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FTX’s collapse in the blink of an eye: From a trading floor making $1 million a day, “exploding” to buy back Goldman Sachs to a burden of 1 million debtors, CEO resigns

That was in 2017, when a former fund trader Jane Street Capital made an interesting discovery while tracking CoinMarketCap.com: the spread sometimes amounted to 60% of the Bitcoin price at different exchanges. Instinct then prompted Sam Bankman-Fried (SBF) to engage in arbitrage, buying Bitcoin cheaply on one exchange, then reselling it at a higher price on another and make a profit.

This type of business is especially active in South Korea, where the listed price of Bitcoin is significantly higher than in other countries. It is nicknamed “Kimchi Premium” – referring to the traditional Korean dish made from fermented pickled cabbage.

After a month of self-study, Bankman-Fried founded his own trading firm, Alameda Research. Bankman-Fried said in an interview in September that the company sometimes makes as much as $1 million a day.

SBF has gained a lot of credibility because such transactions were not easy to do in the cryptocurrency market five years ago. Bitcoin arbitrage involves setting up and connecting each platform as well as building a complex infrastructure to abstract away the transaction execution process. Bankman-Fried’s Alameda Research is very good at this.

From there, the SBF empire exploded. Alameda’s success spurred the birth of the FTX cryptocurrency exchange in the spring of 2019, followed by $2 billion worth of venture funds. Bankman-Fried’s assets rose to a record more than $16 billion in March.

This guy then appeared on every poster promoting the cryptocurrency, while the FTX logo adorned everything from a Formula 1 track to a Miami basketball arena. Bankman-Fried also gave endless speeches, boasting that he could one day buy Goldman Sachs and become a Washington giant.

Sadly, these are just delusions.

As the price of cryptocurrencies plummeted this year, Bankman-Fried remained confident that its exchange would be immune, but in reality, this has negatively affected the company’s overall performance.

Alameda hastily borrowed money to invest in struggling digital asset companies, even draining FTX customers’ deposits to deal with escrow deposits and meet debt payment obligations. The Twitter battle of the CEO of rival exchange Binance has debunked this plan.

The FTX and Sam Bankman-Fried exchange’s paranoia paid a heavy price.

Alameda, FTX and a series of subsidiaries founded by Bankman-Fried have filed for bankruptcy protection in Delaware. Bankman-Fried also stepped down from the leadership role after seeing 94% of his personal wealth evaporate in just one day.

His whereabouts are unknown, while his $40 million apartment in the Bahamas has been put up for sale. Bankman-Fried’s face posters on FTX ads throughout downtown San Francisco serve as reminders of a rotting empire.

From “hero”, this guy becomes a villain. Speaking to CNBC in September, Bankman-Fried said one of his fundamentals when entering the market is working with incomplete information.

“There are a lot of things you don’t know, but you still have to try to figure out some trade to make,” Bankman-Fried said.

Putting together the pieces from various news sources, we get a picture of a frenzied exchange that covers up its mistakes in a variety of dubious, and perhaps illegal, ways.

According to reports, at some point during the past two years, Alameda started borrowing money for various purposes, including venture capital.

Six months ago, the wave of giants in the crypto space receded after market liquidity plummeted. The most notable is the collapse of $ 60 billion of the stablecoin project terraUSD (or UST for short) and its sister coin LUNA.

Three Arrows Capital, or 3AC, one of the industry’s key crypto hedge funds failed shortly thereafter, bringing down a host of crypto brokers and lenders such as Voyager Digital and Celsius.

The big problem is that everyone is borrowing from each other. This will only happen smoothly if the prices of all cryptocurrencies continue to rise sharply. Meanwhile, by June, Bitcoin and Ether both lost more than half their value in a year.

“Leverage is at the root of all the booms in financial institutions, both traditional and crypto markets,” said Hart Lambur, a hedge fund and money manager. Lehman Brothers, Bear Stearns, Long-Term Capital, Three Arrows Capital and now FTX have all become giant bubbles because of leverage.”

When the dominoes began to collapse, SBF managed to save several crypto companies before it was too late with hundreds of millions of dollars in support. In some cases, SBF even tried to acquire these companies.

Amid the wave of bankruptcy, some investors who loaned money to Alameda have demanded repayment. Of course, the company couldn’t respond as the entire borrowed money was used for venture capital – a decision the SBF later said was “probably not really worth it”.

To fulfill its debt payment obligations, FTX borrows customers’ deposits and silently guarantees Alameda. Loans up to billions of dollars. Bankman-Fried acknowledged this in an interview with the Times, but declined to disclose the exact number.

“It’s basically bigger than I thought,” Bankman-Fried told the Times. “And in fact, the risk of falling prices is huge.”

According to CNBC, unauthorized use of client funds is a violation of FTX’s own terms and conditions. For Wall Street, this behavior clearly violated US securities laws.

FTX s collapse in the blink of an eye From a trading floor making 1 million a day exploding to buy back Goldman Sachs to a burden of 1 million debtors CEO resigns | Technological iced tea

FTX extracted customers’ assets as collateral for loans, then covered it up with a new trading code.

“FTX and Alameda have an extremely troubled relationship,” Nic Carter of Castle Island Venture told CNBC. “Bankman-Fried runs both the exchange and the backing company. This is unorthodox and not allowed in the market.”

Often, companies create a lot of crypto tokens to entice users, when their real value is merely a form of speculation hoping the price will increase.

The bottom line is that FTX extracted customer assets as collateral for loans, then covered it up with a new trading code. The play is similar to the story of energy company Enron nearly two decades ago: concealing losses by transferring underperforming assets to subsidiaries that are not on the balance sheet, then create complex financial instruments to conceal.

As all of this unfolded, Bankman-Fried continued to speak and was named one of the great young tech entrepreneurs. Things only began to unravel after Bankman-Fried got into a public controversy with Binance – a rival exchange.

In 2019, Binance announced a strategic investment in FTX. This exchange announced the purchase of FTX Token (FTT) to serve the sustainable development of the FTX ecosystem. A few years later, in the summer of 2022, for unknown reasons, Bankman-Fried urged regulators to oversee Binance, while openly criticizing the exchange.

On November 2, CoinDesk reported on a balance sheet, showing that a significant amount of Alameda’s assets are held in FTX’s illiquid FTT token. Many questions have been raised about the company’s solvency as well as FTX’s financial condition.

“Due to recent revelations that have come to light, we have decided to liquidate the remaining FTTs,” said CZ, CEO of Binance.

Investors then raced to withdraw their funds from FTX. As of November 6, according to Bankman-Fried, the exchange has lost about $5 billion with tens of millions of dollars in record withdrawals every day.

According to Fabian Astic, head of decentralized finance and digital assets at Moody’s Investors Service: “Cryptocurrency players are more responsive to news and rumours. A liquidity crisis follows that much faster than in traditional financial markets.”

On November 11, FTX and Alameda both filed for bankruptcy. FTX, valued at $32 billion earlier this year, has frozen all transactions and customer assets. Bankman-Fried is also no longer the owner of both companies.

Recently filed bankruptcy filings show that FTX may have more than 1 million creditors. The exchange has had to deal with dozens of US and foreign regulators over the past 72 hours, including the US Attorney’s Office, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The SEC and Department of Justice are also reportedly investigating FTX for civil and criminal violations of securities laws.

Follow: CNBC

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