In January 2022, FTX was one of the hottest startups in silicon valley (although it was headquartered in the Bahamas) worth a staggering 32 billion dollars. Its founder, Sam Bankman-Fried was hailed as a genius, a visionary, and “the most generous billionaire in the world”. Now, not even a year later, all of it has vanished into thin air and Ftx joins the list of now-defunct startups after losing billions of their customers’ money. So how did this all happen? In this article, we will cover the rise and fall of FTX and Sam Bankman-Fried!
Let’s start with the founder, Sam Bankman-Fried or SBF for short (crypto personalities seem to love abbreviating their names). Sam came from a privileged background being born to two Stanford law professors, which put him in a unique position to achieve success in silicon valley.
He graduated from MIT with a degree in physics in 2014 (which is no small feat so you can understand why people thought he was some genius) but even before this, he was interning at a trading firm.
Sam Bankman-Fried After Graduation
Soon after graduation, he would join Jane Street Capital which specialized in international money exchange (whatever that means), learning the ropes of the finance world.
This is where he discovered the new exploding world of crypto, which is why after just 3 years at Jane Street, Sam quit and founded his own firm Alameda Research.
Apparently, he chose this name to sound more official as people were more likely to trust a research institution than a trading firm, a move you may view as shrewd, deceptive, or both.
Using Sam’s knowledge of finance and its loopholes, Alameda was able to make millions of dollars by exploiting differences in bitcoin prices in different markets, or arbitrage if you will. But SBF wasn’t satisfied by this.
He used this money to generate publicity and paint himself as a seasoned entrepreneur and an expert in the field of computer science who had been involved with the startup scene for years, setting up many successful companies along the way.
In 2019 he set up FTX, a startup with a team drawn from the elite of the computer science world.
FTX was a startup, and it was supposed to be the first crypto exchange that focused on security and compliance much like a conventional exchange.
It made its debut in 2015 with the promise of creating a new financial technology (fin-tech) company that would allow people around the world to buy and sell cryptocurrencies in a secure environment.
This approach attracted a lot of investors that were usually risk-averse and didn’t wanna get involved in the chaotic crypto industry.
In addition to being an exchange for buying and selling cryptocurrencies like bitcoin, Ethereum, Litecoin, and others, FTX also offered what they called “smart contracts”–a series of pre-programmed instructions executed by computers running on blockchain technology–that allowed customers to trade between each other without going through an intermediary such as an exchange or broker-dealer firm like TD Ameritrade or Charles Schwab.
FTX also offered traditional financial instruments such as options and futures contracts. Options let traders bet on whether a specific asset will rise or fall in value over time; futures contracts allow traders to lock in prices now so they can trade at those prices later (an example would be buying an apple today at $2.lB but knowing exactly how much money it will cost tomorrow).
Futures also allow investors who don’t want their money tied up for long periods of time–or who just want some extra leverage–to use margin trading: betting more money than what they actually have available through loans from their brokerages or lenders at higher interest rates than normal bank accounts offer.
The launch of Leverage Tokens
Ftx also launched something called Leveraged Tokens. This was an exciting development for investors and traders because it allowed them to trade in derivatives without having to worry about margin calls or other issues associated with traditional futures contracts.
The exchange also had some controversies that were revealed in its early years, mostly due to its focus on different derivative products instead of standard spot exchange services. For example, it was accused of manipulating the market by offering users incentives to trade certain derivatives (like futures) at certain times.
It’s important to note that these claims were unproven and largely speculative; there was no evidence yet that FTX manipulated any markets–but many people were worried about what could happen if they did!
However, this was nothing FTX, couldn’t overcome with a few well-planned PR and ad campaigns, which included super bowl ads, celebrity endorsements and the naming rights to an NBA arena.
SBF appeared on countless podcasts and interviews professing his altruistic ideology. Sam was hailed as the next Warren Buffett and he got featured on the covers of several business magazines.
This led to more cash injections and the valuation of FTX ballooning. On top of this empire sat the king himself, SBF. Everyone was so enamored by this persona that they failed to see or just ignored all the red flags.
The warning signs
One of these was the unusual relationship between Sam and an employee at Alameda Research named Caroline Ellison whom he had met at Jane Street before sparking up a romance and going into business together.
What’s funny is that this workplace fraternization was almost standard practice at FTX so it came as no surprise when Ellison was made CEO at Alameda Research.
What’s even more concerning were Caroline’s tweets professing her love for amphetamine use. If you also factor in Sam’s habit of playing league of legends during meetings, you’ll get a good picture of the kind of childish and unprofessional culture at FTX/Alameda.
The most glaring of the warning signs was when during an interview SBF described his business plan in a way that sound awfully similar to a Ponzi scheme with regards to their FTT token.
