Using one’s own personal wealth or resources to purchase e.g. bitcoin is nothing out of the ordinary. Enticed by the tremendous increase in value of cryptocurrencies, many took on debts, sold assets and valuables and then went on to purchase crypto. Some turned major profits while many made devastating losses.
bitcoin price fluctuation over a decade:
March 2010 $0.003
December 17, 2017 $19,783.06
December 22, 2017 ~$14,000
October 31, 2018 ~$6,000
July 27, 2019 $10,148.60
In December 17th, 2017 bitcoin reached an all-time high with a price of $19,783.06 per coin. Only 5 days later, the price dropped to below $14,000 and would continue on to fluctuate greatly to this day with only a few short periods of relative stability.
As mentioned above, there is a difference between personal and business finance.
Side-note: When handling crypto taxable events can occur. Losses on crypto and bitcoin trades can be used to offset other capital gains.
Buying and trading crypto as a business
Why would a business buy crypto? There are 3 main concepts:
- Crypto as a means of investing
- Crypto as a means of payment
- A business related to crypto
Just like a regular individual, a business or rather a business entity may decide to invest in crypto assets or currencies e.g. as a means to rebalance portfolios. One such example of a business entity investing in crypto is the Liechtenstein bank “Bank Frick” offering crypto trading services.
Another means of utilizing crypto as business would be in the form of alternative payment.
It is highly unlikely that any business entity would engage with something as volatile as crypto in a way that could damage its finances to any serious degree or even indulge bankruptcy.
This also applies to the second concept. A business may choose to accept bitcoin as an alternative form of payment. Whether to keep or not to keep these cryptos is up to the respective business, but it is reasonable to believe that SME would swag any obtained crypto periodically to avert its volatility.
Nonetheless, it is absolutely possible for a business to go bankrupt due to crypto which brings us to the third concept: businesses related to crypto.
These businesses are naturally dependent on crypto and include:
– Exchanges, enabling investors to buy and sell crypto
– Issuance platforms, providing the technical framework for issuers to create and launch crypto
– Custody, offering custodial, compliance, and security services
Liquidity providers, synonymous with market makers facilitating trade by providing inventory, often bought at favorable conditions
and of course blockchain- or crypto businesses.
Side-note: Because many ICO start-ups neglect to tend to KYC/AML procedures and regulations, they have trouble creating bank accounts meaning their funds are often locked up as crypto tokens or coins such as Ethereum’s ETH, unable to change it into FIAT and making them especially vulnerable to e.g. fluctuations. This is especially true for ERC-20 projects. One of the most known and popular yet also most simplistic protocols for token issuance. It lacks the complexity and capability necessary for a fully compliant project and only very, very few have found a way around this issue.
Quarters, a blockchain project aiming to be the universal virtual currency for gaming is one such exception.
The Japanese cryptocurrency exchange Mt. Gox. created in 2010, managed the majority of bitcoin transactions at a time when one bitcoin was approximately $0.08. As bitcoin’s value experienced an astronomical increase, hackers started to raid Mt. Gox ultimately leading to its demise and filing for bankruptcy.
How to file
Now that we have the context, we can finally start filing for bankruptcy.
As we have established by now, there are 2.5 scenarios.
1. We are a business entity
2. We are a private entity
2.5 We are a business entity but have some or full private liability
First we want to consider our options. Naturally, bankruptcy is more often than not a last resort. While it can be a strategic move in business, it’s a double-edged sword to say the least. There are sever consequences to be dealt with such as, trust, reputation, lock-up periods and of course your credit rating:
(Largely dependent on credit rate before filing. The higher and the more accounts associated with the filing, the worse the impact.)
Chapter 7 and 11 remain on a credit report for up to 10 years, Chapter 13 for up to 7.
Side-note: You may want to consider hiring a bankruptcy attorney. It isn’t required but filing for bankruptcy is a complicated process and rarely successful without one. (There are free legal services available).
Then it’s time to change to a bird-view perspective of the situation. Depending on the state, a variety of debts cannot be discharged.
- Child Support
- Debts that arise after bankruptcy is filed
- Fraudulent credits/ Loans
- Debts from damages due to reckless behavior such as driving intoxicated
- Most student loans and taxes
- Anything based on/stemming from. /derived from unlawful events, behavior, businesses and so forth.
- Any loan connected to a security as creditors can simply seize the asset
As usual, it depends on the state, but certain assets/valuables can be exempt. Common exceptions include a not too high value car, your home and sentimental items like a wedding ring.
In the case of chapter 13, virtually all assets can be kept with the option of selling them,, if they have significant value, to reduce liability to creditors.