The Hot New Market in Crypto? Trading FTX’s Carcass.

After the FTX cryptocurrency exchange filed for bankruptcy last year, Thomas Braziel, an investor who specializes in collapsed businesses, started brokering an unusual kind of transaction: a market to profit from FTX’s downfall.

Mr. Braziel put one of his clients in touch with a large financial firm that had lost nearly $100 million when FTX went under. Last December, the firm agreed to sell its claim in the FTX bankruptcy — essentially an i.o.u. from the collapsed exchange — for 6 cents on the dollar, betting that it was better to collect some fast cash than wait years for the husk of FTX to start paying creditors back.

Then the market for FTX claims exploded. Mr. Braziel recently brokered the sale of a $19 million FTX claim for 68 cents on the dollar, collecting a nearly $100,000 commission, he said. Some claims are selling for more than 70 cents, as investors grow optimistic that FTX’s new leadership will recover a sizable portion of the roughly $8 billion that the founder, Sam Bankman-Fried, was convicted of stealing from customers.

“The market is insane,” said Mr. Braziel, a partner at the investment firm 117 Partners. “It’s so hot.”

The initial despair over FTX’s failure has given way to a strange afterlife for the bankrupt exchange: a trading frenzy that has intensified in recent weeks as major financial firms seek opportunity in the rubble of one of the worst business collapses in decades. The story of FTX has come full circle, as investors who once used the platform to place risky crypto bets now gamble on the company’s prospects in bankruptcy court — and funnel any gains back into the resurgent crypto market.

For speculators, the math is simple: They are betting that if they buy a $10 million claim for, say, 50 cents on the dollar, they will pocket substantial profits if more than $5 million is ultimately paid back by the bankruptcy estate. In total, $1 billion to $1.5 billion in FTX claims has changed hands since the bankruptcy began, according to Xclaim, a company that connects buyers and sellers.

Most of the claims represent the crypto and cash holdings that FTX customers stored on the exchange when it filed for bankruptcy in November 2022. Some of the claims have a face value of just a few million dollars, while others are worth tens of millions. In recent weeks, a few $100 million claims have been shopped around, according to market participants.

The market has attracted a number of well-known hedge funds and investment firms, including Farallon Capital, Silver Point Capital, Hudson Bay, Contrarian Capital Management and Canyon Partners, court records show.

But it has also drawn investors with more checkered histories in the finance industry. In June, a court-appointed investigator in Delaware accused Mr. Braziel of falsifying bank records and misappropriating funds from a bankruptcy estate that he was managing. Lawyers for Mr. Braziel responded by objecting to those conclusions about his “actual or potential criminal liability.”

Another figure involved in the claims marketplace is a former top FTX executive who worked closely with Mr. Bankman-Fried. Ramnik Arora, one of FTX’s chief fund-raisers, recently started an online claims trading platform for FTX customers and began buying some smaller claims for himself, according to corporation records and two people familiar with the matter. Mr. Arora had been scheduled to testify for the prosecution at Mr. Bankman-Fried’s criminal fraud trial in October but ultimately wasn’t called as a witness; he hasn’t been charged with any wrongdoing.

An FTX spokesman declined to comment.

Claims trading isn’t new, especially in complex bankruptcies that take years to unfold. But recent bankruptcy filings by high-profile crypto firms, including the lending companies Genesis Global, Celsius Network and BlockFi, have created a cottage industry of brokers who specialize in matching buyers and sellers.

The market gives creditors with money locked up in court proceedings the chance to cash out immediately rather than wait years for a payment. The trade-off is that they must accept far less than the face value of a claim — and potentially less than the bankruptcy estate may ultimately dole out.

Still, hundreds of crypto investors are taking that deal. Over the past 18 months, Xclaim has processed $70 million in Genesis trades and $4 million in Celsius trades, according to Andrew Glantz, the firm’s chief strategy officer.

FTX’s bankruptcy has drawn by far the most interest. After the company failed, John Ray, a veteran of corporate turnarounds who handled Enron’s unwinding, took over from Mr. Bankman-Fried. In court filings and testimony to Congress, Mr. Ray called FTX the worst corporate mess he had ever seen, raising fears that the money might be impossible to claw back.

But the recovery process has moved faster than expected. Mr. Ray estimated in August that FTX had recovered $7 billion, though it was unclear how much of that money would make its way back to creditors, given the number of outstanding claims.

Still, claims that once traded for just a few cents on the dollar have surged in value. “Our first trade was in the low teens,” said Jay Conklin, a managing partner at the hedge fund Park Walk, which began working with institutional investors to buy and sell claims shortly after FTX’s collapse. “Now there are deals in the 70s,” Mr. Conklin said.

One of the most vocal evangelists for the claims market is Mr. Braziel, who lives in Forte dei Marmi, a seaside town in Italy, and has become a familiar face on the crypto conference circuit. Not long ago, he said, he persuaded Scott Galloway, the popular podcaster, to buy $2.5 million of FTX claims. Mr. Galloway discussed the investment on one of his shows.

“He got lucky — we bought him a basket in like the low 20s,” Mr. Braziel said. “He’s going to make at least three or four times his money.”

In bankruptcies, claim transfers are usually recorded on the court docket within a few weeks of closing. The filing almost always identifies the buyer, but the seller’s identity is often redacted for privacy reasons.

There are risks on all sides. Brokers operate with limited oversight, and no one regulates who can buy claims or arrange deals. Some matchmakers require sellers to give them an exclusive time period to find a buyer, which can limit a creditor’s ability to shop a claim around.

Bradley Max, a director for the claims broker Cherokee Acquisition, said some sellers had trouble negotiating deals on their own because they had to comply with the “know your customer” rules that buyers institute to avoid transacting with bad actors.

“Nobody wants to buy Vladimir Putin’s FTX claim or someone like that,” said Mr. Max, whose firm runs an online platform for trading claims.

It’s also unclear how much FTX will ultimately pay back. By this fall, lawyers and other professionals working on the bankruptcy case had collected more than $300 million in fees — money subtracted from the pool of funds that flows back to creditors.

And in recent months, the Internal Revenue Service has filed $24 billion in claims, arguing that FTX owed the government “income taxes, employment taxes and penalties” from 2018 to 2022. (The I.R.S. did not respond to a request for comment.)

The I.R.S. is usually paid before all other creditors in a bankruptcy, so a large tax claim could drastically reduce the funds available to customers. But the amount that FTX actually owes remains in dispute, with a hearing set for early next year.

For now, the speculators aren’t worried.

“A silly, silly thing,” Mr. Braziel said of the I.R.S.’s efforts to claim billions of dollars in unpaid taxes. “No basis in facts.”

Kirsten Noyes and Sheelagh McNeill contributed research.