Updated: Aug 26
Author: Radim Nakladal
Publication date: 16.08.2023
Sam Bankman-Fried a businessman, visionary, and fraudster
Cryptocurrency exchange FTX was one of the biggest exchanges in the industry. Actually, it was trustworthy, reliable, safe, and profitable. In other words, a perfect place to let your savings grow. A lot of people thought so. Sadly, it was too good to be true. Nowadays, bankruptcy, lawsuit, arrest, and charges against Bankman-Fried. In fact, FTX became a terrifying example of the havoc that greed, incompetence, and blind trust can wreak. So, it was a disappointment that had a severe impact on many investors. A sudden and dramatic crash of FTX in late 2022 is going to have lasting consequences for the global crypto community for years to come.
I assume that everybody in crypto space has already heard about FTX collapse. At least I hope so. If not, never mind. That’s why we are here to educate you all on the topic. If something like this could happen one year ago, it can happen next year too. That’s why it is so crucial to know about these events. I deeply regret all those who lost money in this affair. Maybe in the future people will not get caught in such frauds, at least not so many. So, let's dive into the story of the FTX crypto exchange.
FTX at its peak
FTX was founded in 2019 by Sam Bankman-Fried. In particular, it has gained popularity due to its high liquidity, low fees and advanced trading features. To meet the needs of professional traders and market makers, Sam Bankman-Fried recognized a gap in the market. Afterward, he aimed to create a platform tailored to the needs of this particular segment. This is because existing cryptocurrency exchanges were not adequately serving these traders.
To promote FTX, Bankman-Fried adopted unconventional marketing methods. Such as sponsoring professional eSports teams and hosting extravagant events. Such efforts not only helped FTX to build a loyal community of users but also faced criticism from a number of certain groups. One notable aspect of FTX's marketing campaigns was the promise of higher yields than traditional banks for money deposited into FTX accounts. This attracted investors looking for better returns on their assets amid the growing interest in cryptocurrencies.
What is FTT?
Cryptocurrency platforms frequently develop their own tokens to attract new clients. When more people invest and demand a digital token, its value will increase. So, platforms can provide additional benefits. For example, in May 2019, FTX launched its own digital token known as FTT (FTX Token) with a multifaceted approach to incentivize user participation. One primary benefit of holding and staking FTT on the FTX platform was the opportunity to receive trading fee discounts.
Moreover, FTT holders were offered additional perks and benefits. These included access to exclusive features, priority customer support, and participation in special events and promotions. FTT tokens also served a governance role within the FTX ecosystem. Additionally, FTX explored the rising popularity of Non-Fungible Tokens (NFTs) and leveraged FTT to offer NFT rewards to users.
Alameda Research was a quantitative trading firm operating in the cryptocurrency markets. They specialized in high-frequency trading, utilizing advanced algorithms to execute trades. Particularly, their daily trading volumes were substantial, reaching around $5 billion, and they charged basis points on these volumes. As a result, the firm generated significant profits, estimated to be approximately $3-4 million per day from their trading activities.
Alameda's investment strategy was allocating a portion of its trading profits into blockchain platforms like Uniswapand Compound. These platforms facilitate decentralized finance (DeFi) services, connecting lenders and borrowers in the cryptocurrency space with minimal overhead costs. What’s more, Alameda invested its income into DeFi platforms to generate additional returns through various mechanisms offered by these protocols. These additional annualized returns on such investments could range from 7% to 50%, depending on the specific asset and market conditions.
The beginning of the end
In November 2022, CoinDesk published an article revealing information about FTX and its affiliated company, Alameda Research, putting an end to their rise. The article revealed that Alameda Research had become heavily reliant on FTX's native digital token, FTT, with assets valued at $5 billion. What is more, the leaked FTX balance sheet exposed a lack of diversification and uncomfortably close ties between the two entities. The report disclosed liabilities of $9 billion and assets of $900 million, with poorly marked entries reflecting a substantial negative balance of $8 billion.
Alameda Research borrowed capital from FTX, mostly sourced from customer deposits. It was later revealed that the trading firm frequently borrowed money from FTX customers' assets. As a result, it raised concerns about the handling of customer funds. FTX and its affiliated companies lacked proper balance sheets and audits. This Caused a lack of transparency, making it difficult to accurately demonstrate the company's financial position. The actual value of FTX's assets turned out to be less than previously stated by Bankman-Fried.
During the unfolding of these revelations, Binance, a competitor of FTX, made an initial agreement to acquire FTX on November 8. Binance's CEO, Changpeng Zhao, had previously been an early investor in FTX. However, the deal fell through due to concerns about the mishandling of customer funds and ongoing U.S. investigations. This led Binance to back out of the acquisition.
In November 2022, FTX experienced a significant collapse that lasted ten days, from November 2 to November 12. The price of FTX's native token, FTT, plummeted, causing concern among FTX customers who began withdrawing funds from their accounts.
Amid this mass withdrawal, FTX suffered significant losses that reached billions of dollars. To manage the situation, Sam Bankman-Fried, ordered Alameda Research to sell off assets to cover the capital needed for the withdrawals. In addition, he looked for financing options to resolve the approximately $8 billion gap. A gap between outstanding liabilities and available funds for payments.
On November 8, FTX took the step of blocking customers from withdrawing funds by removing the option from its online platform. This action prevented hundreds of thousands of customers from accessing their funds at a critical time. Unfortunately, despite its efforts to bridge the financial gap, FTX found itself unable to meet its obligations. As a result, the company had no choice but to file for bankruptcy.
On December 12, 2022, Sam Bankman-Fried was arrested by authorities on several fraud charges related to FTX. He was indicted by the U.S. District Court on eight criminal charges. Accused of, for example. money laundering, wire fraud, campaign finance violations, and securities fraud. Following his arrest, Bankman-Fried was released from custody upon posting a record-breaking $250 million bond, the largest in history.
What really happened and how? No one knows for sure. From my point of view, it was a systemic failure. Maybe I am completely wrong. Smart guy who knows the tricks, sees the opportunity of growing a new industry and goes for it. He uses tools such as aggressive marketing and lobbying. Because it is so profitable, he avoids auditing, has no evidence and no accounting because of lobbying. People are investing more and more. Basically, if they would stay with this approach, I think FTX could be still with us today. But it is only speculation.
What truly led to FTX's collapse?
In my opinion, what triggered FTX’s collapse was greed. Greed in the form of Alameda Research. It appears that they wanted to earn even more money by trading with their customers' funds. And it backfired spectacularly, as you now know. So, maybe it was a good thing it ended. Maybe if FTX had still been operating this way today, the damage could have been many times greater. But anyway, I might be wrong. In the end, who lost the most from it was the ordinary people who believed the marketing and all the benefits. Who's going to pay them back?