They lost crypto in the crash. They are trying to get it back.

David Little began to lose hope. Like thousands of other investors, he lost a large chunk of his cryptocurrency savings—which at one point accounted for more than half of his net worth—when experimental cryptobank Celsius Network filed for bankruptcy this summer.

Then he got an idea. In July, Mr. Little, a 35-year-old engineer in Houston, wrote a letter to the US Bankruptcy Court for the Southern District of New York, arguing that he and others who had deposited their digital currencies in a special type of Celsius account should be able withdraw the funds. Soon he started getting calls from other depositors – a man struggling to pay his rent, a woman who had lost her retirement savings.

Mr. Little started a group chat that grew to include hundreds of Celsius customers. Within days, they raised $100,000 to hire the law firm Togut, Segal & Segal to press their case in court.

“If I become part of the cautionary tale in crypto, I want to know that I didn’t just sit around and do nothing,” Mr. Little said.

The company’s implosion was one of the most damaging episodes of this summer’s crypto crash, a moment of reckoning that exposed the industry’s risky practices and devastated thousands of investors. Celsius customers alone lost $5 billion, and the firm’s collapse sent tremors through the digital currency market, sending Bitcoin and Ether appreciating.

Now the crash has entered a decisive new phase: a mad rush to recover lost funds. The stakes extend beyond Celsius, as the amateur traders who bet on a string of failed crypto projects seek compensation, file lawsuits and mobilize online. At the same time, some of the industry’s most powerful firms are examining what is left of the distressed companies in search of potential deals.

The stakes are highest for the regular investors who lost everything. Trying to salvage some of their savings themselves, Celsius depositors gather in online forums to discuss legal strategy and offer emotional support. For weeks, they have flooded the bankruptcy court with hundreds of impassioned letters detailing their losses and suggesting ideas for maximizing their recoveries. Aside from Mr. Little’s group, at least one other customer coalition has hired a lawyer to recover some of Celsius’ remaining assets, an unusual show of grassroots activism for a bankruptcy case.

“I’m amazed at how fast and furious some of the creditor bodies are forming,” said Thomas Braziel, a partner at investment firm 507 Capital, which specializes in bankruptcies. “Usually in bankruptcies with very small creditors, they are absolutely swallowed up by big law firms and the debtor.”

Recovery efforts have gained momentum as the cryptocurrency market has gradually stabilized. The price of Bitcoin rose to around $25,000 this week from a low of $18,000 in June, although it is still more than 60 percent from a peak of about $68,000 last November.

Whether the grassroots organizing and backroom deals will lead to significant payouts for people who have lost money is still uncertain. The Celsius case is complex, and historically investors who have lost cryptocurrencies in a corporate collapse have struggled to get them back. Mt. Gox bankruptcy in 2014, an early exchange, cost investors billions and led to years of legal wrangling.

The customers hope that the company’s bankruptcy will be less drawn out. For years, Alex Mashinsky, the cryptobank’s founder, trumpeted an opportunity that seemed too good to pass up: savings accounts where people could deposit cryptocurrencies and receive annual returns as high as 18 percent. In weekly “ask me anything” videos, he cast Celsius as a populist alternative to traditional banks, which have federally insured deposits that pay much lower interest rates.

Mr. Mashinsky’s pitch made Celsius a sensation. Last year, the New Jersey-based company had one million customers and $20 billion in assets under management.

A crypto enthusiast, Mr. Little put most of his Bitcoin into Celsius in early 2021. (He declined to disclose the total value of his deposit.) “This had been such a reliable platform,” he said. “It was nowhere near what was advertised.”

To generate the 18 percent return, Celsius took risks by investing customer deposits in experimental crypto products, according to court papers. (The company did not respond to a request for comment.) In June, the market crash similarly triggered a bank run, forcing Celsius to halt withdrawals and eventually file for bankruptcy.

