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The collapse of the FTX exchange

FTX was one of the biggest and best-known cryptocurrency exchanges in the world. Its founder, Sam Bankman-Fried, was also one of the most influential figures in the crypto industry. How could a $30 billion empire have crumbled in a single day? This is the story of the rise and fall of Sam Bankman-Fried.

SBF and Alameda Research

Let’s begin the story by introducing the main character. At the center of it all is 30-year-old American Sam Bankman-Fried. An abbreviation SBF is commonly used for his name. As some might have thought, SBF is not an “OG” in the crypto industry. This man was an unknown name to everyone five years ago.

Sam Bankman-Fried made his fortune by taking advantage of an arbitrage in the price of Bitcoin. This opportunity opened late in the crypto boom of 2017. At the same time, Bankman-Fried founded Alameda Research for trading. In the video below, SBF talks about the initial difficulties in raising funding.

SBF’s plan was simple; he took advantage of the so-called kimchi premium, which means an elevated Bitcoin price in South Korea. If the market price of Bitcoin was $10,000, the price could be $15,000 on Korean exchanges. A similar advantage was also available in Japan.

This arbitrage was not easy to exploit, as not everyone was able to open an account on the Japanese or Korean exchanges. “You do have to put together this incredibly sophisticated global corporate framework in order to be able to actually do this trade,” SBF told Yahoo in an interview in 2021.

Bankman-Fried announced a year ago that it owned 90% of Alameda Research. We will come back to this company later in this article.

FTX and Chanpeng Zhao

Bankman-Fried started to emerge in the crypto industry in 2019. He founded the FTX exchange in May 2019, which was designed for pro traders and offered Bitcoin futures and other derivative products.

The aforementioned Alameda Research has been a close partner of FTX since the beginning. It has facilitated OTC trading and acted as a market maker on the exchange. FTX also created its own token with the ticker FTT. Its role is similar to other exchange tokens; traders pay smaller fees when holding the coin. You could also receive other benefits within the FTX ecosystem.

Not many people know that the Binance exchange is closely linked to the history of FTX. Binance was one of the largest investors in the early days of FTX. Many saw Binance founder Changpeng “CZ” Zhao as a mentor to SBF. Below is a photo from the days when the men were still smiling side by side.

These companies were growing in the same direction in 2019 and 2020. However, there was a split in 2021. FTX had grown to be too big of a rival for Binance. Other factors might have accelerated the process. FTX eventually bought Binance out in late 2021.

According to unconfirmed information, Sam Bankman-Fried started aggressively pitching the FTX stock to the company’s employers. There was a juicy 50 % discount for a minimum investment of $25,000. Many were lured in to make big investments with promises of massive profits.

The Coindesk article

The collapse of FTX, Alameda, and SBF was the result of a war between Sam Bankman-Fried and Changpeng Zhao. What caused this? Why did CZ launch an attack on FTX on Sunday, November 6th, 2022?

The snowball started rolling after Coindesk published an article on November 2, 2022. This news site obtained information about Alameda Research’s finances, which has not been made public before as it is a private limited company.

Coindesk observed that Alameda had a worryingly large proportion of FTT tokens on its balance sheet.

As of June 30, the company’s assets amounted to $14.6 billion. Its single largest asset: $3.66 billion of “unlocked FTT.” The third-largest entry on the assets side of the accounting ledger? A $2.16 billion pile of “FTT collateral.

The article immediately sparked speculation on social media. As Alameda Research is a hedge fund and is also active in the DeFi sector, it has probably leveraged its balance sheet.

There’s nothing special about leveraging as such – it’s something that almost all pro traders do. The problem was Alameda’s collateral, as the company’s massive FTT balance was, in reality, only a fraction of its balance sheet value. This is because there was no way Alameda could have sold an illiquid FTT token to the market without collapsing its price.

Changpeng Zhao’s tweets

The Coindesk article caused a stir on social media. Little by little, rumors started to circulate about possible problems with Alameda. However, most investors did not react particularly strongly to the situation.

However, the revelation had serious consequences. In practice, a layer of dynamite had been laid under the foundations of Alameda and FTX. If someone lit a match too close to it, the whole organization would explode in a massive explosion. This is exactly what happened when Changpeng Zhao started tweeting on Sunday, November 4th, 2022.

