by Dimitrios Gourtzilidis

In November of 2022, the biggest story in the media was the collapse of the second-largest crypto exchange FTX.

In this article, the focus would be on its founder, Sam Bankman-Fried (SBF), its arbitrage trading that build his companies, and the rise and collapse of the FTX crypto exchange.

Although this article started as an examination of Sam Bankman-Fried’s (SBF) arbitrage trading, it evolved by including details on the fall of his empire.

Disclaimer: The numbers below will follow their resource, and since this case is in progress, different sources might have different numbers. Plus, the amount of information out there is enormous, and since, this case is in progress, many bits of information cannot currently be confirmed. Please take this information with a grain of salt.

Sam Bankman-Fried was born in 1992 in California, US.

His parents both were law professors at Standford Law School. Joseph Bankman has written, as it is stated in his Standford profile about “ how government might control the use of tax shelter”. His mother, Barbara Fried is also a co-founder of a political fundraising organization that favors the Democratic party in the US, called “Mind the Gap”.

From an early age, Sam loved math and science, so much so that he attended the Canda/USA Mathcamp, a summer program for high school students with talent in math.

At a later age, he attended MIT and got a Physics degree with a minor in mathematics. During that time he also worked for a prop trading company, trading international ETFs. When he graduated he got a full-time position in that firm, Jane Street Capital in New York.

After Jane Street Capital, SBF would leave to start his own companies.

Before FTX’s collapse, Sam Bankman-Fried had the 32nd place in the Fortune 500 billionaires list.

Effective Altruism

SBF talk at every chance given about his philosophy, effective altruism. The basic idea behind that is “using and to figure out how to benefit others as much as possible, and taking action on that basis” [source].

SBF would network with similar-minded individuals, and through the “Centre for Effective Altruism” would also meet Tara Mac Aulay, his first co-founder.

Arbitrage Trading and Alameda Research

SBF is most famous for arbitraging the price difference between the US and Japanese crypto exchanges on Bitcoin. In that period, the demand for Bitcoins in Japan and the limited liquidity caused the price of Bitcoin to diverge from their US counterparties.

For that purpose, SBF would find and hire people from different backgrounds who would consider trustworthy in order to help him with his trade. In his words “…Random selection. People I knew from high school, from college, from effective altruism, (and) a friend of theirs…”. This is where he co-founded his quant trading firm “Alameda Research”, together with Tara Mac Aulay. Tara would quit Alameda Research in April 2018 due to, as she said, “concerns over risk management and business ethics”.

In late 2017, the difference in pricing between the Japanese exchanges Bitflyer, Coinchecker, or Bitbank and the US exchange Coinbase on Bitcoin was about 10% to 15%, he split his team into two parts, one would stay in the US and tried to buy Bitcoins, and the other would fly to Japan, and try to sell Bitcoins.

When the Bitcoins were bought in the US and then sold to the Japanese exchange, the teams would then convert them to US dollars and transfer the money to the US.

One of the problems that he faced was that the US exchange would accept only $100'000 per try as a limit, all other banking transfer and converting limits, “Know-Your-Customer” and “Money-Laundering” limitations, and owning banking accounts in foreign countries such as Japan aside.

So, both teams had to coordinate and buy Bitcoins in the US with US dollars, send them over to Japan, wait for the blockchain confirmation, sell them there for Japanese Yen, convert them to dollars, and finally withdraw the US dollars from Japan and wire them back to the US for the whole process to be repeated again.

SBF tested his whole idea with $200 and from this process, the whole team ended up making $10'000'000 to $15'000'000 a day.

In March 2018, Caroline Ellison (1994), Sam’s friend (romantically involved by many sources) and colleague at Jane Street, joined Alameda Research as a CEO. Caroline is a Standford Graduate with a bachelor's degree in mathematics, and her parents are both professors of economics at MIT.

