The beneath is an excerpt from the Bitcoin Magazine Pro report on the rise and fall of FTX. To learn and obtain your entire 30-web page report, follow this link.
The Beginnings
Where did all of it begin for Sam Bankman-Fried? As the story goes, Bankman-Fried, a former worldwide ETF dealer at Jane Street Capital, stumbled upon the nascent bitcoin/cryptocurrency markets in 2017 and was shocked on the quantity of “risk-free” arbitrage alternative that existed.
In specific, Bankman-Fried mentioned the notorious Kimchi Premium, which is the massive distinction between the worth of bitcoin in South Korea versus different international markets (due to capital controls), was a selected alternative that he took benefit of to first begin making his thousands and thousands, and finally billions …
At least that’s how the story goes.
The Kimchi Premium – Source: Santiment Content
The actual story, whereas presumably comparable to what SBF favored to inform to clarify the meteoric rise of Alameda and subsequently FTX, seems to have been one riddled with deception and fraud, because the “smartest guy in the room” narrative, one which noticed Bankman-Fried on the duvet of Forbes and touted because the “modern day JP Morgan,” shortly modified to one among huge scandal in what seems to be the biggest monetary fraud in fashionable historical past.
The Start Of The Alameda Ponzi
As the story goes, Alameda Research was a excessive-flying proprietary buying and selling fund that used quantitative methods to obtain outsized returns within the cryptocurrency market. While the story was plausible on the floor, due to the seemingly inefficient nature of the cryptocurrency market/trade, the crimson flags for Alameda have been obtrusive from the beginning.
As the fallout of FTX unfolded, earlier Alameda Research pitch decks from 2019 started to flow into, and for a lot of the content material was fairly surprising. We will embody the total deck beneath earlier than diving into our evaluation.
The deck incorporates many obtrusive crimson flags, together with a number of grammatical errors, together with the providing of just one funding product of “15% annualized fixed rate loans” that promise to have “no downside.”
All obtrusive crimson flags.
Similarly, the form of the marketed Alameda fairness curve (visualized in crimson), which seemingly was up and to the suitable with minimal volatility, whereas the broader cryptocurrency markets have been within the midst of a violent bear market with vicious bear market rallies. While it is 100% potential for a agency to carry out nicely in a bear market on the quick facet, the flexibility to generate constant returns with close to infinitesimal portfolio drawdowns is not a naturally occurring actuality in monetary markets. Actually, it is a inform-story signal of a Ponzi scheme, of which we now have seen earlier than, all through historical past.
The efficiency of Bernie Madoff’s Fairfield Sentry Ltd for practically twenty years operated fairly equally to what Alameda was selling by way of their pitch deck in 2019:
- Up-only returns no matter broader market regime
- Minimal volatility/drawdowns
- Guaranteeing the payout of returns whereas fraudulently paying out early traders with the capital of recent traders
Stated returns by Bernie Madoff’s fund
It seems that Alameda’s scheme started to run out of steam in 2019, which is when the agency pivoted to creating an alternate with an ICO (preliminary coin providing) within the type of FTT to proceed to supply capital. Zhu Su, the co-founding father of now-defunct hedge fund Three Arrows Capital, appeared skeptical.
Approximately three months later, Zhu took to Twitter once more to specific his skepticism about Alameda’s subsequent enterprise, the launch of an ICO and a brand new crypto derivatives alternate.
“These same guys are now trying to launch a “bitmex competitor” and do an ICO for it. 🤔” – Tweet, 4/13/19
Beneath this tweet, Zhu mentioned the next whereas posting a screenshot of the FTT white paper:
“Last time they pressured my biz partner to get me to delete the tweet. They started doing this ICO after they couldn’t find any more greater fools to borrow from even at 20%+. I get why nobody calls out scams early enough. Risk of exclusion higher than return from exposing.” – Tweet, 4/13/19
Additionally, FTT could possibly be used as collateral within the FTX cross-collateralized liquidation engine. FTT obtained a collateral weighting of 0.95, whereas USDT & BTC obtained 0.975 and USD & USDC obtained a weighting of 1.00. This was true till the collapse of the alternate.
FTT Token
The FTT token was described because the “backbone” of the FTX alternate and was issued on Ethereum as a ERC20 token. In actuality, it was largely a rewards based mostly advertising scheme to appeal to extra customers to the FTX platform and to prop up stability sheets. Most of the FTT provide was held by FTX and Alameda Research and Alameda was even within the preliminary seed spherical to fund the token. Out of the 350 million whole provide of FTT, 280 million (80%) of it was controlled by FTX and 27.5 million made their method to an Alameda pockets.
