Over the past few years, many investors have used cutting edge financial products, like crypto exchanges, to make significant profits. Now, that the markets are turning, many are wondering how protected they will be in the event of collapse of a crypto exchange. We’re about to find out the hard way as those cutting edge financial platforms are being put on trial in bankruptcy courts for the first time. Although many of these products have been around for much of the past decade, in a booming market bankruptcy filings are few and far between.
Crypto has been around for more than a decade, but there is little to look at for guidance because things have generally gone well for crypto companies. Aside from crypto lending platform Cred, which filed for bankruptcy in 2020, the only other noteworthy precedent for a crypto bankruptcy case is Tokyo-based Mt. Gox – the largest exchange for Bitcoin BTC in 2010 that collapsed in 2014; that was a Chapter 15 case (where representatives of a corporate bankruptcy proceeding outside the U.S. obtain access to U.S. courts).
After the past few months of a crushing “crypto winter,” the avalanche of filings is on its way. First was Canadian crypto broker and lender Voyager Digital, which was recently forced to hastily file for Chapter 11 bankruptcy in New York, after having suspended account holders from withdrawing assets from their accounts. Voyager had lent $650 million worth of crypto to a hedge fund, Three Arrows, which also went under. Voyager hired the prominent law firm Kirkland & Ellis to represent it in its bankruptcy proceedings, which it filed under duress. In the papers Voyager submitted to the bankruptcy court Voyager argued that it already had a tentative plan of restructuring. According to its plan, account holders would be repaid in the form of crypto “coins” and “tokens”, in addition to proceeds from the litigation with Three Arrows, and some equity in a future reorganized Voyager.
Then, several days later, crypto lending platform Celsius, which refers to itself as “a crypto bank” – it charges interest when lending out crypto, and enables crypto deposits to earn their own interest – confirmed that it has initiated Chapter 11 bankruptcy proceedings as well. And if the Terra/Luna LUNA stablecoin crash a couple of months ago was not enough to signal that things are about to get ugly (like the Bear Stearns’ impending collapse in 2008 that regulators prevented by arranging for a distressed sale to J.P. Morgan Chase) the Celsius collapse has already been labelled by some as a “Lehman Brothers moment” for the crypto industry.
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But even if customers’ rights to get their money and assets back do exist, it is not clear that such customers will end up getting anything for two main reasons. First, while according to its bankruptcy petition Celsius says is interested in restructuring rather than liquidating (meaning that if there are funds available for distribution to unsecured creditors, customers can get something back), there is no promise that it will be successful. Second, once in bankruptcy, it is up to the bankruptcy process to determine: (i) the priority of creditors; and (ii) the valuation of assets – two novel tasks in the crypto world.
Priority of Creditors
In terms of priority of creditors, when an entity files for bankruptcy, and a trustee is appointed to determine all the assets of the debtor available to creditors, among the trustee’s tasks is to examine transfers made by the debtor to third parties within a certain period prior to the bankruptcy filing. If transfers are found to be improper or illegal the trustee can avoid them in order to recover the value of such transactions. For instance, “fraudulent transfer” actions seek to avoid or “unwind” certain pre-bankruptcy transactions that were made for little or no money. In a recent example of this, bankrupt cryptocurrency exchange Cred Inc., sought to claw back millions of dollars’ worth of bitcoin it argued the entity fraudulently transferred to an investor in return for a worthless bond.
There are other situations in which a trustee would seek to avoid transactions. In the Bankruptcy Code “avoidable preferences” are meant to prevent situations where the debtor’s assets are unfairly distributed to creditors. For example, when an aggressive creditor seeks to take a lion’s share of the available funds or assets in repayment of her claim right before the debtor files for bankruptcy, it does so to the detriment of all the other creditors. But the recovery of transfers that qualify as avoidable preferences is not automatic, and the burden of proof is on the trustee, who is required to show that all the elements required by the Bankruptcy Code have been met.
In Celsius’ case, the entity paid its debts to DeFi’s biggest lenders, reclaiming over $1 Billion in collateral. These payments will surely be carefully examined soon, as according to the Bankruptcy Code, the bankruptcy trustee may seek to avoid payments or transfers of interest made by the debtor to a creditor before filing for bankruptcy to recoup funds for the benefit of the bankruptcy estate and repayment of the estate’s creditors, including the unsecured creditors, such as Celsius’ customers. But in Celsius’s case there are several legal challenges. First, it needs to meet the burden of proof requirements, which might not happen based on reports regarding the overcollateralization of the loans that were repaid. Second, it might prove difficult to order transfers to be reversed when dealing with DeFi protocol. Indeed, DeFi protocols – unique programs that use computer code called smart contracts that run on the blockchain network– are decentralized, autonomous protocols, and are therefore harder to challenging to legally go after. A somewhat good illustration of this challenge of needing to deal with a DeFi protocol was recently demonstrated in a traders’ class action against Uniswap, a cryptocurrency exchange which uses a decentralized network protocol. The class action lawsuit was, therefore, brought against developers and venture capital backers of the decentralized digital assets exchange, and alleged that since the protocol allows users to freely list and also trade tokens, its creators should be the ones that are responsible for “rampant fraud on the exchange.”
