Below is an excerpt from Bitcoin Magazine Pro’s report on the rise and fall of FTX. To read and download the 30-page report, follow this link.
Beginnings
Where did it all start for Sam Bankman-Fried? As the story goes, Bankman-Fried, a former international ETF trader at Jane Street Capital, came across the nascent bitcoin/cryptocurrency markets in 2017 and was shocked by the amount of “risk-free” arbitrage opportunity available.
In particular, Bankman-Fried said that the famous Kimchi Premium, which has a huge difference in the price of bitcoin in South Korea compared to other global markets (due to capital controls), is a special opportunity that it used to start creating its own money first. millions, eventually billions…
At least that’s how the story goes.
Kimchi Premium – Source: Sentiment content
While the real story is similar to what SBF wanted to tell to explain the meteoric rise of Alameda and later FTX, it was full of deception and fraud, as was the “smartest guy in the room” narrative that saw Bankman. -Grilled on the cover of Forbes and billed as “a modern day JP Morgan”, it quickly became one of the biggest financial fraud scandals in modern history.
The beginning of the Alameda Ponzi
As the story goes, Alameda Research was a high-flying proprietary trading fund that used quantitative strategies to make huge profits in the cryptocurrency market. While the story is seemingly plausible, due to the seemingly inefficient nature of the cryptocurrency market/industry, the red flags for Alameda were bright from the start.
As the results of the FTX came out, the pre-2019 Alameda Research pitches began to circulate, and for many, the content was quite shocking. Before we begin our analysis, we’ll include the full deck below.
There are many glaring red flags on the deck, including many grammatical errors, including offering only one investment product of “15% APR fixed rate loans” with “no downside”.
All glaring red flags.
Similarly, the shape of the advertised Alameda equity curve (illustrated in red) is up and to the right with seemingly minimal volatility, while the broader crypto markets were in the midst of a violent bear market with relentless bear market rallies. While it is 100% possible for a firm on the short side to perform well in a bear market, generating consistent returns with infinitesimal portfolio drawdowns is not a naturally occurring reality in financial markets. In fact, this is the telltale sign of a Ponzi scheme that we have seen before throughout history.
The performance of Bernie Madoff’s Fairfield Sentry Ltd. over nearly two decades was very similar to what Alameda promoted through its pitch deck in 2019:
- They are only upside, regardless of the broader market regime
- Minimal volatility/drawdowns
- Guaranteeing the payment of returns while paying early investors by defrauding the capital of new investors
Bernie Madoff Foundation’s Declared Income
Apparently, Alameda’s scheme began to fizzle out in 2019, when the firm started an exchange with an ICO (initial coin offering) in the form of an FTT to continue its source of capital. Zhu Su, co-founder of the now-defunct hedge fund Three Arrows Capital, seemed dubious.
About three months later, Zhu took to Twitter again to express his doubts about Alameda’s next venture, the launch of an ICO and a new crypto derivatives exchange.
“The same people are now trying to create a ‘bitmex competitor’ and create an ICO for it. 🤔” – Tweet, 13/4/19
Below this tweet, Zhu said the following while posting a screenshot of the FTT white paper:
“Last time, they pressured my business partner to delete my tweet. They started doing this ICO after they couldn’t find a bigger fool to borrow money from at 20%+ interest. I understand why no one calls out the scammers early enough. The risk of exclusion is greater than exposure.” – Tweet13/4/19
Additionally, FTT can be used as collateral in the FTX cross-collateralized cancellation engine. FTT received a collateral weight of 0.95, USDT & BTC received a collateral weight of 0.975, and USD & USDC received a collateral weight of 1.00. That was until the stock market crash.
Source: https://help.ftx.com/hc/en-us/articles/360031149632
FTT Token
The FTT token was described as the “backbone” of the FTX exchange and was released as an ERC20 token on Ethereum. In fact, it was basically a reward-based marketing scheme to attract more users to the FTX platform and support their balance sheets. Most of the FTT supply was done by FTX and Alameda Research, and Alameda was even in the early stages of funding the token. Of FTT’s total supply of 350 million, Of this, 280 million (80%) were managed by FTX and 27.5 million went to Alameda wallets.
