Hello hello! The story that we’re going to talk about today is going to be in-depth documentation of the FTX collapse. And since this is a story that isn’t just a page long, we recommend you sit back, grab a mug of coffee or tea and let us walk you through a story that vanished $14 billion from the face of the earth in mere 6 days.
What does humanity care about the most? Is it fame? Is it love? Is it virtue? Or is it billions of dollars?
Of course, billions of dollars do seem more enticing. In fact, you practically get your hands on a quarter of a billion dollars, so you won’t have to work your entire life, right?
Now imagine a person that has a net worth of $16 billion. That’s a crazy amount of money. This kind of money is something that can take care of generations together. How likely is it that a person with such a net worth loses it all in a mere week?
This is exactly what happened to a 30-year-old, Sam Bankman Fried (SBF), the CEO of FTX – the second largest global crypto exchange. See SBF wasn’t your average billionaire. He was the golden boy of covers and Forbes magazines, a man that watched the Super Bowl with NBA star Steph Curry, and had dinner with Jeff Bezos and Leonardo DiCaprio. In fact, big names like BlackRock and SoftBank invested in his vision.
But behind the facade was something completely different.
Sam’s Empire was actually a bunch of 10 romantically involved crypto kids running a shady operation out of the Bahamas. The fall of FTX triggered the collapse of more than 100 Affiliated companies and wiped out countless savings.
This is a story that strangely has ties to American politics, romance, and the war in Ukraine. This is the wild story of the FTX collapse.
The beginnings
Sam Bankman Fried, an innocent and harmless-looking kid was brought up in a wealthy household. His mother Barbara is a lawyer and the co-founder of several Democratic organizations. His father was a law professor, who would later help Sam raise funds for his company.
Sam graduated from MIT back in 2014 and went to work at the New York trading firm Jane Street Capital, where he realized that trading cryptocurrencies could make him an unbelievable amount of money, something he wouldn’t be able to make from any other avenue in his life back at the time. This pursued Sam to buy Bitcoin at cheaper prices in America and sell it for a higher price in Japan. Some days, he would make as much as 25 million dollars.
This is the fund that he later used to start his very own company, Alameda research.
Alameda research was made up mostly of Sam’s MIT College friends and former work colleagues. This firm would later be a key player in the collapse.
Intending to make a “positive impact” on the world, Sam started up the Alameda research. To appear trustworthy, he would dress modestly and drive a Toyota, appear in interviews and yet still make himself the center of attention.
Despite this humble attitude, Sam still owned a $30 million mansion in the Bahamas. However, people (especially social media influencers) backed Sam more than anything.
The romantics
While trading at Jane Street, Sam would make a few friends. One of these was Caroline Ellison, whom Sam started dating in 2017.
You see Caroline was an average joe that really didn’t have a general direction in her career. Sam suggested that she should work in his new company Alameda research. She gave it a go.
And within a very short period of time, she became the CEO of what would soon become a multi-billion dollar company. The problem is that this company Alameda research was run by a gang of kids that included Sam’s college mates, who partied together and dated each other.
This group was managed by the CEO Caroline who was very vocal about supporting drugs on her Twitter and Tumblr.
The misjudgment?
Despite the poor state of Alameda at the time, Sam decided that it would be a good idea to start a crypto exchange called FTX.
Sam would start his next major project FTX. FTX was a cryptocurrency derivatives Exchange. The firm would also offer discounts to clients who stored their money in a token called FTT.
The FTT token, which obviously was made by FTX was also the token that blew up this entire mass. That’s something we will get to in a minute.
For now, let’s understand what Alameda Research really did. Well, this company was a crypto hedge fund of sorts that carried out trades that matched buyers and sellers and would give investors a supposed return. Too good to be true, right?
Except for the fact that it wasn’t.
The company would use the customer deposit as loans for trading. Because of this, Alameda Research would receive 10 billion dollars worth of loans from FTX funds.
Sam was basically gambling away the funds of the customers at FTX.
And well, gambling the customers’ funds without their knowledge is a clear violation of traditional finance.
This money was being sent to Alameda Research, run by Caroline, who was not fit for her job according to most people because of what she said in certain interviews.
Sam stated that he started FTX because he saw that most other crypto platforms only managed to cater to inexperienced retail investors. FTX, on the other hand, would offer more advanced financial products like features and options trading for crypto or tokenized stocks that track the value of real companies like Tesla.