FTT holders benefited from extra FTX perks reminiscent of decrease buying and selling charges, reductions, rebates and the flexibility to use FTT as collateral to commerce derivatives. To help FTT’s worth, FTX routinely bought FTT tokens utilizing a share of buying and selling price income generated on the platform. Tokens have been bought after which burned weekly to proceed driving up the worth of FTT.
FTX repurchased burned FTT tokens based mostly on 33% of charges generated on FTX markets, 10% of web additions to a backstop liquidity fund and 5% of charges earned from different makes use of of the FTX platform. The FTT token doesn’t entitle its holders to FTX income, shares in FTX nor governance choices over FTX’s treasury.
Alameda’s stability sheet was first talked about on this Coindesk article displaying that the fund held $3.66 billion in FTT tokens whereas $2.16 billion of that was used as collateral. The recreation was to drive up the perceived market worth of FTT then use the token as collateral to borrow towards it. The rise of Alameda’s stability sheet rose with the worth of FTT. As lengthy because the market didn’t rush to promote and collapse the worth of FTT then the sport might proceed on.
FTT rode on the backs of the FTX advertising push, rising to a peak market cap of $9.6 billion again in September 2021 (not together with locked allocations, all of the whereas Alameda leveraged towards it behind the scenes. The Alameda property of $3.66b FTT & $2.16b “FTT collateral” in June of this 12 months, together with its OXY, MAPs, and SRM allocations, have been mixed value tens of billions of {dollars} on the high of the market in 2021.
The worth of FTT with a facet profile displaying FTT buying and selling quantity on FTX (logarithmic scale)
FTT Market Cap (logarithmic scale) – Source:CoinMarketCap
CZ Chooses Blood
In one decision and tweet, CEO of Binance, CZ, kicked off the toppling of a home of playing cards that in hindsight, appears inevitable. Concerned that Binance can be left holding a nugatory FTT token, the corporate aimed to promote $580 million of FTT on the time. That was bombshell information since Binance’s FTT holdings accounted for over 17% of the market cap worth. This is the double edged sword of getting the vast majority of FTT provide within the fingers of some and an illiquid FTT market that was used to drive and manipulate the worth increased. When somebody goes to promote one thing huge, worth collapses.
As a response to CZ’s announcement, Caroline of Alameda Research, made a important mistake to announce their plans to purchase all of Binance’s FTT on the current market price of $22. Doing that publicly sparked a wave of market open curiosity to place their bets on the place FTT would go subsequent. Short sellers piled in to drive the token worth to zero with the thesis that one thing was off and the danger of insolvency was in play.
Ultimately, this state of affairs has been brewing because the Three Arrows Capital and Luna collapsed this previous summer season. It’s doubtless that Alameda had vital losses and publicity however have been in a position to survive based mostly on FTT token loans and leveraging FTX buyer funds. It additionally is sensible now why FTX had an curiosity in bailing out corporations like Voyager and BlockFi within the preliminary fallout. Those companies could have had giant FTT holdings and it was needed to hold them afloat to maintain the FTT market worth. In the newest chapter paperwork, it was revealed that $250 million in FTT was loaned to BlockFi.
With hindsight, now we all know why Sam was shopping for up all the FTT tokens he might get his fingers on each week. No marginal consumers, lack of use instances and excessive threat loans with the FTT token have been a ticking time bomb ready to blow up.
How It All Ends
After pulling again the curtain, we now know that each one of this led FTX and Alameda straight out of business with the companies disclosing that their high 50 collectors are owed $3.1 billion with solely a $1.24 money stability to pay it. The firm doubtless has over 1,000,000 collectors that are due cash.
The original bankruptcy document is riddled with obtrusive gaps, stability sheet holes and an absence of monetary controls and constructions that have been worse than Enron. All it took was one tweet about promoting a considerable amount of FTT tokens and a rush for patrons to begin withdrawing their funds in a single day to expose the asset and legal responsibility mismatch FTX was dealing with. Customer deposits weren’t even listed as liabilities within the stability sheet paperwork supplied within the chapter courtroom submitting regardless of what we all know to be round $8.9 billion now. Now we will see that FTX by no means had actually backed or correctly accounted for the bitcoin and different crypto property that prospects have been holding on their platform.
It was all an internet of misallocated capital, leverage and the transferring of buyer funds round to try to hold the boldness recreation going and the 2 entities afloat.
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This concludes an excerpt from “The FTX Ponzi: Uncovering The Largest Fraud In Crypto History.” To learn and obtain the total 30-web page report, follow this link.
