Until Sam Bankman-Fried’s cryptocurrency exchange FTX filed for bankruptcy, the likelihood of a multi-billionaire losing their entire fortune in one weekend would seem pretty remote. The charismatic crypto billionaire was a favorite among wealthy investors, but their golden boy soon turned into their worst nightmare. Let’s take a deeper dive into the man behind the biggest crisis suffered by the crypto industry to date.
Abnormal returns: a financial gateway drug
In 2013, after graduating from the Massachusetts Institute of Technology (MIT), physics major Sam Bankman-Fried made his first fortune working as a trader for proprietary trading firm Jane Street Capital, a firm that reportedly pays entry-level quant traders annual salaries of $450,000. He gained an appetite for risk by trading Exchange Traded Funds, currencies, and futures.
In true entrepreneurial fashion, Sam was thinking bigger. He mobilized his newly acquired affluence in 2017 when he founded Alameda Research, the now-bankrupt crypto hedge fund behind the FTX collapse. In 2019, he went on to found the crypto exchange FTX in order to facilitate customers’ cryptocurrency trades. The birth of FTX coincided with the bull market that sent cryptocurrencies skyrocketing and pulled in huge speculative investments.
Sam Bankman-Fried – a humble yet resourceful billionaire
Sam’s scruffy appearance and humble character made FTX a smash hit among venture capital and private equity firms, and Sam reportedly closed a $210 million investment from Sequoia Capital while playing League of Legends.
FTX also became a popular brand within the sporting world. Promotors of FTX included Tom Brady, Stephen Curry, Naomi Osaka, and the Mercedes F1 team. Some promoters received equity in FTX for their efforts, with Tom Brady investing $650 million into the exchange. This strong branding campaign propelled FTX to dizzying heights. FTX partnered with the World Economic Forum and built infrastructure to supply funds to Ukraine. Sam soon began lobbying politicians for a stronger crypto regulatory framework. Sam donated $5 million to now US president Joe Biden in 2020 and a further $50 million to politicians ahead of the 2022 midterms.
A sacrificial lamb for the crypto industry
On September 28, 2022, Sam tweeted that FTX was carrying out a routine wallet rotation that would have no impact on customer funds. On November 2, a report from CoinDesk revealed that $4 billion in customer funds was being moved from FTX to Alameda Research. The report also leaked details of Alameda Research’s balance sheet, revealing that much of its $14.6 billion in assets were customer funds transferred over from FTX. The funds were in FTX’s flagship cryptocurrency FTT and were used to facilitate several risky trading projects.
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This concentrated exposure triggered Binance CEO Changpeng Zhao (CZ) to dump Binance’s holding’s in FTT, a move which he publicly tweeted about. In turn, this triggered a huge fall in the value of FTT and a run on FTX deposits. With Sam now looking for a potential buyer, CZ agreed to acquire FTX on November 8 to protect depositors, only to go back on this decision shortly after. FTX filed for Chapter 11 bankruptcy on November 11.
Keep your friends close, and your management clueless
People started to notice potential early warning signs of FTX’s ultimate demise. Many of FTX’s key employees were Sam’s friends from MIT, very few of which had backgrounds in finance. One of these was Sam’s ex-girlfriend, Caroline Ellison. She was appointed CEO of Alameda Research and was vocal about her risk appetite, publicly endorsing amphetamine drugs, and bragging that she only needed elementary school math to run the fund. Reports also show that management had no idea of what FTX was doing behind the scenes. A former FTX employee told Forbes that its leadership was “just a bunch of degenerate kids at the end of the day”.
While it is clear to see much of the blame lies with Sam Bankman-Fried and his clique of peers, the revelation also highlights a lack of homework done by investment banks, hedge funds, private equity houses, and celebrities when investing in FTX. To facilitate proper due diligence in the future, countries’ regulatory frameworks must include well-defined reserve requirements for players in the nascent industry. This will likely need to be different from that of traditional finance due to the volatility of crypto assets.