A Ponzi scheme is where you make up an investment opportunity that promises wild returns with no risk. This opportunity doesn’t have to be legit, it just has to sound enticing.
Then you create hype around the ‘opportunity’ and get the ball rolling. Then once enough people fall for the scam, you use their ‘investments’ to pay off the first ‘investors’ with the owners skimming money off the top which is basically what FTX was doing with their FTT token. One of the people to call this out was a YouTuber called Coffeezilla.
(Grab a cup of coffee cause $hit is about to get real)
The beginning of the end
However, these concerns were drowned out by FTX’s hype machine because FTX was growing every day.
Everybody thought FTX was really solid and stable and I’ll admit I was guilty of this too. I even wanted to develop my own crypto app using the FTX API.
This reputation was useful when the crypto market started plummeting. The so-called great crypto crash of 2022 saw a lot of the players in the industry plunge into bankruptcy.
This presented a unique but risky opportunity to further bolster this positive sentiment around the company.
Sam swooped in to save the day by bailing out several crypto exchanges and wallets becoming ‘crypto’s white knight’. This helped FTX cement its strong reputation and it kept crypto prices from sinking even further which would have sunk FTX as well.
It also added to Sam’s charitable billionaire status. However recklessly moving its weight around and splashing money on dying companies wasn’t really a good long-term strategy for FTX because it left them with very little cash on hand.
Making enemies
Another thing that certainly didn’t help was how Sam and FTX had made enemies along the way to building the empire, the most prolific of which was the founder and CEO of Binance, Changpeng Zhao, or CZ for short.
Binance is the largest crypto exchange in the world and was actually an early investor in FTX. As FTX took off the relationship between these two soured with Sam even testifying against CZ in congress.
This enmity would later turn out to be a large factor in the FTX collapse.
The fall of FTX
In November 2022, leaked documents from Alameda shone a light on the incestuous relationship between FTX and Alameda research.
Everybody knew the companies were related (kinda like Tesla and SpaceX) but nobody really knew just how close the relationship really was.
Turns out the majority of Alameda’s balance sheet was comprised of FTT (yes, that FTT). This was incredibly suspicious because FTX could always mint more FTT and create money out of thin air, with no way for Alameda to quickly convert it into cash so it didn’t really count as an asset.
A few days after this news came out, the value of FTT dropped by over 10% and CZ saw his moment to strike, announcing on Twitter that he would be selling off all of his FTT.
Ellison, thinking this was a bluff, offered to buy all his FTT off him to keep FTT stable but it was too late because upon the announcement, FTT dipped by over 80% and Sam lost billions.
(Or rather, Billons lost Sam)
This triggered a mass selloff, which exposed that FTX really didn’t have the money to pay off all these people which is known as a liquidity crunch. But CZ wasn’t done. He offered to buy out the company but he was never gonna make good on that offer.
Soon the feds announced they were going to launch an investigation into FTX over mishandled customer funds and fraud and CZ and Binance pulled out of the deal.
FTX filed for bankruptcy but it didn’t end there. As the feds prepared their arrest warrants and extradition papers, FTX got hacked into what appears to be an inside job and lost millions of dollars worth of crypto assets.
Soon after, leaked messages revealed all his sinister motives and that his charitable persona was fake and carefully crafted to help his reputation.
By early December, Sam Bankman-Fried was in cuffs and extradited to the united states along with his co-conspirators, Caroline Ellison and Gary Wang. Wang and Ellison quickly turned on Sam and got plea deals.
Sam, despite claiming to have only 100k in his bank account made his 250 million dollar bail and is now sitting comfortably in his parent’s home awaiting trial which could drag on for years given that he probably has access to some good lawyers.
Conclusion
The rise and fall of Ftx is a cautionary tale. It shows how quickly fortunes can be made and lost in this volatile market, but also how important it is to keep an eye on your trading strategy at all times.
If you’re new to trading or investing, it might be best for you not to start with derivatives until you have more experience under your belt! While we might be quick to blame SBF and his cronies we, should also remember the other guilty parties.
The VC’s could have done a better job at due diligence and the celebrities should have been more hesitant to accept a paycheck and endorse FTX.
The media is also guilty of creating this lone genius figure for us to worship. We also have ourselves to blame for ignoring all the red flags.
At the same time, we must also cut everyone some slack for falling for the scam. For most people, FTX seemed really solid and we were none the wiser as to what was really going on.
It’s easy to be revisionist historians and look back now thinking we should have known better when in reality we made the decisions that seemed rational at the time.
What’s more important is to learn from this fiasco and not let ourselves be fooled (because we will be fooled again) so easily in the future.
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