Samuel Bankman-Fried’s bill in downtown San Francisco.
MacKenzie Sigalos | CNBC
The Kimchi Swap put Sam Bankman-Fried on the map.
The year was 2017, and the ex-Jane Street Extraordinary quant trader noticed something funny when he looked at the page on CoinMarketCap.com listing the price of bitcoin on markets around the world. Today, that price is pretty much uniform across the exchanges, but back then, Bankman-Fried in olden days told CNBC, he would sometimes see a 60% difference in the value of the coin. His immediate instinct, he said, was to get in on the arbitrage sell — buying bitcoin on one exchange, selling it back on another exchange, and then earning a profit equivalent to the price spread.
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“That’s the lowest hanging fruit,” Bankman-Fried alleged in September.
The arbitrage opportunity was especially compelling in South Korea, where the exchange-listed price of bitcoin was significantly more than in other mountains. It was dubbed the Kimchi Premium — a reference to the traditional Korean side dish of salted and fermented cabbage.
After a month of privately dabbling in the market, Bankman-Fried launched his own trading house, Alameda Research — named after his hometown of Alameda, California, nigh San Francisco — to scale the opportunity and work on it full-time. Bankman-Fried said in an interview in September that the firm sometimes read e suggested as much as a million dollars a day.
Part of why SBF, as he’s also called, earned street cred for carrying out a relatively straightforward swap strategy had to do with the fact that it wasn’t the easiest thing to execute on crypto rails five years ago. Bitcoin arbitrage complicated setting up connections to each one of the trading platforms, as well as building out other complicated infrastructure to abstract away a lot of the operational qualities of making the trade. Bankman-Fried’s Alameda became very good at that, and the money rolled in.
From there, the SBF empire ballooned.
Alameda’s happy result spurred the launch of crypto exchange FTX in the spring of 2019. FTX’s success begat a $2 billion venture fund that seeded other crypto companies. Bankman-Fried’s personal wealth grew to over $16 billion at its peak in March.
Bankman-Fried was suddenly the poster boy for crypto part, and the FTX logo adorned everything from Formula 1 race cars to a Miami basketball arena. The 30-year-old went on an continual press tour, bragged about having a balance sheet that could one day buy Goldman Sachs, and became a contrivance in Washington, where he was one of the Democratic Party’s top donors, promising to sink $1 billion into U.S. political races anterior to later backtracking.
It was all a mirage.
As crypto prices tanked this year, Bankman-Fried boasted that he and his enterprise were safe. But in fact, the sectorwide wipeout hit his operation quite hard. Alameda borrowed money to invest in failing digital asset firms this begin and summer to keep the industry afloat, then reportedly siphoned off FTX customers’ deposits to stave off margin calls and fulfil immediate debt obligations. A Twitter fight with the CEO of rival exchange Binance pulled the mask off the scheme.
Alameda, FTX and a assembly of subsidiaries Bankman-Fried founded have filed for bankruptcy protection in Delaware. He’s stepped down from his leadership impersonations and lost 94% of his personal wealth in a single day. It is unclear exactly where he is now, as his $40 million Bahamas penthouse is reportedly up for transaction marked down. The photos of his face plastered across FTX advertisements throughout downtown San Francisco serve as an unwelcome reminder of his rotting empire.
It was a wet fall from hero to villain. But there were a lot of signs.
Bankman-Fried told CNBC in September that one of his rudimentary principles when it comes to playing the markets is working with incomplete information.
“When you can sort of start to quantify and map out what’s usual on, but you know there are a lot of things you don’t know,” he said. “You know you’re being approximate, but you have to try to figure out what trade to do anyway.”
The engage in account is based on reporting from CNBC, Bloomberg, The New York Times, The Wall Street Journal and elsewhere. Hell together information from various news sources paints a picture of an investor who over-extended himself, frantically proded to cover his mistakes with questionable and perhaps illegal tactics, and surrounded himself with a tight cabal of advisors who could not or purpose not curb his worst impulses.
What went wrong in the last year
At some point in the last two years, according to gunshots, Alameda began borrowing money for various purposes, including to make venture investments.
