This synopsis was provided to us when asked for a summary of what went wrong with FTX. Bitcoin was invented because Satoshi saw how broken our current financial system was, and still is. But the crypto industry as a whole has forgotten this and has moved ever closer to what Satoshi wished to destroy; centralized entities misusing customer funds, opaque financial institutions doing shady stuff with unfathomable amounts of other people’s money, self-interested and incompetent rich dudes holding all the power with none of the oversight.

 

Sam Bankman-Fried Crypto Fail(bill)ionaire – Estimated Fortune Lost = $15 Billion USD + Many People Burned

FTX and Alameda research were both founded by Sam Bankman-Fried or SBF as he’s known.

SBF holds a bachelor’s in physics from MIT and spent the first three and a half years of his career working as a trader for James Street, one of the world’s largest market makers.

In late 2017, he realized that there were lots of trading opportunities in cryptocurrency, so he founded a crypto trading company called Alameda Research with his friend Gary Wang, another MIT graduate who was tired of working at Google and wanted something new to do.

Alameda His claim to fame was a Bitcoin trade between the United States and Japan; BTC was 10% cheaper in the US than Japan, so Alameda would buy the BTC in the US and sell it in Japan for an instant 10% profit. This became known as the Kimchi premium. Alameda started this arbitrage trade with just $200 and soon scaled it up to the point that they were executing 10 to $15 million of cross border BTC trades per day. Note: It seems most of Alameda as initial investment capital was borrowed in case that matters. On that note, you should know that Sam chose the name Alameda research specifically because he was concerned about scrutiny from banks who were skeptical of crypto in his own words, quote, “If we’d named ourselves shit-coin daytraders the banks wouldn’t have worked with us.”

In case that didn’t give it away. Alameda didn’t just trade BTC; in a 2019 presentation, Sam revealed that Alameda was “trading every coin on every exchange and making mad money.”

In the 2019 interview the interviewer revealed that Alameda was making 4% to 5% per month during a bear market. Alamitos massive profits made it possible to accumulate enough coins and tokens to become one of the largest market makers in crypto.

Alameda was soon working with every major crypto exchange to some extent and in the case of Binance, it was assisting with large over the counter or OTC trades. That’s why when by Binance got word that Sam and Gary were starting a new cryptocurrency exchange that was focused on futures trading, it made sure it was one of the first investors. The FTX exchange was founded in April 2019, with Sam as CEO, Gary as CTO and Binance as one of its biggest backers.

This is where things get interesting because it’s not entirely clear what Sam’s position is, or was in Alameda, nor how much influence he has or had over the company. His LinkedIn biography notes that he stepped down as the CEO of Alameda in April 2019, but the Forbes 30 under 30 for 2021 notes Sam as Alameda CEO. Not only that, but the LinkedIn profiles for current Alameda CEO Caroline Ellis and the former co CEO suggests they only filled Sam’s CEO position in the summer of 2021. This is just one of many peculiarities in the FTX Alameda relationship.

Now, when FTX first started, there wasn’t much buzz about the exchange. Sam even admitted in an interview that they “didn’t know the first step to get users, but knew there was an army of 20 million futures traders on other exchanges, who are having a bad time and wanted a better place to trade.” According to Sam, the catalysts that kick-started FTX his growth was the private sale and subsequent listing of its FTT token in the summer of 2019. This attracted the eyes of investors and traders alike and FTX. His close relationship with Alameda and by Binance led many to believe FTX would become a big deal.

In terms of tokenomics FTT started off as an ERC 20 token on the Ethereum blockchain with a maximum supply of 350 million. Today’s FTT exists as an SPL token on the Solana blockchain and as a BEP-Two token on the BNB chain, but almost all of its supply is still on the Ethereum blockchain. Of FTTs initial supply 20% was sold to investors across three private sales in 2019. According to Masari, the list of investors in FTTs private sales included Alameda, Binance, Coinbase, Multicoin Capital and other crypto VCs. It looks like Multicoin is the only one that’s been burned so far. According to the FTT transparency page, more than half of FTTs initial supply was allocated to the company and team. All this FTT finished vesting in May 2022.

A CoinDesks article from earlier this month about the relationship between Alameda and FTX suggest that the term company and team includes Alameda.

The remaining 30 or so percent of FTTs initial supply went towards various initiatives and incentives related to or on the FTX exchange. This is to be expected given that FTTs primary use cases are as collateral for futures trading and to lower trading fees on the FTX exchange.