Lastly, a different potential issue in Celsius’ case with regards to “avoidable preferences” could be what would happen to regular customers that pulled money out during the preference period – if the case converts to a chapter 7 bankruptcy case, a trustee go hypothetically go after those.
Valuation of Assets
As for valuation of assets, even outside the crypto space, disputes over valuations are challenging and could result in full blown legal battles where parties litigate the correct valuation using expert witnesses, evidence, and comparisons to comparable assets. But with digital assets being so volatile, and typically not tied to any external fixed prices or scales, the task of determining value is going to be much harder.
Additionally, in bankruptcy proceedings, valuations are usually determined as of the bankruptcy petition date. In cases such as Celsius’ and Voyager’s, this practice will complicate things. For example: if creditors state their proof of claims in U.S. dollars, and had 10 bitcoins (BTC) valued at $100,000 on the bankruptcy petition date, they should get assets based on the $100,000 amount. But if, by the end of the case, those same coins are worth $200,000, the creditors would want to be repaid in bitcoin, not cash. The issue of who should get the benefit of the increased value during the cases need to be resolved as well.
Yet these are not the only legal hurdles that customers of bankrupt crypto firms should expect.
Traditional brokerage firms are subject to SEC rules and laws, and if they collapse, they can use the Bankruptcy Code stockbroker liquidation proceeding, or the proceeding under the Securities Investor Protection Act of 1970 (SIPA). Therefore, although history does not include many instances in which brokerage firms collapsed, there are basic protections for investors if and when that does happen, including the: (i) “Net Capital Rule” of the SEC that makes it mandatory for brokerages to keep a minimum amount of prescribed capital in liquid form; (ii) “Customer Protection Rule” that requires brokerage firms to keep client assets in separate accounts from the brokerage’s assets in order to prevent confusion; (iii) protection of the Securities Investor Protection Corporation (SIPC)— a nonprofit, membership group that also functions as insurance for customers of brokerage firms that are registered under the Securities Exchange Act of 1934—specifically up to $500,000 of securities and $250,000 of cash held at a brokerage firm; and (iv) SIPC’s attempts to arrange the transfer of a failed brokerage’s accounts and assets to a different brokerage firm with little interruption, and if all attempts fail, the failed firm is typically liquidated.
But crypto firms are typically not registered with the SEC as a securities broker-dealer, and their deposits are not protected by SIPC insurance either. Coinbase and Kraken are good examples, which is why such firms are also not subject to other SEC and FINRA rules such as the “best execution” regulations and the SEC’s “national best bid and offer,” that are laws that ensure that investors receive the best buy or sell price for a security, no matter which broker was tasked with filling the order. This means that cryptocurrency prices can—and frequently do—vary across exchanges.
Medifast is a growth company that is sporting some attractive value-stock metrics after its shares have fallen to a level that is “simply ridiculous” when measured against its prospects, according to Taesik Yoon, who edits the Forbes Special Situation Survey and Forbes Investor newsletters. The diet business’s equity has suffered with growth shares in general as elevated inflation and aggressive Federal Reserve monetary policy to combat it have caused investors to rethink stocks that benefit from an expanding economy.
A slide of roughly 40% in the past year undervalues a growth story that is taking a hit now but remains intact over the longer term, says Yoon, making the stock a bargain. Yet despite also having a fantastic balance sheet with more than twice as much cash on hand than total debt and paying a very generous dividend that is now yielding almost 5%, Yoon says, Medifast’s stock currently trades at less than 12 times its earnings expectations for the year versus a five-year average of 19.4. That might make sense if you expected the current earnings swoon to persist, but Yoon thinks the secular trend toward healthier living and the company’s coach-based business model will have its earnings back on the rise soon, outpacing the market.
Medifast combines an extensive menu of proprietary nutritional products to help with diet goals and a network of almost 64,000 independent coaches. Most of these are former customers who achieved their weight-reduction goals and are compensated from the sales of company products to their clients. Medifast delivers its food regimens to customers, which aided revenue during the pandemic lockdowns and helped earnings growth accelerate by an average 53% over the past two calendar years. That drove its shares to a record $337 in May 2021, but they have lost more than half of that since. Still, even accounting for the risk of an economic slowdown, Yoon expects Medifast’s heavy spending to improve its technology and distribution infrastructure, which could help raise annual sales to more than $2.5 billion, up almost $1 billion from 2021.
Yoon sees long-term profit growth in the double digits, in line with expected sales gains and with operating margins in the mid-teens.
August 14 is National Financial Awareness Day, and I had the opportunity to chat with John Duffy, founder of Trending Stocks, who went from personally absorbing the 2000 and 2008 market crashes to launching a risk-adverse stock market platform for DIY investors. Here, I chat with Duffy about trend following and investment risk management.
