Cryptocurrency and Bankruptcy

Jun 1, 2022 | Bankruptcy

Cryptocurrency. What on earth is Cryptocurrency and why should anyone care?

Well… it certainly sounds scary enough. It has the ring of something that only takes place on the dark web. You might picture a mad-genius man-child huddled in the corner of his mother’s basement – surrounded by computers. He never emerges to see the light of day, and only survives by the delivery of sandwiches and juice that his mother totes downstairs thrice daily. He may not have his driver’s license yet, but he’s got billions of dollar’s worth of some digital money that he lords over his pretend universe.

As we shall see, it’s not quite as scary as that – or is it?

Let’s try to figure out just what this Cryptocurrency is, before we investigate what (if anything) bankruptcy has to do with it.

What is Cryptocurrency?

Maybe it makes sense to at least define the name before we do anything else. According to, the word “crypto” is just a short word for “cryptography,” although there is an informal use of the shortened version of the word that alludes to “a person having a secret allegiance to a political creed,” which sounds nice and creepy, doesn’t it? As we delve into it, you will see this is not what we are talking about here.

So we need to look at the word “cryptography” since the meaning of the word “currency” should be obvious enough, especially if you have the wherewithal to read an article such as this in the first place. states that “cryptography” is “the art of writing or solving codes.” So we should suppose that cryptocurrency is some sort of money that is written as a code. Are we on the right track?

Let’s look to Wikipedia for a definition. Maybe it’s not a primary source, but good ol’ Wiki should give us a pretty solid idea of what people are thinking of, or what they mean when we talk about cryptocurrency. There it is defined as “…a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it”

Given what cryptocurrency actually is, that Wiki definition is a strong one. It also indicates that the term “cryptocurrency” is probably not the best descriptor that could have been created, because the name itself is probably a reference from the early days of its development as an untraceable form of currency – which for all intents and purposes it is – but it is also more than that.

Since not all of us are quite at the intellectual level required for the real Wikipedia, let’s take a look at how the Simple.wikipedia defines it. They say cryptocurrency is “a type of currency which uses digital files as money. Usually, the files are created using the same ways as cryptography (the science of hiding information). Digital signatures can be used to keep the transactions safe, and to let other people check that the transactions are real. The first cryptocurrencies were made to be free of government-given currencies.”

Huzzah! It may have taken us a long time to get there, but we finally have a definition that we all (hopefully) can understand. Maybe we should have started with the simple.wikipedia right from the get-go. Now that we know how to define it, and before we run to the children’s section of the library to check out a whole slew of dumbed-down books on complex topics, let’s focus here on cryptocurrency.

How Do I Get Into Cryptocurrency?

For efficiency purposes, let’s just call it “crypto” from now on. Crypto is fairly easy to use, and is a bit like using a brokerage account for stocks and other investments if you are familiar with those. If not, let’s take a quick look at how that works.

There’s a vast network of crypto being traded all the time, but how do you get connected to it? Just as with a stock exchange, the easiest way to do so is to go through a third-party that acts as a centralized broker for buying and selling crypto.

So let’s say you sign up for one of these crypto exchanges because you are ready to take the plunge. Now how do you actually get crypto, especially if you don’t already have crypto to buy crypto?

The easiest way is just to buy some crypto with cold, hard, cash. Unless you are from another planet, you probably have some of your nation’s fiat currency. No, it’s not an Italian car, it’s just a fancy name for the normal money you use in your country. It’s the stuff you’re used to. As a side note, you should put some work into shopping around and make sure the exchange you use has a good reputation and charges reasonable fees, because as with any brokerage account, they don’t just give away their services.

This all seems fairly simple… for now. But guess what? It turns out there’s more than one cryptocurrency. Crypto isn’t a specific type of currency the way that something like the Swiss Franc is a currency. It’s just the concept for a type of currency. You’ve probably heard of Bitcoin, but there’s also Ethereum, Cardano, etc. Choosing which one is right for you is beyond the scope of this article (it would be its own, vast article), so let’s just say when it comes to picking a crypto – do your research!

How Do I Spend It?

An easy way to spend your crypto is by converting it back to normal currency to spend anywhere. You can usually do this through your broker. There are usually fees for this, and also traceability concerns for some of you (you know who you are!), so converting it back into cash defeats the purpose of using crypto in the first place.

Another way to buy things with crypto is to find an online retailer who takes crypto. There is an ever-growing list of those who take it, so this shouldn’t be too hard to do and could be a fun, new way to spend (and part with) your hard-earned money. There is also a small list of retailers who accept crypto at their physical store. This is a way that crypto can feel just like real money. You walk into the store, grab what you want, and spend your money to buy it. It’s just like pulling some dollars out of your back pocket!

Making (And Losing) Money With Cryptocurrency

Like virtually anything of value, you can buy and sell crypto to try to make money. The old adage of “buying low and selling high,” applies here as well. You can buy your crypto through your exchange when you think the value is on its way up, and then sell (or spend it) when the value is higher. This could be a great money-making proposition, much like playing the stock market.

There is a caveat when it comes to crypto. It is unregulated. It’s like the Wild-West of finance. Consequently, the value of your crypto can fluctuate wildly. This could be a good thing. It could mean that you make a tremendous amount of money in a matter of hours or even minutes. As with any investment, it could also mean that you could lose a tremendous amount of money in as little time.

That’s a scary part, but not the only scary part. Since it doesn’t have the backing of governments or central/federal banks, and it isn’t regulated like the stock market (think stock market crash), what’s stopping my crypto from completely disappearing at the drop of a hat? Here’s a warning – this might be just as scary as that man-child in the basement.

Can Crypto Go Bankrupt?

Changes in the legal world are deliberately slow. The founding fathers (of the legal world anyhow) don’t want things to be fickle when it comes to the law. After all, it has the power to lock you up for life (or end your life in certain states), so it’s something we don’t want to be able to change on a whim or based on the ever-shifting political climate.

The downside of this slow-to-change approach to the law is that it does not address new issues quickly. When something like crypto becomes a worldwide phenomenon, we have to wait in limbo until the law catches up to the changes. So as of now, we don’t have any clear answers to give you when it comes to whether or not crypto can go bankrupt, and whether you can lose your money if a specific currency files for bankruptcy.

We at least have one cryptocurrency that could be a potential, legal test-case for this very question. Coinbase is a cryptocurrency that recently had a substantially negative earnings report. This caused their stock to have a drastic drop in value. It has been widely reported that its CEO Brian Armstrong has addressed the potential for bankruptcy. No one knows for sure, but legal experts and Armstrong seem to indicate that if a cryptocurrency files for bankruptcy, anyone owning their currency would be treated as an unsecured creditor.

Unsecured creditor? Uh oh… If that’s the case, as an owner of crypto you would have virtually no protection for your money. In a bankruptcy situation, an unsecured creditor is the last in line to get money from the debtor. Depending on the type of bankruptcy and the circumstances of the case, unsecured creditors can end up with only some of what they are owed, or sometimes nothing at all.

Just think of a personal bankruptcy. Your credit cards are a great example of an unsecured creditor. When you file for chapter 7 bankruptcy, your credit card debt usually goes away completely. This means your credit cards don’t get a penny of what you owe them. If you own crypto, and you are treated as an unsecured creditor, the same thing could happen to you too.

So yes, it’s a scary scenario indeed. Is it a reason not to put your money into crypto? Only you can decide that for sure, but crypto should be approached with an abundance of caution. From what we know about crypto so far, it would be hard to find a financial instrument outside of a casino with less protection.

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