Through the venture capital giant, Sequoia Capital, Sam raised $210 million in funding. Little did they know that they won’t ever see this money again.
Popularity like no other
In July 2021, it was reported that FTX was averaging 10 billion dollars a day in trading volume across its 1 million users.
FTX was soaring in popularity. From the likes of having a UC Berkeley Stadium named after them to being promoted by stars like Tom Bradey and Stephen Curry, there was no stopping them.
Tom Brady was even known to put his 650 million dollar fortune into FTX. How true is that, we don’t know.
Despite this soaring popularity, FTX still didn’t have a board of directors. It was just Sam and his lawyer.
The political influence
With time and popularity, FTX even became involved geopolitically. Being a partner of the world economic forum, they also built the infrastructure to supply funds to Ukraine, basically converting cryptocurrency donations into fiat currency for deposit at the National Bank of Ukraine.
At this stage, Sam also started developing political connections for himself.
With a net worth of $26 billion, Sam donated five million dollars to Joe Biden in 2020 alone and 50 million dollars to politicians ahead of the 2022 midterm elections.
Here’s a hidden detail you can’t miss.
A lesser-known player within FTX was Ryan salami. He donated 23 million dollars to Republican politicians to also gain political leverage for FTX.
Despite the parties they chose, what mattered was that FTX was trying to buy political influence, yet nobody really minded. After all, crypto markets last year were booming. Why would anybody miss the prize at hand, right?
The lies and the leverage
For Sam, things started to change in the second half of 2022 when inflation was beginning to rise and the US federal reserve lifted the interest rates.
We know that higher rates for everything = a shaky economy,
And when you have a shaky economy, you don’t mind taking risks.
Since crypto assets are known to be a risky investment, at least for now, financial institutions consider cryptos to be the right place to store some capital.
At the forefront of it was Sam and his empire of college kids managing billions of dollars.
As crypto firms began to blow up and go under, Sam became the man to bail them out. He could then buy the crypto of their books at record discounts and this wasn’t risky because after all Alameda had plenty of capital to spare.
Everyone thought behind the scenes, Sam and his friends at Alameda were making huge losses from a bad trade.
Sam secretly transferred at least four billion dollars worth of FTX consumer funds publicly he stated that all of these funds were being moved around within the FTX company.
People tracking these wallets were suspicious and they had a right to be.
Sam was lying. This trade wasn’t routine. It was the largest transfer of tokens on an exchange ever and the recipient wallet wasn’t one with an FTX but another wallet that was at Alameda.
According to Reuters, Sam did not tell other FTX Executives about the move to prop up Alameda he was afraid that it could leak.
Meanwhile, Caroline accidentally said on a call that FTX used customer money to help Alameda meet its liabilities. Oops!
A key point to note in this case is that these funds given to Alameda weren’t in dollars but four billion dollars worth of FTX’s tokens FTT and herein lies one of the biggest issues with Sam’s crypto Empire – FTT was essentially a made-up token by Sam and his friends.
The worst part lies here only. These were made-up, centrally-controlled tokens, which basically meant that these tokens had no value on their own. They had an associated value with a company.
And on November 2nd, Sam’s worst fears came true when behind-the-scenes information about Alameda finally leaked.
A report by Coindesk detailed a very unhealthy balance sheet that showed that much of Alameda’s 14.6 billion dollars in assets were held in FTT tokens.
To make it easier to understand, Sam created a coin, artificially attributed value to it, and then used it as collateral to finance his projects. It was very unlawful, let alone shady.
And as long as the coin went up in value, things were fine.
But things took a turn as the crypto market was sliding and Alameda’s books became essentially illiquid.
Questions about the real financial stability of FTX were raised. And that’s where the Binance CEO, Changpeng Zhao (CZ) stepped in.
The protagonist?
As Sam’s empire was growing, somebody very close at hand was watching the entire company more closely than most.
This person was Chang Pang Zhao (CZ), the CEO of Binance.
Who knew a tweet from the owner of Binance, the biggest competitor of FTX could change the entire trajectory of things for Sam and his companies, right?
After FTX launched, Sam’s and CZ’s relationship started to develop.