In legal filings, Celsius reported that it had $4.3 billion in total assets but $5.5 billion in debt, including $4.7 billion owed to customers. That gap will make it difficult for Celsius to return users’ deposits. In one of hundreds of letters sent to the bankruptcy court, an Australian couple, Katie and Christopher Davis, said they had deposited about $150,000 in Celsius, hoping to use the money to start a family.

“It was our life savings,” they wrote. “It was our chance to have a baby.”

The fate of these funds now depends on a complex legal process that will take months to unfold.

In court, lawyers for Celsius cited the user terms that customers signed to argue that most depositors transferred ownership of their cryptocurrencies to the company. This claim has major legal ramifications: If the judge rejects the company’s argument and finds that the company was only storing its customers’ property, then the firm would have to return what remains of those deposits immediately.

Celsius is pursuing alternative routes to repay customers and even restart the business. The company has a Bitcoin mining operation, which the lawyers say can help generate funds for depositors.

Mr Little is pushing for a quicker solution. Before Celsius’ bankruptcy, he moved his savings from one of the company’s popular interest-bearing accounts to a non-interest-bearing “custodial account” that was supposed to provide a safe method of storage.

Around 58,000 customers had cryptocurrencies in the company’s custody accounts. The lawyer Mr. Little’s group hired, Kyle Ortiz, plans to argue that those funds — worth $180 million — remain the property of customers under the terms of service.

For Celsius’s interest-bearing accounts, that will be a difficult case to make, legal experts said. But custody holders have a better chance, because the language of the agreement appears more favorable.

“The custodians have a decent chance of prevailing and getting their money back,” said Adam Levitin, a bankruptcy professor at Georgetown Law.

In a hearing Tuesday, a lawyer for Celsius, Joshua Sussberg, gave further reason for hope. The company is working to resolve the custody issue, he told the judge, and potentially get those assets “back to customers.”

Celsius depositors are following the case closely. Demand to watch a live broadcast of the hearing was so high that the bankruptcy court had to borrow another court’s Zoom link to accommodate the roughly 500 people who logged on. In Telegram group chats, customers offered a running commentary on the proceedings, posting fire. emojis when Mr. Sussberg suggested that regaining custody was likely.

The custody initiative is one of several initiatives by Celsius customers to get their deposits back. In federal bankruptcy cases, the Justice Department appoints a committee of creditors to represent the interests of the people to whom a company owes money. But individuals or groups of creditors can also hire their own lawyers to pursue narrower goals.

A full recovery for the custody group would help only a small portion of Celsius users, leaving the rest to consider other legal strategies.

“There are other groups that are starting to follow suit,” said Jon Dimetros, a depot owner involved in fundraising efforts. “Just to make sure it’s a level playing field.”

Celsius is also attracting interest from potential buyers. Last week, crypto company Ripple said it was “interested in learning about Celsius and its assets, and whether any may be relevant to our business.”

An acquisition would present its own complications.

Last month, Sam Bankman-Fried, CEO of crypto exchange FTX, offered to buy crypto from Voyager Digital, a digital asset company that collapsed at the same time as Celsius, and then transfer an unspecified amount of cash to Voyager’s customers. He designed the proposal as a way to quickly solve process and avoid years of costly court battles. Voyager rejected the plan, calling it a “low-ball bid dressed up as a white knight rescue.”

Changpeng Zhao, CEO of crypto exchange Binance, said both Celsius and Voyager had approached his company to discuss selling some of their assets. “Our team engages in all of these conversations,” he said in an interview.

Regardless of whether an outside bidder emerges, a resolution to the Celsius case is unlikely anytime soon. Mr Little said he was prepared to wait for the savings he lost.

“It was a very, very long-term hold,” he said. “This was something that would potentially go to my daughters.”

In June, he tried to move his money out of Celsius, but the transfer never went through. Now when he checks his account, the uncertainty is expressed in a single word: “Waiting.”