Caroline Ellison famously said, when interviewed by the El Momento podcast, that she needed ‘elementary school math’ to be CEO of Alameda Research. Another viral tweet of hers is when she wrote “nothing like regular amphetamine use to make you appreciate how dumb a lot of normal, non-medicated human experience is”. [source] And All of that when she was the CEO of Alameda Research.

Later this year, the headquarters of the company would be transferred to Hong Kong.

Stephen Findeisen, the host of the popular YouTube channel “Coffeezilla” said in one of his videos that after talking to an FTX insider, it was revealed to him that Alameda research’s main trades would include insider information from their sister company FTX, into which tokes will be listed in their exchange, and thus profiting from buying them before the listing and watching the price to rise due to exchange liquidity flowing to them. [source]

The FTX Crypto Exchange

The FTX exchange, which stands for “Futures Exchange”, was a crypto exchange “by traders for traders”, as their slogan would communicate.

Sam Bankman-Fried and Gary Wang co-founded FTX, a crypto exchange, in May 2019. Gary Wang is an SBF’s high school friend, college roommate at MIT, and ex-Google employee.

Gary allegedly had created a backdoor in the FTXs platform so he could move funds around without raising red flags. [source]

Investors

Later that year, Changpeng Zhao of Binance would buy a 20% stake in the exchange, worth over $100'000'000. This would set the value of the company at that time at around $500'000'000. This Binance stake though will be completely bought back by FTX at a later point. [source]

Other FTX’s investors included which have invested a total of around $2 billion [source], among others, companies like [source]..

.. and invidivuals like..

SBF was famously playing the video “League of Legends” when talking to the investors of his company. [source]

The Rest of the Executive Team and Company Structure

The executive team at FTX included Constance Wang, in the position of Chief Operating Officer (COO), who holds a degree in finance from the National University of Singapore and had worked for Credit Suisse for two years as a compliance manager in CS’s training program. [source]

FTX’s Chief Regulatory Officer, Dan Friedberg was a lawyer defending UltimateBet. This case has been characterized as “one of the largest online gambling scandals in history” and got caught on aiding the perpetrators of the fraud. [source]

Details for other staff members of the company are not known since they didn’t even have a list with them.

Company Structure

Besides the executive team which couldn’t give much confidence to potential investors, FTX’s company structure was rambling, with more than 130 companies involved.

In comparison, Lehman Brothers had the following corporate structure..

The FTT and Serum Tokens

FTX had its own native token that helped owners to cut down on trading fees, but also provided other benefits when using the exchange platform.

The problem starts when this token was held in SBF’s companies and artificially raised its value.

Another issue that SBF labeled as a “mistake” is that the FTT token would also be locked up in its balance sheet as collateral for loans. [source]

The Serum token is a Solana-Blockchain-based token of decentralized exchange Serum, which collapsed because its backers were both FTX and Alameda Research. [source]

Financial Statements

FTX had in its balance sheet a position of around $16 billion from customer assets. [source]

FTX had also Robinhood shares in its balance sheet which was bought at $482 million [source], and allegedly also had Twitter stocks as a private company, which makes Elon Musk’s statements about SBF, a fault. [source]

FTX also had spent $300'000'000'000 on real estate in the Bahamas, characterized as “vacation homes for staff members”. [source]

On the 1st of July 2022, FTX expressed interest in buying out BlockFi for $240'000'000, and on the 22nd day of the same month, it gave a partial bailout of $500'000'000 to Voyager Digital. [source]

FTX “lost” around $10 billion in customer money to its sister company Alameda. The story is that when customers needed to deposit money to FTX, they will be given an account in the name of its sister company Alameda Research since FTX didn’t have bank accounts yet. Alameda Research used this money to trade the crypto markets. In his defense, SBF has stated that it was a “labeling” issue [source]..

