Before FTX collapsed, Alameda Research was believed to be one of the best quantitative trading firms and market makers within the industry. Much of that perception may be a facade, however, as a recent report details Alameda’s financial woes in 2018. People familiar with the matter said Alameda lost money at the time and took a big loss from a botched xrp trade in the middle. – In 2018, the company’s assets decreased by more than two thirds.
Alameda Research’s Facade Crumbles As Top Quantitative Crypto Trading Firm Reveals Early Financial Struggles
According to a report published by the Wall Street Journal (WSJ), Sam Bankman-Fried (SBF) Alameda Research lost a large amount of money in 2018. Alameda Research was a quantitative trading firm that officially launched in September 2017 with Tara Mac Aulay. Before starting Alameda, SBF worked at Jane Street, where she traded international exchange-traded funds (ETFs) before becoming director of development at the Center for Effective Altruism.
Reports detail that when SBF started Alameda, the trading firm was making millions by trading through arbitrage. As an arbitrageur, SBF argued that opportunities come from countries such as Japan and South Korea, as bitcoin (BTC) is traded at high prices in these regions. Because of the so-called “Kimchi premium” price in South Korea, SBF said BTC is sometimes 30% higher and 10% higher in Japan. There have been a number of reports highlighting that Alameda has made millions from cryptocurrency arbitrage, but a recent Wall Street Journal report published on December 31, 2022 details that Alameda’s trade is not always profitable.
Although SBF resigned as Alameda’s chief executive, he still controlled much of the company until the end, the report said. WSJ reporter Vicky Ge Huang detailed that Alameda “took a big gamble, won some and lost a lot.” In addition, the WSJ report said that SBF continuously borrows money to finance such bets, and it promises investors double-digit returns if they help it. According to Austin Campbell, Citigroup’s former co-head of digital asset price trading, the firm wanted to partner with market makers like Alameda, but Campbell said he was skeptical of the SBF firm.
“What I immediately realized was that what was causing the heartburn was the complete lack of a risk management framework that they could articulate in any meaningful way,” Campbell said.
SBF’s Creditors’ Demands Raise Questions About Company’s Financial Stability
According to people familiar with the matter and Alameda’s trading, arbitrage opportunities quickly stalled and Alameda’s trading algorithm made many bad bets. In the spring of 2018, Alameda took a big hit on xrp (XRP), losing two-thirds of its assets. People familiar with the matter said SBF has started asking for loans again with schemes promising 20% returns. A document reviewed by the WSJ shows that SBF’s attorney explained to one lender that Alameda was the best market maker in a specific area, but the attorney did not disclose any financial information.
Other people familiar with the matter said SBF is seeking lenders at the Binance Blockchain Week event in Singapore in January 2019. While Alameda sponsored the event for $150,000, it was alleged that the conference was used by SBF to solicit creditors and distribute a brochure to potential investors. The prospectus claimed that Alameda held $55 million in assets under management (AUM), but it remains to be seen whether that figure is factual. By February 2019, SBF decided to relocate Alameda from California to Hong Kong. Former partners said Alameda had made about $1 billion in profits during the cryptocurrency run in 2021, but when the bull run ended, SBF’s bets began to taper off.
Reports also show that former Alameda CEO Caroline Ellison had a significant negative balance in FTX in May 2022, months before FTX. An indictment in Manhattan, charges from the US Securities and Exchange Commission (SEC) and complaints from a lawsuit filed by the Commodity Futures Trading Commission (CFTC) show that Alameda’s losses were so great that it forced SBF to borrow from FTX clients. to strengthen the company after losses. The WSJ further notes that SBF considered closing Alameda months before the two companies collapsed, but the idea never came to fruition.
What do you think of Alameda Research’s report that says bad bets are hurting in 2018? Let us know your thoughts on this topic in the comments section below.
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