As with all exchange tokens, FTX uses a portion of trading fees to buy back and burn the FTT token. FTX has the most aggressive buyback and burn schedule of the more burning FTT with trading fees every Monday. Obviously, buying FTT raises its price, whereas burning it decreases its supply, which further increases its price. If demand stays the same. The result is that the value of exchange tokens goes up over time often regardless of actual crypto market conditions. So far over 21 million FTT have been burned. And I feel obligated to tell you that a massive amount of FTT is scheduled to be burned this coming Monday. That’s simply because all the chaos on the FTX exchange resulted in abnormally high trading volume. Assuming FTX still follows through with its buyback and burn, we could see a short squeeze on FTT that similar to the short squeeze we saw on Celsius. Now this is a warning to anyone still going short, and to those who are thinking of going long, because there’s no guarantee a buyback will occur. It’s also worth pointing out that unchained statistics suggest there are at least 400,000 holders of FTT almost all of whom are thoroughly in the red. This means any FTT pump is likely to be received with a lot of cell pressure from those trying to recover their losses.

In 2020, FTX’s popularity started to explode. This was due in part to the unprecedented amount of stimulus that tempted many millennials into trading with 100x leverage on shit-coins, and yet to be listed altcoins on FTX.

FTX’s popularity was also due in part to project Serum, a defi project by FTX. Those of you around in 2020 will know that this is when the famous defi summer occurred. This is basically when all the defi protocols really blew up with 1,000% yields and all that other defi-dgen stuff. It’s also when the crypto bull market really started to gather steam.

What’s funny is that folks like Sam weren’t famous at all back then; Sam admitted in an interview with blockwork that he didn’t really know anyone in crypto until 2021. He also admitted on many occasions, that he has a bad habit of going big, sometimes too big when a money making strategy is working. This bad habit helped Sam become one of the richest people in crypto and his massive wealth opened many doors in Washington DC and around the world. If you’re a regular on crypto Twitter, you might remember all the jokes about how crypto was really Sam’s world and we were all just living in it.

This ties into all the stuff that’s happened with FTX and Alameda over the last week (NOTE: this is an ever changing situation). It’s also not entirely clear exactly when FTX and Alameda started to experience issues. Believe it or not, but Alameda was apparently hours away from insolvency due to liquidations more than two years ago when the markets crashed in response to the pandemic. This was implied by Sam in that BlockWorks interview when discussing a Twitter thread by Sam Trabuco about the crash. This is important to mention because it suggests that Alameda has been engaging in risky trading activities for quite some time. It’s quite possible that FTX was involved to some extent, given that Alameda was of course the primary market maker for its own exchange.

Now, as far as I can tell, FTX’s collapsed began with a CoinDesk article published on the 2nd of November 2022, which revealed that a significant amount of Alameda researches assets were held in FTT. As of the 30th of June this year, more than a third of Alameda $14 billion balance sheet was held in FTT. In the days that followed, lots of speculation started to spread on social media about the nature of the relationship between Alameda and FTX. Most of this speculation related to the possibility that user funds on FTX were finding their way to Alameda behind the scenes. This evolved into concerns that FTX didn’t have enough crypto on hand to honor all user withdraws. Given the recent collapse of crypto platforms like Celsius, which had engaged in similar shenanigans with customer funds behind the scenes, crypto holders slowly started to withdraw from FTX out of caution. The bank run on FTX accelerated when ‘on-chain’ sleuths discovered that FTX’s reserves of stable-coins, ETH, and other cryptocurrencies were rapidly decreasing. It didn’t help that Alameda started withdrawing stable coins ETH and other cryptocurrencies from other exchanges to send to FTX. This effectively confirmed that FTX was facing stress from user withdraws — something that Sam was denying on Twitter the entire time.

Meanwhile, Caroline took to Twitter to tacitly confirm that the Alameda balance sheet reported by CoinDesk was correct, but that it was much larger than reported. When by Binance got word of what was going on as FTX is announced that it would be selling its FTT.

Sam bought back the FTX shares by Binance had purchased in 2019 for roughly $1.5 billion in B-USD, and 580 million in FTT. For context, Binance and FTX, had a falling out sometime in 2021. This is believed to be because of former Binance US CEO Brian Brooks, who was allegedly leaking sensitive information about Binance to FTX. Brian was only the CEO of Binance us for four months and attended multiple FTX events. After leaving, there was speculation that FTX could have been involved in the leak of this information to the mainstream media, such that they could run hit pieces on by Binance. The purpose of these hit pieces was to point regulators in Binance’s direction. So naturally, CZ wasn’t too impressed with FTX’s shenanigans and decided to de risk from Binance’s FTT stake. The news that by Binance would be selling such a massive amount of FTT resulted in speculation that FTX would dump or delist Binance’s BNB coin in retaliation, the conflict caused both tokens to plummet and all the uncertainty added to their volatility. It was at this point that Caroline made the incredibly suspicious decision to publicly offer to buy Binance’s entire FTT stake at $22 a pop over the counter. This Supercharged further speculation that Alameda and FTX were using FTT as collateral for crypto loans and feared getting liquidated. Now, while I have yet to see any on chain evidence of this, it’s more than likely that FTT was being used as collateral for a lot of futures trading on FTX. You will recall that this was one of the primary use cases for FTT, and it’s likely that FTX and Alameda weren’t the only whales using large amounts of it as collateral. Even though FTT had a fully diluted market cap in the billions the token had low liquidity, meaning that it didn’t take much money to push its price up or down. This means it’s possible the fears that by Binance was going to sell FTT were enough to crush its price before Binance even sold a single token. I imagine that this resulted in hundreds of millions of dollars of FTT liquidations on FTX, which due to the tokens low liquidity caused its price to fall further even faster. I suspect that FTX and Alameda started selling off the other cryptos they held to prevent FTX from collapsing, causing other cryptos to crash.