CZ tweeted that Binance would market-sell FTT tokens it received from the FTX deal. However, he underlined that this was not an attack directed at FTX, and the purpose of the tweets was just to be open about their plans. As mentioned earlier, FTX bought Binance out of the company in 2021. About 550 million dollars of this deal consisted of FTT tokens.

Later on the same day, CZ made also another tweet. This was the one that eventually blew up all the dynamite that was laid under Alameda and FTX.

The Binance boss said the FTT sales were a risk management operation and mentioned Terra Luna’s collapse. That project crashed in May, causing investors to lose tens of billions of dollars.

The association of Luna with the FTX exchange was too much of a red flag for many investors. A process had begun with an outcome nobody could have predicted.

The war between FTX and Binance

The Coindesk story and the tweets mentioned earlier set the snowball rolling. However, there was already an FTX vs. Binance war behind the scenes. Why was that? What had caused the industry giants to become hostile? The explanation can be found in the CZ tweet above: “We won’t support people who lobby against other industry players behind their backs.”

Sam Bankman-Fried had become enormously wealthy in recent years. It was estimated that his net worth was north of $15 billion. He had also been donating a lot of money to Washington, i.e., lobbying. Among other things, SBF was the second largest donor to Joe Biden’s presidential campaign. He was also at a congressional hearing earlier this year.

Many felt that the SBF had lobbied Washington for an anti-DeFi and anti-Binance regulation. Did the SBF also have a hand in the various Reuters “exposés” and attacks on Binance? Hard to say. We will probably see some new revelations in the coming months.

CZ’s message was clear, though. SBF has been playing games behind his back. Many also felt that Sam Bankman-Fried’s tweet below was a major mistake. He directly described Changpeng Zhao as an undesirable person in Washington.

For now, we can only speculate on what happened. Was it CZ’s intention to teach a lesson to SBF and make him publicly beg for an OTC deal? How long had this house of cards held together without the Coindesk story and CZ’s tweets?

It is certain that Changpeng Zhao (or nobody else, for that matter) didn’t want to see a mess of this scale. The collapse of FTX is a PR disaster for the whole industry. It seems that everyone—including his own employees — was surprised by what Sam Bankman-Fried had masterminded.

Who knew what was going on in Alameda and FTX? What are the origins of the Coindesk story? There are still many questions and few answers.

Twitter users begin to wake up

People became aware of the situation on Monday, the 7th of November, 2022. This mainly happened through social media. Tweets started to appear from various influencers, urging people to withdraw funds from the FTX exchange and sell their FTT tokens. Coinmotion founder Henry Brade also joined the ranks.

In the end, Henry was right, but few people thought the situation would be so severe on Monday. Many industry professionals considered the risk of the FTX crashing to be close to zero. Where did this confidence come from?

In 2022, FTX profiled itself as the savior of the crypto industry. When the dominoes started to fall after the collapse of Celsius and 3AC, FTX was doing bailouts! Among other things, it lent hundreds of millions of dollars to BlockFi.

With Sam Bankman-Fried practically living in Washington and FTX rescuing companies from bankruptcy, the SBF empire was considered the most stable in the industry amidst the bear market. Famous investor Kevin O’Leary publicly said that FTX is the one exchange where he knows he’s not going to get into trouble.

Sam Bankman-Fried also stated that the company’s balance sheet is in good shape.

SBF has since deleted the above tweet, which was found to be false less than 24 hours later.

The house of cards falls

Sam Bankman-Fried’s empire fell on Tuesday, the 8th of November 2022, following the worst bank run ever seen in the crypto industry. Reuters reported on Tuesday that $6 billion of customer funds had been withdrawn from the FTX exchange before Tuesday. Everyone wanted their money out at the same time.

A process was underway that no one could stop. At the same time, the FTT token started to collapse. It had remained around $22 for a long time, which FTX and Alameda tried to defend. Caroline Ellison, CEO of Alameda, also made a bad mistake in attracting Changpeng Zhao into an OTC deal.

Ellison’s well-meaning tweet effectively revealed where the “line of pain” lies. Sharks attacked the FTT token and quickly crashed its price. This was the final nail in the coffin.

