By Jevan Soyer. Samuel Bankman-Fried better known as SBF was once the Golden Boy of crypto. He was compared to JP Morgan at one time and now he is being compared to Bernie Madoff. He was the CEO of a massive crypto exchange FTX and also had his own Venture Capital firm, Alameda Research.
At his peak, the 30-year-old was worth 26 billion dollars, but it all came crashing down for SBF as FTX filed for chapter 11 bankruptcy in mid-November. The question on everyone’s mind is, how did a 40-billion-dollar empire vanish in a matter of days?
Then, to be dubbed, “Worse than ENRON” by John J Ray III, attorney and insolvency professional and current CEO of FTX. John J Ray III was appointed CEO of ENRON after its collapse and was able to recover $828.9 million to its creditors, and is uniquely qualified to make such a comparison.
FTX started in 2019 and expanded in 2021
SBF founded the Venture Capital firm Alameda Research in 2017 and made a fortune through arbitrage trading, before starting FTX in 2019. In 2020, he rose to prominence as a crypto saviour for helping Sushi Swap, when the creator of that decentralised exchange disappeared and abandoned the project.
FTX expanded gradually through the beginning of 2021, but the company started courting the general public through partnerships with sports and celebrities Tom Brady and Shaquille O’Neil. Its profile and trade volume increased significantly in a few months. FTX head signed sponsorship agreements with the Esports team Solomid for a period of 10 years for 210-million-dollars. SBF also signed a deal with the Miami Heat’s arena for 19 years at a cost of 135 million dollars.
Elite athletes could be seen in FTX commercials and promoting cryptocurrency to an expanding audience. These athletes included Naomi Osaka, Steph Curry and even the Mercedes Benz Formula One Racing Team. 2022’s Super Bowl commercial which starred comedian Larry David further added to FTX’s campaign.
FTX raised enormous amounts of money from investors, including a one-billion-dollar series B in July 2021, another 421 million in October 2021, and an additional 400 million dollars in January 2022. FTX staged its own crypto conference in the Bahamas, which featured celebrities like former US President, Bill Clinton, and former UK Prime Minister, Tony Blair.
Acts of altruism funded by depositors’ money
SBF is a fervent believer in “Effective Altruism Theory”. This was used to explain why he gave so much of “his money” away to charities, bailed out failing cryptocurrencies, advocated against climate change for green energy, donated to politicians, and expected no financial rewards in return.
In essence, SBF tried to make as much money as possible through FTX and cryptocurrency trading to give it all away and help the world. It would then be revealed that it was depositors’ money that was funding all these acts of altruism.
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In the run-up to the 2024 US Presidential elections, he stated that he might donate up to one billion dollars for the elections, although he later pulled back that statement. So far, SBF is the second to George Soros in terms of campaign contributions to the US Democratic Party, donating 40 million dollars to date. He has donated 26 million dollars to the republican party as well.
When the cryptocurrency market tanked in early 2022, SBF bailed out bankrupt companies like Voyager Digital and BlockFi that had exposure to Terra’s USD and Luna. It is now speculated that these bailouts were in fact to protect FTX, as these companies held huge reserves of FTT, FTX’s token. If these companies were left to fail, they could bring down the price of FTT and the eventual collapse of FTX.
Red flag for the experts
In August 2022, SBF stated on the Decrypt Media podcast that saving Voyager Digital would likely be 70 million dollars down the drain. He seemed cool about saving Voyager and did not anticipate the money being paid back. He told Decrypt Media, “There’s 70 million dollars that we knew we might never see again.”
Many experts at this point started seeing SBF’s casual demeanor as a red flag. This is when the first questions arose of what were the sources of SBF’s money to bail out failing crypto companies. At the time, SBF who had a net worth of billions justified his bailouts of Voyager Digital and BlockFi as being in the best interest of the customers and cryptocurrency as a whole.
Rumours started swirling that behind the scenes, SBF was inappropriately using FTX customer funds to stop the losses at Alameda. FTX and Alameda are separate companies, FTX being an exchange.
FTX’s business model was simple, customers trade on the FTX platform and FTX would charge a commission. Alameda on the other hand was for all intents and purposes a cryptocurrency hedge fund, investing deposits and then making money on the resulting profits.
Most of Alameda’s investments did not pan out, that is why SBF had to step in to save Alameda. Alameda was holding billions of dollars in FTT tokens, so just like Voyager and BlockFi, if left to fail, the house of cards would collapse.
When things got out of hand
In the second week of November 2022, things started to get out of hand. It all started with a report concerning Alameda Research’s illiquid FTT Holdings and the disparity in FTT’s Market valuation. FTT tokens had a 3.35-billion-dollar liquid market cap whereas Alameda had FTT Holdings worth 5.5 billion in debt leverage and collateral.