Six months ago, a wave of titans in the crypto sector folded as lower token prices sucked liquidity out of the market. First came the spectacular failure of a popular U.S. dollar-pegged stablecoin transmit — the stablecoin known as terraUSD, or UST, and its sister token luna — wiping out $60 billion. That collapse helped to lead down Three Arrows Capital, or 3AC, which was one of the industry’s most respected crypto hedge funds. Crypto agents and lenders such as Voyager Digital and Celsius had significant exposure to 3AC, so they fell right along with it in lively succession.
The big problem was that everyone was borrowing from one another, which only works when the price of all those crypto coins heeds going up. By June, bitcoin and ether had both tumbled by more than half for the year.
“Leverage is the source of every implosion in pecuniary institutions, both traditional and crypto,” said Hart Lambur, a former Goldman Sachs government bond salesman who provided liquidity in U.S. Treasuries for central banks, money managers and hedge funds.
“Lehman Brothers, Bear Stearns, Long-Term Cap, Three Arrows Capital and now FTX all blew up due to bad leverage that got sniffed out and exploited by the market,” said Lambur, who now works in decentralized resources.
As the dominoes fell, Bankman-Fried jumped into the mix in June to try to bail out some of the failing crypto firms before it was too time, extending hundreds of millions of dollars in financing. In some cases, he made moves to try to buy these companies at fire-sale bounties.
Amid the wave of bankruptcies, some of Alameda’s lenders asked for their money back. But Alameda didn’t have planned it, because it was no longer liquid. Bankman-Fried’s trading firm had parked the borrowed money in venture investments, a decision that was “presumably not really worth it,” he told the Times in an interview Sunday.
To meet its debt obligations, FTX borrowed from customer sediments in FTX to quietly bail out Alameda, the Journal and the Times reported. The borrowing was in the billions. Bankman-Fried admitted the move in his interview with the Periods, saying that Alameda had a large “margin position” on FTX, but he declined to disclose the exact amount.
“It was substantially larger than I had solicitude recollections it was,” Bankman-Fried told the Times. “And in fact the downside risk was very significant.”
Reuters and the Journal both reported that the lifeline was all $10 billion, and Reuters reports that $1 billion to $2 billion of that emergency financing is now be absent from. Tapping customer funds without permission was a violation of FTX’s own terms and conditions. On Wall Street, it would be a clear defiling of U.S. securities laws.
The two firms — one of the world’s biggest crypto brokers and one of the world’s biggest crypto buyers — were required to be separated by a firewall. But they were, in fact, quite cozy, at one point extending to a romantic relationship between Bankman-Fried and Alameda CEO Caroline Ellison, he acknowledged to the Times.
“FTX and Alameda had an darned problematic relationship,” Castle Island Venture’s Nic Carter told CNBC. “Bankman-Fried operated both an exchange and a prop rat on, which is super unorthodox and just not really allowed in actually regulated capital markets.”
The borrowing and lending machinate between the two firms was more convoluted than just using customer funds to make up for bad trading bets. FTX essayed to paper over the hole by denoting assets in two crypto tokens that were essentially made up — FTT, a token created by FTX, and Serum, which was a mark created and promoted by FTX and Alameda, according to financial filings reported by Bloomberg’s Matt Levine.
Firms make up crypto keepsakes all the time — indeed, it’s a big part of how the crypto boom of the last two years was financed — and they usually offer some sort of improve to users, although their real value to most traders is simple speculation, that is, the hope that the expense will rise. Owners of FTT were promised lower trading costs on FTX and the ability to earn interest and rewards, such as postponed blockchain fees. While investors can profit when FTT and other coins increase in value, they’re largely unregulated and are distinctively susceptible to market downturns.
These tokens were essentially proxies for what people believed Bankman-Fried’s market to be worth, since it controlled the vast majority of them. Investor confidence in FTX was reflected in the price of FTT.