“… I didn’t correct Alameda balances on FTX by a seriously large number… It was a very poorly labeled accounting thing, which was a historical artifact of the time from before FTX had a bank account. There was a time way back when people would wire money to Alameda and then actually credited on FTX that basically never got screwed up and that was a pretty big miss. It meant that Alameda was substantially more leveraged than I thought it was… ” — Sam Bankman-Fried

All of that by having his company FTX to be audited by a company with headquarters in Metaverse..

FTX’s income statement is also bizarre in many ways. Firstly, in Q1 2021 the net income was greater than the net revenue itself.

Another bizarre issue is that there is no pattern to it. It seems that in the first quarter of 2021 the image started to be improved, but in the fourth quarter, the net revenue rose and the net income fell dramatically.

Finally, in the second quarter of 2022, the company had a loss of $161'000'000 seemingly out of nowhere.

Sponsorships, Donations, and Other

On September 2021, FTX was an official sponsor of the Mercedes Formula 1 team. FTX’s sponsorships wouldn’t stop there though. The exchange will sponsor the National Basketball Association’s Miami Heat, baseball teams, and more. [source]

SBF has also donated to political parties in order to lobby for crypto regulations, and although SBF claims that he has donated to both the Democrat and the Republican political parties in the US, his donation to the Democrat party makes him their second-biggest donor after George Soros. SBF also stated that his donations to the Republican party were kept “dark” by reporters. [source]

The Bankruptcy

On the 2nd of November 2022, CoinDesk publishes a document that reveals FTX’s balance sheet and both Alamedas and FTX’s massive dependence on FTX’s own native FTT token. In fact, $3.66 billion in the $14.6 billion balance sheet, were “unlocked FTT” holdings, and another $2.16 billion were “FTT collateral”. [source]

On November 6th, Binance’s CEO, Changpeng Zhao twitted that his firm will sell its FTT tokens, creating massive sell pressure [source]. To that, Caroline Ellison answered that they will buy all of his FTT tokens at $22, revealing this way their margin call level, and driving the market participants to short FTT tokens through perpetual futures contracts due to its imminent collapse. [source]

On November 7th, SBF tweeted that “Assets are fine”. Which removes it a day later. [source]

On November 8th, FTX receives over $6 billion worth of withdrawal requests. [source]

On November 10th, Binance backs off the FTX buyout deal. [source] On the same date, SEC Chair Gary Gensler mentioned in an interview that the crypto market needs more regulation, causing crypto investors to hold down away from investing. [source]

On November 11th, Sam Bankman-Fried wrote a series of tweets apologizing and taking responsibility, but without making any statements. [source] FTX US, which SBF had stated was safe from bankruptcy, freezes withdrawals. [source] On the same day, SBF steps down as FTX’s CEO. [source]

After the exchange filed for bankruptcy on 11 November 2022, John J. Ray III has been hired as a CEO in order to oversee the liquidation of the company. John J. Ray III was also responsible for liquidating Enron after its bankruptcy in 2001.

His comments on FTX when he took over was..

“Neuer in my career have I seen such a complete failure ofcorporate controls and such a complete absence of trustworthy financial information as occurred here, from compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in thehands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals, this situation is unprecedented.”

— John J. Ray III

Currently, the big issue is that FTX has filed a Chapter 11 bankruptcy although the exchange has headquarters in the Bahamas.

In 30th of November 2022, SBF spoke at the DealBook Summit in New York City, along with Eric Adams, the Mayor of NY, CEOs of many big corporations, as well as Meredith Kopit Levien, the president and CEO of the New York Times and Secretary Janet Yell of the US treasury department.

A big question that arises is why SBF’s investors didn’t request board sits at SBF’s companies.

FTX used many “unique” processes in their company such as approving reimbursements with personalized emojis,

… but also..

.. not to mention the following..

One is certain, this whole story will teach investors how important qualitative fundamental analysis is, and that quantitative is just a part of the whole picture, but it will also influence future crypto regulations since such stories create future standards.

Sources