WHAT GAVE YOU THE IDEA FOR TRENDING STOCKS?
It took me 14 years to “get even” after two huge downturns in the stock market – first in 2000 (down 50%) and then in 2008 (down 56%). Losing 14 years of investing time and money was the impetus for me to research a better way in the market. I learned about the ancient trend following strategy – and while it worked well – there was no simple software or program to apply it. Spending hours upon hours charting and graphing doesn’t interest anyone, so I programmed and launched TrendingStocks.IO to automate the research time and hassle on the backend.
HOW DOES IT HELP INVESTORS AVOID RISK?
The trend following strategy inherently has a focus on risk management, so I applied that into the new platform. The risk management helps investor avoid riding the market down. You pre-set a fixed stop-loss amount based on your personal risk tolerance. As a stock goes up, which it should based on the trend following strategy’s identification, so does the stop-loss amount; it rides up. While the stop-loss amount fluctuates up and down causally with the stock, if it gets down far enough to cross below a bottom threshold – we flag you to sell and get out.
WHAT’S YOUR BACKGROUND?
Aside from studying finance, economics and business, I’m a Vietnam Navy Veteran. Oddly enough, this was my foray into programming and coding. I bunked with the first IBM IBM programmers in the world. Their expertise interested me, so I asked a bunch of questions and they taught me the science.
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Not to date myself, but this was before when computers could be owned, only leased. IBM recruited me to program after the war, so I entered as one of few who had learned how to program back then.
IS THIS FOR DAY TRADERS OR DIY INVESTORS?
This is definitely not a day-trading solution. Trending Stocks provides analysis at the end of every business day and therefore, it’s not suitable for day trading. It’s after-hours based.
The tech is suited for a long-term, DIY investor and anyone who’s a newbie or wants to get involved in the market. Aside from managing risk, being a diligent trend follower helps with wealth growth over time.
Once an individual has confidence they’re working with good investable trends and a solid risk management process, it’s an easy plan to follow and platform to supplement that plan.
Contracts for Difference (CFD) trading and share trading vary primarily in that when you trade a CFD, you speculate on a market’s price without acquiring ownership of the underlying asset, but when you trade shares, you must do so.
The main distinctions between a share and a CFD are ownership and leverage. You become the owner of the shares when you purchase shares. Investing in shares is equivalent to acquiring a modest ownership share in a business you support. You must pay the whole share price when purchasing stock shares.
Contract for Difference is referred to as CFD. Without holding the underlying asset, you can speculate on the price of a security by engaging in online CFD trading. A stock, stock index, currency, commodity, or cryptocurrency might all be the underlying security for a CFD. With CFDs, you may join a trade with a lower initial investment because they trade on leverage.
Trading CFDs involves taking into consideration leverage and margin, fees and charges, instrument categories, going short, and asset ownership, which is one of the primary difference between CFD and share trading. Let me elaborate more.
What are Leverage and Margin?
Leverage and margin go hand in hand when trading CFDs. By using leverage, you may acquire exposure to an underlying asset without having to put down the whole amount of money needed to purchase and hold the real asset; instead, you just have to contribute a portion of the position’s overall worth.
The amount you must initially have available to begin a position, known as margin, fluctuates based on the contract size and the underlying asset you want to trade. Margin is not a cost. Based on the pre-determined leverage for the asset class, the first margin need is expressed as a percentage of the contract value. Risk is increased while trading on margin.
When you trade on the Invest trading platform, you must have the full asset value accessible, and you buy shares without applying leverage to your available funds.
Variety of Assets
You may trade on more than 2500 different assets on the Traders Union CFD platform, including shares, forex, commodities, indices, cryptocurrencies, ETFs, and options. You may do this to diversify your portfolio and get exposure to major exchanges across the world.
The Invest trading platform is a marketplace where you may buy and sell stocks and ETFs (ETFs). You may purchase and hold shares of your favorite businesses or any listed ETF on the platform, as well as benefit from the newest IPOs when firms go public, thanks to your access to over 1200 equities and 90 ETFs.
You may acquire exposure to an underlying asset, such as Gold (XAU), Apple (AAPL), or EUR/USD, without really holding it by using a CFD. Due to changes in the underlying asset’s price, you will either gain or lose money. The goal of CFD trading is to bet on changes in an underlying asset’s price. The size of the stake and price changes determine any profit or loss.
In contrast, when you purchase a stock on the Invest trading platform, you become the owner of the physical asset and look for a potential longer-term rise in the asset’s value before selling it.
A Little More About How CFDs Can Differ From Investing
If your position remains open overnight while trading CFDs, you will be charged an overnight fee. While CFD trading is frequently utilized to speculate on near-term events like earnings announcements or the release of U.S. data reports, stock trading is typically favored for constructing portfolios.
In summary, both CFD and share stock trading offer benefits and drawbacks, and both let you profit from price changes that might result in either a gain or a loss. You should be able to choose which Traders Union platform best matches your trading preferences after you have an understanding of your trading goals. Which trading platform—CFD or Invest—does best for you?