CZ bought 20% of the exchange for about 100 million dollars which Sam would later buy for two billion dollars.
This sum was paid to finance in part by FTX’s own token FTT. Meanwhile, CZ was bitter because behind closed doors, Sam had been lobbying for the creation of a brokerage-like licensing system decentralized finance, and who would lose out the most from this arrangement?
Almost all other exchanges.
Especially binance.
This is where things get a bit crazy because interestingly it’s reported that the head of SEC Gary Gensler and Caroline’s dad Glenn Ellison both worked at MIT as professors.
At MIT, Caroline’s dad was the former boss of the head of the SEC.
An alleged leaked email shows that the SEC was going to give FTX “no-action relief”.
What this means is that we’ll look the other way even if you break the rules.
if these reports are true, we could be looking at genuine corruption within the US government.
And as FTX grew, CZ viewed them as a genuine competitor. But, he now had two billion dollars worth of FTT tokens. If he wanted, he could bring down the company. And well, that’s what he did.
The leaked coindesk report was the best reason to do that, right? How convenient!
CZ came out publicly stating that Binance will dump the two billion worth of FTT that they got from that early FTX stake. Doing this on an open market, well, you know the consequences.
The coindesk report revealed that Alameda’s balance sheet is full of FTX’s native token FTT. So Binance CEO CZ got in on the actions he said that he would be liquidating the exchanged FTT tokens.
The aftermath
FTX was bleeding money at this point and a panicked Sam said that FTX saw a rush of users trying to withdraw over $6 billion in crypto tokens from FTX in just 72 hours.
FTT tokens collapsed 80 percent over the next two days. This resulted in FTX’s reserves falling. FTX didn’t even have the funds to pay. Out of all of these withdrawals, they had nine billion dollars in liability and only 900 million in liquid assets.
To stop a further sell-off, Caroline of Alameda offered Binance a deal.
Alameda would purchase all the FTT that Binance were dumping on the open market but CZ answered by saying that he won’t support people who lobby against other industry players behind their backs.
In the next few days, Sam would call CZ begging for help. An agreement was made for Binance to buy FTX so to go from saying that assets are completely fine to a complete 180 and selling his company in a single day was frightening obviously.
CZ ‘supposedly’ considered. At least he had to. Call it a strategic acquisition. He went online, stating that FTX was in trouble and that he didn’t know a single dump of FTT’s tokens would destroy Sam’s entire empire.
However, only two days later, Binance made another announcement and this would rock the crypto world once again – They were no longer pursuing the deal and they weren’t going to help FTX. Why? Because the assets and liabilities of FTX had a far bigger gap than what could be fixed.
Reports suggest an 8 billion shortfall with this news. Even some employees at FTX were shocked. Executives had been left in the dark about the true State of Affairs.
The final blow
And just like that, the money people put in FTX and trusted it so dearly with was gone in a poof. 10 billion dollars, vanished from the face of the earth.
On Nov 11, Sam resigns as the CEO of FTX and soon tweeted that FTX and Alameda are filing for bankruptcy.
And the crypto markets started crashing. The 15 largest cryptocurrencies lost over $150 billion in market value
What’s worse than this, right?
Well…
Whatever money remained in the FTX account was hacked and stolen. This again alarmed the consumers as they started seeing that their balance was now reading zero.
Over half a billion dollars in cryptocurrency was siphoned.
Many companies and institutions were affected as well. Sequoia Capita announced that their stake was worthless and wrote it off their books.
FTX bankruptcy files show 134 affiliate companies across the world estimates say that liabilities could be up to 50 billion dollars for a sense of scale.
As for Sam, according to reports, he lost all of his wealth and has a negative net worth. This is because he has more debt than equity in all of his companies.
Sam is currently under police surveillance in the Bahamas. On November 16th, Sam tweeted that he was going to meet regulators to try and repay customers.
Who knows…
This entire story is so heartbreaking and triggering for people that lost money in the process. There are plenty of lessons to be learned.
This is one of those times when the problem wasn’t on the consumer’s end. It wasn’t a pump and dump, it wasn’t a rug-pull, and it wasn’t a get-rich-quick scheme. It was a crypto exchange that was supposed to profit off our transaction value and allow us to trade digital assets. Purely that.
The damages done right now are beyond repairable, which leaves us with the hope that things would be alright.
Hopefully.
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