FTX continued to process withdrawals as usual until Tuesday morning. For example, at the time of our news report, there were still rumors and no evidence of liquidity problems. The situation changed a couple of hours later.

Sam Bankman-Fried and the FTX stock exchange started a radio silence, and then the news that everyone was waiting for with horror began to spread on social media. FTX had stopped withdrawals. At this point, it was clear that FTX had collapsed due to liquidity problems. Just like Celsius and 3AC a few months earlier.

Binance’s takeover offer

Social media exploded on Tuesday evening when news of the withdrawal freeze started to spread. This was not least because many professionals had huge amounts of money stuck in FTX, some even 8-figure sums.

Events quickly took a new turn. Rumors had it that Sam Bankman-Fried had been asking for dollars from the deep pockets of Silicon Valley, but to no avail. Ultimately, he was forced to make a call that SBF never believed or wanted to make. Sam Bankman-Fried asked Binance for help. When this news started to spread on social media, people couldn’t believe what they were reading.

For a while, it looked like Binance would save the day and grab FTX at a meager price. The event also spawned many memes, one of the best of which is below (edited from Elon Musk’s arrival at Twitter HQ just over a week earlier).

Cryptocurrency prices also started to rise. Bitcoin’s price quickly rose to as much as $20,500 but plunged to almost $18,000 just a few hours later. What happened?

The previously mentioned FTT token collapsed from around $15 to $4. The rest of the market began to collapse after the FTT to new lows in 2022. By this point, it became apparent to everyone that the collapse of FTX would cost dearly for all crypto investors. Even if you held no funds at FTX, you paid the price with your portfolio.

On Wednesday evening, the 9th of November 2022, worrying news started to emerge. According to preliminary reports, Binance would be backing out of the deal. This was confirmed later in the evening on Binance’s official Twitter account.

At the same time, rumors about FTX’s financial situation started to circulate. According to various estimates, the company’s balance sheet had a gap of up to $10 billion! This would be a hole so big that even Binance would not be able to fill it. FTX would probably go bankrupt and take its customers’ money into a black hole.

These rumors have been later confirmed. According to WSJ, Sam Bankman-Fried had told in an investor’s meeting that FTX loaned up to 10 billion dollars to Alameda Research. These funds were mainly coming out of user deposits. How is this possible? Why would FTX need to loan money to Alameda?

The reason for the crash

The content of this article has so far been based on actual events and public information. There are still a lot of questions in the air that have not yet been answered. However, there is a pretty good theory about the reasons for the crash that would make a lot of sense.

It seems that the reason for the crash was a liquidity crisis at FTX. This was triggered because of the bank run. FTX simply didn’t have the user deposits because it had loaned the money to Alameda Research. But how was this maneuver even possible? You can’t just move billions of dollars without anyone noticing, can you?

It seems that Sam Bankman-Fried had built a backdoor to the FTX compliance system. This made it possible for Alameda to drain user funds out of FTX without setting any alarms.

It’s safe to say that SBF couldn’t have pulled this off by himself. There had to be people at FTX and Alameda involved. According to WSJ, it was a small group of Sam Bankman-Fried, Caroline Ellison, and two other executives.

It can’t be a coincidence that previous Alameda CEO Sam Trabucco resigned only a few months ago. Trabucco even underlines that he has not acted as a CEO for months. Did Trabucco leave because he found out about the scam? We don’t know. So far, he hasn’t tweeted since the crash.

The next question is why Alameda Research needed up to 10 billion dollars?

We don’t know, but many believe we must go back in time six months. The collapse of Terra Luna triggered a wave that led to the fall of many other dominos, such as 3AC and Celsius. Many loans went bad, and many companies started to demand payments.

This would have also crashed Alameda Research due to the high risk and leverage the company had taken. Sam Bankman-Fried didn’t want this to happen, so he bailed out Alameda and used customer funds. This created a massive hole in the FTX + Alameda empire. It was only a matter of time before someone found out. Check out the Twitter thread below that reveals some FTT token movements.

We are now talking about 10 billion dollars. Alameda may have also accused massive losses in the past weeks or months, and SBF had to keep filling the hole. Who knows if the companies even tried some Hail Mary bets on the final days to rescue the situation?