FTT holders benefited from additional FTX benefits such as lower trading fees, discounts, rebates and the ability to use FTT as collateral for trading derivatives. To support the value of FTT, FTX regularly bought FTT tokens using a percentage of the trading fee revenue generated on the platform. Tokens are purchased and then burned weekly to continue raising the value of FTT.
FTX redeemed burned FTT tokens based on 33% of fees generated on FTX markets, 10% of net additions to the backstop liquidity pool, and 5% of fees generated from other uses of the FTX platform. The FTT token does not entitle holders to receive FTX revenues, shares in FTX, or management decisions regarding FTX’s treasury.
Alameda’s balance sheet, first reported in this Coindesk article , shows that the fund holds $3.66 billion in FTT tokens, of which $2.16 billion is used as collateral. The game was to inflate the perceived market value of FTT, then use the token as collateral to borrow against it. The rise of the Alameda balance rose with the value of FTT. As long as the market didn’t rush to sell and drive the FTT price down, the game could go on.
FTT rose to a peak market value of $9.6 billion in September 2021, following FTX marketing push (not including related deductions, which Alameda leveraged against behind the scenes. Alameda assets are $3.66 billion FTT and $2.16. b In June of this year, the “FTT collateral” combined with OXY, MAP and SRM allocations to be worth tens of billions of dollars at the market peak in 2021.
FTT price with side profile showing FTT trading volume on FTX (logarithmic scale)
FTT Market Cap (logarithmic scale) – Source:CoinMarketCap
CZ Picks Blood
In a decision and a tweetBinance’s CEO, CZ, started the fall of a house of cards that seemed inevitable in retrospect. Concerned that Binance would end up with a worthless FTT token, the company aimed to sell $580 million in FTT at the time. This was bombshell news as Binance’s FTT holdings represented more than 17% of its market cap. This is the double edged sword of an illiquid FTT market with the majority of the FTT supply being held by a few people and used to drive and manipulate the price higher. When someone goes to sell something big, the value collapses.
In response to CZ’s announcement, Caroline of Alameda Research made the critical mistake of announcing plans to buy all of FTT from Binance. the current market price is $22. Doing so has sparked a flurry of open market interest to place bets on where the FTT will go next. Short sellers flocked to drive the token price to zero on the thesis that something is not working and there is a risk of bankruptcy.
After all, this scenario has been brewing since Three Arrows Capital and Luna broke up last summer. Alameda likely suffered significant losses and exposure, but was able to survive using FTT token loans and FTX client funds. It also now makes sense why FTX was interested in bailing out companies like Voyager and BlockFi in their initial failure. These firms could have large FTT holdings and needed to be kept afloat to maintain FTT market value. In the latest bankruptcy filings, FTT revealed that $250 million was owed to BlockFi.
In hindsight, we now know why Sam bought all the FTT tokens he could get every week. No marginal buyers, no use cases and high risk loans with FTT token was a ticking time bomb waiting to explode.
How It All Ends
Pulling back the curtain, we now know that all of this led FTX and Alameda straight into bankruptcy, revealing that the firms’ top 50 creditors owed $3.1 billion and had only $1.24 in cash to pay it off. The company probably has more than a million creditors to pay.
The original bankruptcy filing is riddled with glaring loopholes, balance sheet gaps and a lack of financial controls and structures worse than Enron. It took a tweet about a large amount of FTT tokens being sold and customers rushing to withdraw their funds overnight to expose the asset-liability mismatch facing FTX. Customer deposits were not listed as liabilities in the accounting documents filed with the bankruptcy court, although we know they are currently around $8.9 billion. Now we can see that FTX never supported or correctly accounted for the bitcoin and other crypto assets that customers held on their platform.
It was all a web of misallocated capital, leverage and client funds to try to keep the confidence game going and keep the two entities afloat.
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This concludes an excerpt from the book “FTX Ponzi: Uncovering the Biggest Scam in Crypto History”. To read and download the full 30-page report, visit this link.