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To investors,

Mainstream media headlines this morning read “FTX Has Billions More Than Needed to Pay Bankruptcy Victims” and “FTX says most customers of the bankrupt crypto exchange will get all their money back.”

This is inaccurate.

Let me explain. FTX’s advisors filed a disclosure statement yesterday that revealed a plan to end the Chapter 11 bankruptcy. In the document, the advisors claim they have between $14 billion to $16 billion to pay out to creditors in the coming months. These are big numbers considering that FTX only owes approximately $11 billion to various people and entities.

So how did FTX get so much money?

First, they had cash on their balance sheet before they went bankrupt. Second, they were able to sell a number of investments they had, such as an investment in hot AI startup Anthropic, to generate more cash. And lastly, the various crypto assets FTX held have appreciated hundreds of percent over the last year.

So if the company has more money than what they owe, everyone should get paid back 100%, right? Not quite — it is not that easy. There is some funny math going on here.

FTX users who had crypto on the platform are owed money based on crypto prices back in November 2022. So if you had 1 bitcoin on the platform, you would be owed approximately $18,000. Although FTX is claiming they will pay you 100% of the $18,000, this means that you are actually only getting ~ 0.28 bitcoin back from the exchange. That is only 28%.

If you price the claim in dollars at the time of the bankruptcy, then FTX can take a victory lap and claim they are paying everyone back 100% of their funds. But if you denominate the claims in the native asset that a user put on the platform, then FTX is not even paying back 30% of the users’ funds.

Unfortunately, this is how bankruptcy works. The courts need to pick a date to use for the value of claims. The court also historically has used a single currency, US dollars, to denominate all claims. The same phenomenon at play in the FTX case is also present in other crypto bankruptcy cases (Celsius, Blockfi, etc).

The fact that crypto assets are involved here has thrown a curveball to the courts. They have never seen financial assets appreciate hundreds of percent in a year, which drastically changes the calculation of the true value of a creditors’ claim.

I don’t know what the right answer is for future bankruptcy cases. That is for people much smarter than me to figure out. But I do know that the headlines boasting that FTX users are going to be paid back 100% of their money are misleading.

Hope you all have a great day. I’ll talk to everyone tomorrow.

-Anthony Pompliano

Marko Papic is a macro strategist who incorporates geopolitics into his investment analysis. He is also the author of "Geopolitical Alpha: An Investment Framework for Predicting the Future."

In this conversation, we talk about geopolitical alpha, how to apply it to your investment process, China, Ukraine, Russia, Isreal, El Salvador, United States, rest of the world, commodity prices, public media narrative, inflation, proxy wars, bitcoin, and more.

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