Sam Bankman-Fried, a 25-year-old MIT graduate, left the quantitative trading firm Jane Street in 2017 to start his own hedge fund, Alameda Research. At first, the crypto-centric fund focused on low-risk algorithmic trades.
After two years of running the business, Bankman-Fried embarked on the ambitious goal of starting a crypto trading exchange that would become FTX.
During crypto’s bull run, things went smoothly for Bankman-Fried as big names in finance such as SoftBank and Sequoia backed his venture. His net worth ballooned to $26.5 billion toward the end of 2021, around the time when Bitcoin’s price was hitting all-time highs.
Asset values plummeted this year, however, as Federal Reserve Chair Jerome Powell has ushered in a new era of tighter monetary policy. Crypto, particularly FTX’s own token FTT, was no exception.
After reaching an all-time high of $84.18 in the fall of 2021, FTT plummeted to $1.43 per token at the time of writing. Many have posited, including Bankman-Fried himself, that the sharp fall in the currency’s value is at the root of the FTX collapse.
Nov. 2: FTT Collateral
An article published by CoinDesk on Nov. 2 triggered a chain of unfortunate events for FTX. The crypto outlet claimed to have verified documents denoting balance sheet entries of Alameda Research.The two largest assets on the balance sheet were “unlocked FTT” at $3.66 billion and “FTT collateral” at $2.16 billion. Eyebrows were raised within the crypto community, particularly at the prospect that Alameda might have taken on massive loans while pledging its sister company’s illiquid tokens as collateral.
The magnitude of these loans made many crypto experts nervous.
As pointed out by Dylan LeClair, the founder of the crypto research firm 21st Paradigm, when the story broke, the total market value of all tokens was only $3.35 billion, compared to the $5.82 billion on Alameda’s books.
He alluded to the futility of trying to liquidate such a massive balance at market price, which was $25 at the time.
“You couldn’t sell $1 million of this thing without pushing the market significantly lower,” LeClair posted on Twitter on Nov. 2, after the CoinDesk story broke.
Nov. 6: Binance and FTT
The story caught the attention of several big players in the industry, most notably Changpeng Zhao, the founder and CEO of competing crypto exchange Binance. On Nov. 6, Zhao announced that Binance would “liquidate any remaining FTT” held by the company.On the same day, Alameda CEO Caroline Ellison responded to Zhao with an offer to buy the entirety of Binance’s FTT balance—$529 million in total—at $22 per token. Many speculated that this was an act of desperation to avoid further drops in the token’s value, which could endanger the trading firm’s solvency given the billions in FTT collateral.
The Binance founder’s declaration commenced a dash for the door. An estimated $6 billion in funds left the FTX exchange within 72 hours.
Zhao Changpeng, founder and chief executive officer of Binance, attends the Viva Technology conference dedicated to innovation and startups at Porte de Versailles exhibition center in Paris on June 16, 2022. Benoit Tessier/Reuters
Nov. 8: Binance Offers Bailout
On Nov. 8, Zhao announced an emergency buyout of FTX to “help cover the liquidity crunch.” He said his company would be conducting full due diligence in the coming days. Before his announcement, Bankman-Fried took to Twitter to assure customers that they are protected and that “all assets will be covered 1:1.”Nov. 9: Binance Walks Away
However, the deal fell through on Nov. 9 as Zhao cited “way too many issues” in a private chat with Bankman-Fried and his employees, according to The New York Times. Amid the chaos, the price of FTT fell to below $2 from $25, more than a 92 percent drop in a matter of days and a 98 percent tumble from the highs.While FTX had frozen client withdrawals on Nov. 8, it began facilitating withdrawals for Bahamian residents on Nov. 10. Bankman-Fried would later claim in an interview that he made this decision to avoid being stranded in a country with a bunch of “angry people.”
Despite the freeze, funds continued to flow to Alameda, shown by the crypto transaction tracking website Etherscan. Reuters also released a report on Bankman-Fried’s “back door,” which was allegedly used to funnel $10 billion from FTX to his investment fund.