Around this time, rumors started to circulate that FTX had started pausing, withdraws. Now many in the crypto community couldn’t believe that FTX or Alameda could possibly be facing insolvency due to their supposedly immense war chests. FTX alone had raised more than $1.8 billion from investors across its lifespan. And then the unthinkable happened; CZ and Sam announced that Binance was intending to buy FTX to “help cover the liquidity crunch.” This confirmed that FTX was in trouble and it led to speculation that FTX could be saved. Assuming is intermingling with Alameda wasn’t nearly as bad as believed. Unfortunately, it looks like FTX is financials were seriously F-ed up because by Binance pulled out of the deal after FTX revealed an $8 billion hole. This effectively confirms that Alameda is also in trouble. And if you need more evidence, check their website. It’s gone offline.

This brings me to the big question, and that’s how much the FTX Alameda situation could affect the crypto markets as a whole. Well, in case you haven’t noticed the crypto market is in freefall already. And I repeat that a part of all the sell pressure is probably coming from Alameda research. That’s because Alameda isn’t just another crypto company, they are a market-maker — meaning a substantial percentage of all the crypto on every exchange is owned by them. Last year, Alameda was making 10% of the crypto market and that figure was probably much larger until recently. If you want an even scarier statistic, consider that Alameda is the largest recipient of all the USD T that’s ever been printed by Tether; of the 110 billion USD-T minted between 2014 and 202, Alameda received around 50 billion.

Interviews with Sam suggests that Alameda was using this USD-T to bypass banks.

Now it wasn’t just exchanges Alameda was providing liquidity to; Alameda was also one of the largest liquidity providers in defi, especially on Solana. That’s primarily because of FTX’s is aforementioned defi project serum and the important role it played in Solana’s defi protocols. Speaking of Solana, both Alameda and FTX were heavily invested in the project, and many tokens in its ecosystem. According to CrunchBase, Alameda has made almost 200 investments in crypto projects and companies and many sources suggest FTX has invested in at least 50 Crypto projects.

Then there’s crypto regulations; Sam, FTX, and Alameda were well known names in Washington DC. The worst part is that they presented themselves as the crème-de-la-creme of crypto — the fact that all three of them have fallen spectacularly from grace is going to leave a massive stain on the entire crypto industry. The craziest part is that FTX’s implosion has many disgruntled individuals and institutions in the crypto community calling for aggressive crypto regulations, specifically, more transparency from cryptocurrency exchanges about the custody and segregation of customer funds.

The Department of Justice and the Securities and Exchange Commission announced they were investigating FTX. This is a timely announcement given that the Commodities Futures Trading Commission had earlier announced that it too was watching the FTX situation. To clarify, the crypto industry has been pushing for the CFTC to become its primary regulator, because its regulations are more reasonable and easier for crypto companies and projects to follow. The SEC swooping in is a sign that it wants to make sure the CFTC stays in second place. Not good.

Now, if there’s anything to be salvaged from this truly God awful situation is that Sam’s own proposed crypto regulations will probably never get off the ground; he was essentially pushing for crypto to become part of the existing financial system, especially defi.

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Note on timing a purchase: Currently we are in a general bear market for stocks, this makes stock picking timing difficult. Consider buying warrants instead of the stock if you want to limit risk. Don’t get mad if the stock goes down, be happy as you can get more stock at a cheaper price… so do not necessarily buy all in one tranche — the point here is, this appears a good company to scale into over the long run.

Notice: Content above may contain forward-looking statements regarding future events that involve risk and uncertainties. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual events or results. Articles, excerpts, commentary and reviews herein are for information purposes and are not solicitations to buy or sell any of the securities mentioned.

Disclosure: The subject company of this article is not a client. Investor Opportunity has full editorial control of this article. The author has not been compensated to cover the subject company on Investor Opportunity. The author and/or its trading desk affiliate either owns now or plans on establishing a long position in the subject company.

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