – there’s a good chance their value will improve along with general market conditions.
Such recoveries are, of course, not guaranteed. But there’s something about the natural volatility and cyclical nature of crypto markets that means that, if a creditor can hold on, there’s a good chance for an improved recovery on their claims.