Galaxy Digital Could Potentially Gain $1 Billion Windfall from FTX Bankruptcy Sales

When FTX filed for bankruptcy, it had $3.4 billion worth of various cryptocurrencies in its estate that needed to be sold off to pay its creditors. However, the initial management of the bankruptcy lacked the necessary expertise, resulting in losses.

In September 2023, the estate enlisted the help of Galaxy Digital Holdings, led by billionaire Michael Novogratz, to handle the complex task of selling, hedging, and staking these digital assets. Galaxy’s involvement was aimed at optimizing the liquidation process in order to avoid destabilizing the volatile crypto market.

A significant portion of FTX’s cryptocurrency assets consisted of SOL tokens, which are the native tokens of the Solana blockchain. Between August 2020 and May 2021, Sam Bankman-Fried’s companies acquired around 60 million SOL tokens. By late 2023, the price of SOL had skyrocketed from around $20 to over $100 per token. However, most of these tokens were locked and could only be sold in batches between 2025 and 2028. This presented a challenge in liquidating them quickly without significant discounts.

In March 2024, the first batch of SOL tokens, totaling between 25 million and 30 million, was auctioned off at $64 per token, which was a 60% discount from the market price. Galaxy Digital, Pantera Capital, Neptune Digital Assets, Brevan Howard Digital, Multicoin Capital, and the Solana Foundation purchased these tokens. Galaxy Digital established a special-purpose fund to acquire the tokens and raised approximately $620 million from investors.

The approach to selling FTX’s assets was carefully planned to prevent market destabilization. The sales were spread out over multiple auctions, with the goal of balancing the need for liquidity with market stability. In the second auction in April 2024, 1.8 million SOL tokens were sold at prices ranging from $95 to $110 each, representing markdowns of 15% to 26%. Galaxy Digital and Pantera were also involved in this auction, and Galaxy raised additional funds from investors.

In the final auction on May 22, 2024, 800,000 SOL tokens were sold at $102 each, which was 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.

However, there were some controversies and criticisms surrounding the asset sales. Some FTX creditors and customers expressed dissatisfaction with how the sales were conducted, raising concerns about potential conflicts of interest as Galaxy Digital managed the 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 pointed out that while it is 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, stating that Galaxy’s participation adhered to the court-approved framework.

A spokesperson for Galaxy Digital declined to comment on specific details but emphasized that all transactions were conducted transparently and in accordance with legal guidelines. Nevertheless, some former FTX customers, like Sunil Kavuri, strongly objected to the handling of the bankruptcy, blaming it for additional financial losses.

Galaxy Digital’s involvement in the FTX bankruptcy has the potential to yield substantial profits. Assuming the tokens were purchased at the auction price of $64, Galaxy’s fund could have made a paper profit exceeding $1 billion based on current market prices. The firm’s strategic positioning and investor backing were instrumental in navigating the complex liquidation process.

As a result of these developments, Galaxy Digital’s stock has experienced a 161% increase over the past year and reached 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.