How did Sam Bankman-Fried, the founder of FTX, lose his entire $16 billion fortune in a single day?? Well buckle up, it’s going to be a bumpy ride, here’s the most detailed answer.
FTX was founded by Sam in 2019. What the company does is simple, it matches buyers and sellers of crypto assets like Bitcoin, Ether and NFTs and holds those assets on behalf of users. It’s like an exchange in a brokerage rolled into one.
Since it was founded over three years ago, FTX’s popularity has exploded, its slick marketing campaigns and easy to navigate user interface attracted over a million customers. People saw the FTX name on everything from ads during the Superbowl to the stadium for the Miami Heat basketball team to Mercedes Formula One race cars.
The company’s founder and CEO, Sam Bankman-Fried(SBF), also had a growing public image. He appeared before the US Congress to testify on crypto regulation and he was chummy with NFL superstar, Tom Brady. To the average person, FTX seemed like a cool, trustworthy place to get involved with crypto. By the end of 2021 FTX had become one of the three largest crypto exchanges in the world and as a result, SBF was one of the richest people in the world.
At the start of this year FTX raised $400 million at a $32 billion valuation. The firm was backed by big name investors, including the venture capital firms Softbank and Sequoia as well as Binance, a competitor and the world’s largest crypto exchange. These investors saw FTX is a great way to play the crypto boom which had pushed prices for digital assets like Bitcoin and Ether to record highs by late 2021. The great thing about a crypto exchange like FTX is it can make a lot of money regardless of where crypto asset prices go, crypto exchanges primarily generate revenues through trading fees. So they’re making money as long as their customers are trading, It’s a relatively straightforward business model but also a lucrative one.
FTX has revenues jumped 10 fold from $89 million in 2022 to more than $1 billion in 2021 amid a frenzy of trading activity in crypto markets. So this is essentially how the world saw FTX up until the first week of November, they saw it as a large fast growing crypto exchange headed by a talented founder. People thought sure the crypto markets plunged in 2022 but FTX was in prime position to navigate the headwinds and maybe even come out stronger once the bear market ends.
In fact, earlier this year when a number of high profile crypto firms were blowing up, FTX swooped in and bought them out at distressed prices. People called FTX and SBF the saviors of the crypto industry and on the surface, they look like they were doing just fine but it turns out behind the scenes some shady things were going on.
You see FTX wasn’t SBF’s only company, in 2017 he founded Alameda research a firm that profited from sophisticated trading strategies like arbitrage market making and yield farming. Alameda is where Sam made his reputation as a brilliant trader and crypto authority. He leveraged that reputation into launching FTX, which became the bigger household name, but Sam was still very much involved with Alameda where he was a majority owner. And even though it was more under the radar, Alameda was reportedly even more profitable than FTX.
Now most people knew that both of Sam’s companies had a connection, Alameda was a market maker on FTX, which means it helped facilitate trades on the exchange so other users could more easily buy and sell crypto assets. But the two companies relationship was much deeper than that, we now know that FTX secretly lent Alameda $10 billion, money that came from FTX customer funds. In exchange for the loans Alameda gave FTX something called FTX tokens as collateral. FTT is a crypto token created by FTX, anyone who holds FTT gets discounts on FTX trading fees and other benefits.
Their token has value to the extent that people like and use FTX to make trades. If you trade on FTX, you want to hold this token because it’s going to give you discounts on trading fees, but the value of the token is highly subjective and tied closely to the reputation and strength of FTX as a company. It’s not entirely clear how Alameda got these FTT tokens, but there’s indications that it might have received them when they were first created in 2019. So what you essentially have is a situation where FTX creates a bunch of tokens out of thin air, gives them to Alameda, and then a couple years later, Alameda uses those same tokens as collateral for $10 billion dollars worth of loans from FTX.
So this was all going on in secret until Coindesk published details of a private financial document that looked at Alameda his balance sheet. People saw that a huge percent of the company’s assets were made up of this FTT token and that it also owed FTX a bunch of money. This was extremely concerning, a few days later Changpeng Zhao, the CEO of the world’s number one crypto exchange, Binance, tweeted that because of what he learned in the Coindesk report, his company would be selling all of the FTT tokens that they received as a result of a business transaction in 2021.
The price of FTT immediately tanked and the rumors began to swirl, if FTX had lent Alameda billions of dollars and most of Alameda’s assets were made up of the FTT token, then there was no way that Alameda could pay FTX back now that the price of that token was plummeting, decimating the value of Alameda’s assets. With Alameda unable to pay back FTX, had no way to pay back all of its customers who were now racing to withdraw their money from the exchange.
On Sunday November 6 alone, FTX received $5 billion of customer withdrawal requests. Shortly thereafter, it stopped allowing customers to take money out of their account, the company is now considered insolvent in a $6 to $8 billion short of what it needs to pitch customers back. FTX along with Alameda Research filed for bankruptcy on November 11. As a result, SBF’s net worth fell from $16 billion to zero essentially overnight, the fastest wipe out of a fortune of that size in history.
Now, this is a story that’s still developing, and there’s a lot of unanswered questions out there. Why did SBF and FTX lend their customers money to Alameda?? and is what they did illegal?? The prevailing theory is that Alameda Research took heavy losses on its investments earlier this year as the crypto market tanked. Based on this theory FTX transferred some of its customer funds to Alameda to help it survive. But that shouldn’t have happened because in FTX’s terms of service, it clearly states that assets and customer accounts won’t be lent out to anyone else.
And while FTX was collapsing, Sam tweeted that FTX doesn’t invest customer assets, and that it had enough money to pay back all of its customers. This was egregiously wrong, there’s also the question of how Alameda lost so much money and what it did with the money that FTX lent it. Records show that the company invested at least some of it into risky crypto startups, a lot of those investments are probably worth a fraction of what they were valued at on Alameda’s balance sheet. So this isn’t a great sign for FTX users, many of which had put their life savings onto the platform and are hoping to get at least some of that back.
To make matters worse, we just got news that FTX might have been hacked the night after it filed for bankruptcy. According to reports, hackers might have run off with more than $400 million, that means there’s even less money to pay back customers of the exchange. Another question is what type of contagion might we see as a result of FTX’s downfall, the blow up of several major crypto protocols and companies earlier this year might have led to losses for Alameda, now the blow up of Alameda and FTX might lead to further losses for other companies that are exposed to them. So this is all going to take a long time to play out and it doesn’t seem like sentiment in crypto markets is going to improve anytime soon.
The whole FTX saga is very reminiscent of what happened to Mt.Gox, which was the biggest crypto exchange several years ago, a combination of fraud and negligence and hacks led to that crypto exchange filing for bankruptcy in 2014, customers of Mt.Gox lost billions of dollars worth of bitcoin that was never recovered. So FTX is downfall isn’t necessarily something we haven’t seen before nor is it an indictment of crypto itself. True crypto believers urge people to manage their own crypto assets and not to trust centralized platforms like FTX to store them, but the fact of the matter is the average person doesn’t want to deal with messy things like storing their own private keys or using hardware wallets.
If crypto is going to become mainstream, easy to use platforms like FTX are necessary but they have to be held to a much higher standard than they have been. Frauds and scams aren’t exclusive to crypto but they’re much too common place and they give the industry a really bad name while hurting ordinary people. Crypto will never reach its full potential unless that changes.
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