• Digital Asset Valuation: Lessons from FTX

    What can we learn about digital asset valuation from the collapse of the once-dominant cryptocurrency exchange?

    In one of the highest-profile digital asset litigations to date, the cryptocurrency exchange FTX filed for bankruptcy after a liquidity crisis caused the exchange to cease operations. The basis for customer claims against FTX in the bankruptcy proceedings comprised over 1,200 different digital assets, including cryptocurrency, digital tokens, and derivatives such as futures, leveraged tokens, and tokenized stock. The bankruptcy, which involved the liquidation of FTX's holdings, illustrates the unique challenges of valuing a wide range of digital assets against the backdrop of significant liquidity and asset marketability constraints.

    In this feature, we describe some of the considerations that informed the digital asset valuation in FTX and provide explanations of key concepts.

    Valuation of Illiquid Assets

    In one example, liquidation of a token by FTX, assuming an orderly sale of 5% of daily trading volume per day, would take more than 1,000 years.

    The FTX case was unique in that the asset valuations had to account for the effect of the complete liquidation of FTX's holdings. Given the magnitude of FTX's holdings, even an orderly liquidation was expected to have substantial valuation implications for assets with few buyers and/or low daily trading volume. For these illiquid digital assets, complete liquidation of FTX's holdings would likely have impacted the market price, and therefore valuation required the calculation of "asset liquidation discounts," or the discounts at which FTX would have been able to sell their holdings in an orderly liquidation that started at the time of the bankruptcy filing.

    The magnitude of an asset liquidation discount will vary across classes of digital assets. In the FTX matter, there were several digital tokens for which the underlying markets could not realistically absorb FTX's positions, given the size of the positions relative to the tokens' daily trading volume. In that case, the valuation discount reflected the fact that, even following a slow liquidation strategy, the liquidated value of the token was very small relative to the original holding.

     

    Non-Marketable Assets

    In the FTX bankruptcy, the face value of customer claims associated with non-marketable assets was approximately $1 billion. When valuing these customer claims, it was necessary to apply a valuation discount for lack of marketability (DLOM). Non-marketable digital assets are those that are subject to a vesting or lock-up period, during which customers cannot sell the asset.

  • Digital Asset Valuation: Lessons from FTX

    What can we learn about digital asset valuation from the collapse of the once-dominant cryptocurrency exchange?

    In one of the highest-profile digital asset litigations to date, the cryptocurrency exchange FTX filed for bankruptcy after a liquidity crisis caused the exchange to cease operations. The basis for customer claims against FTX in the bankruptcy proceedings comprised over 1,200 different digital assets, including cryptocurrency, digital tokens, and derivatives such as futures, leveraged tokens, and tokenized stock. The bankruptcy, which involved the liquidation of FTX's holdings, illustrates the unique challenges of valuing a wide range of digital assets against the backdrop of significant liquidity and asset marketability constraints.

    In this feature, we describe some of the considerations that informed the digital asset valuation in FTX and provide explanations of key concepts.

    Valuation of Illiquid Assets

    The FTX case was unique in that the asset valuations had to account for the effect of the complete liquidation of FTX's holdings. Given the magnitude of FTX's holdings, even an orderly liquidation was expected to have substantial valuation implications for assets with few buyers and/or low daily trading volume. For these illiquid digital assets, complete liquidation of FTX's holdings would likely have impacted the market price, and therefore valuation required the calculation of "asset liquidation discounts," or the discounts at which FTX would have been able to sell their holdings in an orderly liquidation that started at the time of the bankruptcy filing.

    In one example, liquidation of a token by FTX, assuming an orderly sale of 5% of daily trading volume per day, would take more than 1,000 years.

    The magnitude of an asset liquidation discount will vary across classes of digital assets. In the FTX matter, there were several digital tokens for which the underlying markets could not realistically absorb FTX's positions, given the size of the positions relative to the tokens' daily trading volume. In that case, the valuation discount reflected the fact that, even following a slow liquidation strategy, the liquidated value of the token was very small relative to the original holding.

    Non-Marketable Assets

    In the FTX bankruptcy, the face value of customer claims associated with non-marketable assets was approximately $1 billion. When valuing these customer claims, it was necessary to apply a valuation discount for lack of marketability (DLOM). Non-marketable digital assets are those that are subject to a vesting or lock-up period, during which customers cannot sell the asset.