Following the publication of the Coindesk article, Binance CEO Changpeng Zhao, also known as CZ, announced on Twitter that the company is liquidating all of its FTT assets which were acquired by the exchange as part of its withdrawal from FTX Equity in 2021. Binance was one of the earliest investors in FTX.
Binance received around 2.1 billion dollars in cash equivalent including FTT tokens. CZ’s tweet caught people’s attention, more than the actual liquidations.
Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won't pretend to make love after divorce. We are not against anyone. But we won't support people who lobby against other industry players behind their backs. Onwards.— CZ 🔶 Binance (@cz_binance) November 6, 2022
FTX’s native token FTT was heavily sold as a result. It was the main reason for CZ’s decision to publicly liquidate FTT and call out his recent entry into politics and advocating for the cryptocurrency sector to be regulated.
The next day, SBF tried to make sure that everything was looking okay with the exchange and that his rival was spreading false information. It did not work, FTT’s price dropped below 20 dollars putting pressure on FTX.
Just one day after, SBF assured the cryptocurrency community that everything was alright and that it had the resources to support customer assets. It was revealed that FTX was experiencing a severe liquidity issue and that it was preparing to sell its Global exchange to Binance.
Then 48 hours later, Binance said it had withdrawn from the deal after reviewing FTX’s internal books and realising that the matter was too far gone. SBF was seeking to acquire 8 billion dollars in emergency cash to cover consumer withdrawals. This suggested that user funds were mishandled.
Alameda Research offered to buy the FTTs off of CZ at market value. He instead opted to dump them on the open market causing the value of the token to further decrease in value.
Collapse of FTX spreading like a virus
At this point, anyone who had money in FTX was trying their hardest to get it out with the recent falls of 3 Arrows Capital and Celsius fresh on every crypto investor’s mind. The fact that Luna and Do Kwon was just 6 months ago, created a bank run that had never been seen before. Six billion dollars was withdrawn in just 72 hours; everyone was willing to take a loss instead of losing everything.
Whether CZ’s actions were motivated by him trying to eliminate a competitor, seeking revenge for SBF activities in politics, or in the best interest of the cryptocurrency ecosystem, we will never know. Following the collapse of FTX, all the dirty little secrets started coming to light, SBF’s living arrangements with his 10 roommates in a penthouse apartment in the Bahamas, their sexual proclivities, and Caroline Ellison, the head of Alameda Research being SBF’s ex-girlfriend and her self-professed drug use.
What makes this situation unique is the fact that institutional investors were caught up in the collapse of FTX. Normally, it is the individual investor that is left holding the bag, as global hedge funds have teams of financial researchers, economists and accountants doing due diligence on companies that they invest in. Even though all the red flags were there from the beginning, investors like Softbank and Sequoia Capital have lost millions of dollars.
FTX is said to have millions of creditors, owing the top 50 creditors more than 3 billion dollars. Since SBF had his hands in almost every financial sector, the collapse of FTX is spreading like a virus, pulling down the entire financial services industry. The question is if professional investors have fallen victim to what could be the largest example on financial mismanagement, if not fraud.
For over 10,000 years, gold has been a store of wealth. It has uses other than this, in electronics, jewellery, dentistry, aerospace, cosmetics, printing, making glass, and the list goes on. So, as an investment option, not has gold only stood the test of time, but it also has an intrinsic value.
7 Ways to invest in gold
|GOLD INVESTING METHOD||DESCRIPTION||PROS||CONS|
|Gold jewellery||Jewellery like rings, necklaces, and bracelets made with gold.||-Easy to acquire|
-Has value to the acquirer
-Questionable resale value
|Gold bullion||Gold formed into bars or ingots.||-Direct exposure to the price of gold|
|-High costs for storage and insurance|
-No upside beyond gold price changes
|Gold coins||Coins made from gold.||-Direct exposure to the price of gold|
-No upside beyond gold price changes
-Cost of storage
|Gold stocks||Equity ownership in a publicly traded gold mining, streaming, or royalty company.||-Upside to the price of gold from production growth|
-Potential to earn dividend income
|-Risk of underperforming the price of gold|
-Exposure to other commodities
|Gold certificates||Proves ownership of a specific amount of gold.||-Direct exposure to the price of gold|
-No need to own physical gold
|-Only as good as the company that backs them|
-Only a few companies issue them
|Gold ETFs and mutual funds||Exchange-traded funds (ETFs) and mutual funds that own physical gold bullion or shares of gold mining stocks.||-Highly liquid|
-Risks underperforming the price of gold
|Gold futures and options||Derivative contracts that provide exposure to the price of gold.||-Direct exposure to the price of gold|
-No need to own physical gold
-Potentially costly to roll contracts forward
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