FTX, a top Crypto exchange, lost $32B in a few days!
Sam Bankman-Fried, FTX’s founder:
- sank $2B funding
- owes $3B to creditors
- and, lost funds of millions of people!
Here’s how this startup’s crash was inevitable 🧵
Sam Bankman-Fried, FTX’s founder:
- sank $2B funding
- owes $3B to creditors
- and, lost funds of millions of people!
Here’s how this startup’s crash was inevitable 🧵
Structure:
1) How did FTX come to be?
2) Bankman goes from Billionaire to Bankrupt
3) A single move that unravelled the scam
4) Magical tokens that make infinite money
5) SBF: It was a PONZI scheme all along!
6) A state full of doe-eyed onlookers
1) How did FTX come to be?
2) Bankman goes from Billionaire to Bankrupt
3) A single move that unravelled the scam
4) Magical tokens that make infinite money
5) SBF: It was a PONZI scheme all along!
6) A state full of doe-eyed onlookers
1/ How did FTX come to be?
After graduating from MIT, SBF worked at Wall Street.
He quit his job to take a reprise at the Centre of Effective Altruism, where he met his close confidants, who built FTX.
He later moved to launch his hedge fund, Almeda Research, in 2017.
(contd)
After graduating from MIT, SBF worked at Wall Street.
He quit his job to take a reprise at the Centre of Effective Altruism, where he met his close confidants, who built FTX.
He later moved to launch his hedge fund, Almeda Research, in 2017.
(contd)
At Almeda, Bankman-Fried made money buying Bitcoin in America (where it was cheaper) and selling it in Japan.
He was moving upward by $25M per day!
He needed an exchange where he could trade derivatives via his hedge fund. So, he built FTX in 2019!
He was moving upward by $25M per day!
He needed an exchange where he could trade derivatives via his hedge fund. So, he built FTX in 2019!
2/ Bankman goes from Billionaire to Bankrupt
SBF was an instant hit among investors.
When he hopped on a call with Sequoia to raise funds for FTX, he was apparently playing League of Legends.
The investors were completely charmed, proclaiming "I love this founder!".
(contd.)
SBF was an instant hit among investors.
When he hopped on a call with Sequoia to raise funds for FTX, he was apparently playing League of Legends.
The investors were completely charmed, proclaiming "I love this founder!".
(contd.)
A group of investors including Sequoia, Softbank, Tiger Global, etc. gave him ~$1B in funding.
This was followed by a meme round, where FTX raised $420M dollars, from 69 investors. How fun!
FTX, quickly grew to the 2nd largest crypto exchange, just behind Binance.
(contd.)
This was followed by a meme round, where FTX raised $420M dollars, from 69 investors. How fun!
FTX, quickly grew to the 2nd largest crypto exchange, just behind Binance.
(contd.)
He began going around Washington funding elections, creating Super packs and lobbying heavily for crypto.
But, in just 4 years, the man went from being an American Robinhood, to crashing a $32B company and losing billions of customer funds.
So, how did this happen?
But, in just 4 years, the man went from being an American Robinhood, to crashing a $32B company and losing billions of customer funds.
So, how did this happen?
3/ Unravelled the FTX scam!
Timeline:
Nov 2nd — CoinDesk published the balance sheet of Almeda Research showing how its asset class was completely reliant on the FTX-issued FTT tokens.
Nov 6th — Binance CEO, announced that he'll be offloading all FTT reserves.
(contd.)
Timeline:
Nov 2nd — CoinDesk published the balance sheet of Almeda Research showing how its asset class was completely reliant on the FTX-issued FTT tokens.
Nov 6th — Binance CEO, announced that he'll be offloading all FTT reserves.
(contd.)
Nov 8th — As a result of the massive offload, FTT's price collapsed below $22.
This run caused panic among FTX customers with traders scrambling to withdraw their actual dollars from the exchange.
This caused a withdrawal of $6B dollars of assets from FTX.
(contd.)
This run caused panic among FTX customers with traders scrambling to withdraw their actual dollars from the exchange.
This caused a withdrawal of $6B dollars of assets from FTX.
(contd.)
Now, the exchange did not have the liquid funds to pay their customers. So, they had to be bailed out.
SBF went to Binance for help. And, Binance's CZ announced that he would gladly help out.
(contd.)
SBF went to Binance for help. And, Binance's CZ announced that he would gladly help out.
(contd.)
Nov 9th — After evaluating FTX's balance sheets, Binance backed out of the deal, citing the mishandling of funds!
Nov 10th — FTX officially announced that they are filing for bankruptcy.
SBF very succinctly explains the whole scenario:
Nov 10th — FTX officially announced that they are filing for bankruptcy.
SBF very succinctly explains the whole scenario:
4/ Magic tokens make infinite money
So, why did Almeda's reliance on these FTT tokens cause such ruin? And, what are these tokens?
Well, these tokens are basically issued by FTX. They behave like a stock, meaning their price changes as people buy or sell them.
(contd.)
So, why did Almeda's reliance on these FTT tokens cause such ruin? And, what are these tokens?
Well, these tokens are basically issued by FTX. They behave like a stock, meaning their price changes as people buy or sell them.
(contd.)