When FTX customers started a bank run, the exchange needed its funds back from Alameda. Alameda couldn’t repay the loan because it had used the illiquid FTT token as collateral. The token would have been too illiquid even if the FTT price hadn’t crashed, which is why the whole empire crashed.

The FTX bankruptcy

At this point in the timeline, we are on November 10, 2022. FTX wasn’t officially a bankrupt entity, which created chaos inside the company. There were rumors on social media that FTX was even processing withdrawals of some VIP clients. The situation was a total mess.

Later that day (Thursday, November 10, 2022), an even bigger show took place. FTX announced that it would start processing withdrawals for Bahamian citizens. They claimed this was due to regulatory reasons. FTX had its headquarters in the Bahamas.

It’s not difficult to guess what happened next. Wealthy FTX clients tried desperately to take advantage of this loophole, and users tried to withdraw their money using Bahamian accounts.

According to rumors, FTX users used the exchange’s NFT marketplace. A Bahamian user would create an NFT, sell it to a rich user for millions, and withdraw the money from FTX. Customer services workers of FTX were also offered bounties for verifying accounts as Bahamian. What a shitshow this was.

Finally, the much-expected news was published. FTX had filed for bankruptcy with over 130 related companies.

This news finally calmed down the situation. The drama wasn’t entirely over, though.

The exchange was even hacked on the night between Friday and Saturday (10th – 11th of Nov 2022)! At this point, the whole saga started to feel surreal. Hundreds of millions of dollars were stolen from the company. The attacker’s identity hasn’t been confirmed. There were also rumors that a trojan was planted on the FTX website and the virus was forced through the FTX mobile app. It was just madness.

Time will tell how much funds are left to process in these companies.

The impact of the crash

The collapse of FTX and Alameda has been considered one of the worst moments in the crypto industry’s history. It is rivaled only by the Mt. Gox hack. This part of the article will be updated later; we simply do not know what will happen yet.

The collapse of 3AC and Celsius over the summer had a knock-on effect on dozens of companies in the sector. FTX was also backed by the most prominent VC firms in the industry. How many companies have lent money to Alameda? How many projects did FTX act as a custody service for? Are clients’ funds being returned? Will SBF go to jail?

There are countless questions at the moment. So far, there is also no information about the gap in Alameda Research’s balance sheet. FTX Ventures, for its part, was the financier of numerous DeFi projects. What will happen to companies that FTX backed in the spring? BlockFi was one of them, and it already closed its doors right after the FTX bankruptcy.

FTX bailed out BlockFi in the summer of 2022 when it was in a liquidity crisis. FTX lent hundreds of millions of dollars to BlockFi to stabilize its balance sheet, but it looks like BlockFi might go down with it.

It is safe to say that this is one of the worst events in the history of cryptocurrencies. On top of all this, the collapse came after 12 months of a bear market. The year 2022 has perhaps hit investors harder than any previous year in the history of cryptocurrencies. And it’s not even over yet.

It is also clear that the story’s main villain has suffered severe losses. In just a few days, over 95% of Sam Bankman-Fried’s fortune has melted.

The FTX exchange, meanwhile, has plummeted from a valuation of more than $30 billion to $1. But even that is one dollar too much.

This mess might even make some US politicians dirty. Republican politician Tom Emmer has questioned Sam Bankman-Fried’s cooperation with the SEC. Emmer claims that FTX tried to create a monopoly by using regulatory loopholes.

This case will cause several months of meltdowns and earthquakes in the crypto sector.

Update on 29th of March 2024: Sam Bankman-Fried was sentenced to 25 years in prison.

Antti Hyppänen

Antti Hyppänen is the founder and editor-in-chief of Antti has written articles about cryptos since 2017. He follows the crypto market every day of the year and is responsible for the daily operations of AboutBitcoin. Antti is not a maximalist regarding any cryptocurrency but looks at the industry objectively. Antti’s investment profile is “buy & hold,” i.e., he does not trade or use leverage. His crypto portfolio consists of mainly Bitcoin and Ethereum. Antti also follows macroeconomic events. In addition to cryptos, his interests include gold, silver, and the US stock market.