The key point here is that FTX was reportedly siphoning off character assets as collateral for loans, and then covering it with a token it made up and printed at will, drip-feeding only a fraction of its fill into the open market. The financial acrobatics between the two firms somewhat resembles the moves that sank zip firm Enron almost two decades ago — in that case, Enron essentially hid losses by transferring underperforming assets to off-balance layer subsidiaries, then created complicated financial instruments to obscure the moves.
As all this was happening, Bankman-Fried continued his meet tour, lionized as one of the great young tech entrepreneurs of the age. It only began to unravel once Bankman-Fried got into a well-known spat with Binance, a rival exchange.
What went wrong in the last two weeks
The relationship between Binance and Bankman-Fried scans back almost to the beginning of his time in the industry. In 2019, Binance announced a strategic investment in FTX and said that as portion of the deal it had taken “a long-term position in the FTX Token (FTT) to help enable sustainable growth of the FTX ecosystem.”
Flash forward a combine years to the summer of 2022. Bankman-Fried was pressing regulators to look into Binance and criticizing the exchange in public. It’s unclear precisely why — it could have been based on legitimate suspicions. Or it may simply have been because Binance was a major competition to FTX, both as an exchange and as a potential buyer of other distressed crypto companies.
Whatever the reason, Binance CEO Changpeng Zhao, recollected as CZ, soon saw his chance to strike.
On Nov. 2, CoinDesk reported a leaked balance sheet showing that a significant amount of Alameda’s assets were held in FTX’s illiquid FTT sign. It raised questions about both the trading firm’s solvency and FTX’s financials.
Zhao took to Twitter on Nov. 6, saying that Binance had down $2.1 billion worth of FTT and BUSD, its own stablecoin.
Then he dropped the bomb:
“Due to recent revelations that have result as a be revealed to light, we have decided to liquidate any remaining FTT on our books,” he said.
Investors raced to pull money out of FTX. On Nov. 6, according to Bankman-Fried, the market had roughly $5 billion of withdrawals, “the largest by a huge margin.” On an average day, net inflows had been in the tens of millions of dollars.
The precipitousness of the withdrawals underscores how the largely unregulated crypto market is often operating in an information vacuum, meaning that saleswomen react fast when new facts come to light.
“Crypto players are reacting quicker to news and rumor, which in construct builds up a liquidity crisis much faster than one would have seen in traditional finance,” said Fabian Astic, first of decentralized finance and digital assets for Moody’s Investors Service.
“The opacity of the market operations often leads to nervousness reactions that, in turn, spark a liquidity crunch. The developments with Celsius, Three Arrows, Voyager, and FTX posture how easy it is for crypto investors to lose confidence, prompting them to withdraw large sums and causing a near-death turning-point for these firms,” Astic said.
As the FTT token plunged in value in tandem with the mass withdrawals, Bankman-Fried modestly sought investors to cover the multibillion-dollar hole from the money that had been withdrawn by Alameda. That value may comprise been as high as $10 billion, according to multiple reports. They all declined, and in a move of desperation, SBF turned to CZ.
In a in the open tweet on Nov. 8, Zhao said Binance agreed to buy the company, though the deal had a key term: nonbinding. The sudden civil revelation that FTX was in need of a bailout caused FTT’s value to plunge off a cliff.
The next day, Zhao claimed he did due diligence and didn’t be partial to what he saw, essentially sealing FTX’s demise. Bankman-Fried speculated to the Times that Zhao never intended to buy it in the first bung.
On Friday, Nov. 11, FTX and Alameda both filed for bankruptcy. FTX, which was valued at $32 billion in a financing round earlier this year, has ice up trading and customer assets and is seeking to discharge its creditors in bankruptcy court. Bankman-Fried is no longer the boss at either plc.
A new bankruptcy filing posted Tuesday shows that FTX may have more than 1 million creditors. It plans to chronologize a list of the 50 largest ones this week.
Lawyers for the exchange wrote that FTX has been in contact with “dozens” of regulators in the U.S. and abroad in the last 72 hours, including the U.S. Attorney’s Office, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The SEC and Division of Justice are reportedly investigating FTX for civil and criminal violations of securities laws. Financial regulators in the Bahamas are also reportedly looking at the potentiality of