But, it's also not exactly a stock since you don't own a piece of a tangible asset like a company.
These tokens are more like airline miles, giving discounts to FTX customers.
Now, FTX buybacks some of these tokens with its profits to inflate their price.
(contd.)
These tokens are more like airline miles, giving discounts to FTX customers.
Now, FTX buybacks some of these tokens with its profits to inflate their price.
(contd.)
So, a bet on these tokens is a bet on FTX's profits.
Now, Almeda uses FTT as collateral to get loans to support its trades.
FTTs are volatile assets that spun out of thin air. Using them to get real money is a risky bet.
(contd.)
Now, Almeda uses FTT as collateral to get loans to support its trades.
FTTs are volatile assets that spun out of thin air. Using them to get real money is a risky bet.
(contd.)
More importantly, Almeda holding a huge amount of FTT and using it as collateral to get "real" money shows a close relation between the two firms.
SBF assured everyone that both companies are totally unrelated.
So when this connection came out, it caused huge panic.
(contd.)
SBF assured everyone that both companies are totally unrelated.
So when this connection came out, it caused huge panic.
(contd.)
There are many other red flags
🚩 Almeda using FTT as collateral for loans
🚩 There was a glaring hole of $8B-$10B in the FTX's balance sheet, part of it apparently transferred to Almeda
🚩 A large portion of these disappeared funds was actual customer's money
(contd.)
🚩 Almeda using FTT as collateral for loans
🚩 There was a glaring hole of $8B-$10B in the FTX's balance sheet, part of it apparently transferred to Almeda
🚩 A large portion of these disappeared funds was actual customer's money
(contd.)
Seeing this mismanagement, FTX's current CEO John Ray, who is tasked to clean this mess, described this as the worst case of fraud he has ever seen, worse than Enron!
The 2nd largest exchange in the world apparently had trouble keeping track of its accounts - how ironic!
The 2nd largest exchange in the world apparently had trouble keeping track of its accounts - how ironic!
5/ SBF: It was a PONZI scheme all along!
In the Ponzi scheme metaphor, everything fits perfectly like puzzle pieces. How? Well, let me explain.
Here's how a Ponzi scheme works:
a) The schemer takes money from their first investor and guarantees them HIGH RETURNS.
(contd.)
In the Ponzi scheme metaphor, everything fits perfectly like puzzle pieces. How? Well, let me explain.
Here's how a Ponzi scheme works:
a) The schemer takes money from their first investor and guarantees them HIGH RETURNS.
(contd.)
b) As the schemer gets more credibility, more people make small investments.
c) He diverts part of these investments to the first investor, fulfilling the "returns" promise and pockets the rest.
d) The small investors are left hanging, till the whole scheme dries up.
(contd.)
c) He diverts part of these investments to the first investor, fulfilling the "returns" promise and pockets the rest.
d) The small investors are left hanging, till the whole scheme dries up.
(contd.)
6 months back, SBF described his genius idea for FTX. And, the plan was uncomfortably close to a Ponzi scheme.
a) He described a metaphoric magical box that issues a token.
b) Anything good that happens because of the box is rewarded to people holding that token.
(contd.)
a) He described a metaphoric magical box that issues a token.
b) Anything good that happens because of the box is rewarded to people holding that token.
(contd.)
c) Slowly, the token's market cap grows. And now, more and more people invest in the box driving up the value of this token.
This apparently goes on forever.
The host quickly pointed out that SBF was essentially describing a PONZI business, and that too quite proudly.
(contd)
This apparently goes on forever.
The host quickly pointed out that SBF was essentially describing a PONZI business, and that too quite proudly.
(contd)
SBF said that that was the "boomer" way of thinking.
And, as long as people believed in the box, the token would grow.
In the whole scheme of things, FTX is that box and FTT is the token. And, the belief in FTX drove its value to $32B.
And, as long as people believed in the box, the token would grow.
In the whole scheme of things, FTX is that box and FTT is the token. And, the belief in FTX drove its value to $32B.
6/ A state full of doe-eyed onlookers
The beauty of this story is that the blatant fraud was taking place in plain sight.
But everybody was too enamoured by SBF.
That's especially true with doe-eyed Bankman lovers at Sequoia, whose $200M+ investment is now at ZERO!
(contd.)
The beauty of this story is that the blatant fraud was taking place in plain sight.
But everybody was too enamoured by SBF.
That's especially true with doe-eyed Bankman lovers at Sequoia, whose $200M+ investment is now at ZERO!
(contd.)
But, that was SBF's long-term plan.
Without the backing of Washington and investors, the whole thing wouldn't have flown for as long as it did.
SBF needed everyone to believe in his vision and he paid good dollars for that belief.
(contd.)
Without the backing of Washington and investors, the whole thing wouldn't have flown for as long as it did.
SBF needed everyone to believe in his vision and he paid good dollars for that belief.
(contd.)
But, since the whole scheme was merely suspended in the thin air of "belief", one doubtful move had the whole thing crashing.
In the end, SBF's one goal with all this was to have an impact.
And, although not positive, no one can deny that he surely had a huge impact.
In the end, SBF's one goal with all this was to have an impact.
And, although not positive, no one can deny that he surely had a huge impact.
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