Bankman-Fried has since claimed that he has no knowledge of any “back door” nor played a hand in building one.
Nov. 10: ‘I’m Sorry’
On Nov. 10, the former billionaire conceded in a Twitter thread, stating “I’m sorry. That’s the biggest thing.”He also said that all available cash would be put toward refunding users and that FTX.US, which is the U.S. subsidiary of the company, remained “100% liquid.”
Nov. 11: Chapter 11
On Nov. 11, FTX filed for Chapter 11 bankruptcy, including FTX.US.During this time, a hold was issued on certain FTX assets by the Securities Commission of Bahamas, who Bahamian Attorney General Ryan Pinder would later praise for acting with “remarkable” speed.
Bahamas Attorney General Ryan Pinder addresses the nation regarding the FTX collapse on Nov. 27, 2022. The Office of the Prime Minister, the Bahamas / screenshot via The Epoch Times
In their initial bombshell piece that kicked off the collapse, CoinDesk noted that FTX and Alameda Research were “unusually close.”
FTX had loaned Alameda $10 billion in customer funds. That represented well over half of total client cash as the exchange held $16 billion in third-party assets, according to The Wall Street Journal.
As Alameda’s investment strategy shifted to high-risk directional bets from low-risk quant trades, FTX user funds were allocated to various reckless investments. As Sam Trabucco, Alameda’s then co-CEO, announced in early 2021, “We’ve held a long DOGE position for months.”
DOGE is the abbreviation for Dogecoin, a dog-based cryptocurrency created as a joke. Trabucco acknowledges that the impetus for Alameda’s investment was “all based on noticing how it goes up when Elon tweets.”
Valued at 27 cents per token at the time of Trabucco’s announcement, DOGE has fallen by 63 percent at the time of writing.
Large chunks of funds were allocated for insider spending sprees as well.
Bankruptcy filings revealed over $4 billion in loans from Alameda to a small handful of executives, with Bankman-Fried himself receiving a $1 billion personal loan and a $2.3 billion loan to an entity he controlled. In addition, at least $300 million in company funds purchased real estate in the Bahamas for Bankman-Fried’s family members as well as FTX senior staff.
Donations
Funds flowed in many directions, including into politics, media, and entertainment.The crypto entrepreneur donated almost $40 million to Democrat candidates ahead of the 2022 midterms, surpassed only by billionaire George Soros. Bankman-Fried would later claim to have given “about the same amount” to Republicans, doing so confidentially to avoid press scrutiny.
Millions were funneled to various mainstream media outlets, including The Intercept, which confessed the FTX bankruptcy left a “significant hole” in its budget. Various celebrities participated in the crypto exchange’s widespread advertising campaign, including Tom Brady, Matt Damon, Gisele Bündchen, Stephen Curry, and Larry David, many of whom are now named in a class-action lawsuit.
The U.S. Department of Justice is reportedly looking into FTX for alleged fraud and other possible wrongdoing, while Bahamian Attorney General Pinder says his country’s investigations are still in the “early stages.” Bankman-Fried, meanwhile, appears to be residing at his family’s condominium in the island nation.
The Future of Crypto
It has been a chaotic couple of weeks for the crypto markets, with Bitcoin down more than 18 percent on the month. The future of cryptocurrencies remains uncertain, but some see the recent price declines as relatively mild considering the magnitude of the FTX collapse.“I’m a trader, and when really bad news comes out and the asset class doesn’t detonate, it gets me sort of curious,” Harris Kupperman, CEO of hedge fund Mongolia Growth Group, said in a recent episode of the Market Huddle podcast. “A neutron bomb just went off in crypto.
“The Economist came out talking about how it’s the end of crypto, and they haven’t melted yet!”
Michael Green, a portfolio manager at Simplify Asset Management, expressed a more pessimistic outlook.
“There was never a future for crypto,” he told The Epoch Times.
He added that crypto’s demise will likely be delayed by the FTX meltdown, and that the digital securities industry “is likely to be more regulated and much more state-controlled.”
U.S. officials on both sides of the aisle have called for more regulation of the asset class.
