This Is How Sam Bankman-Fried’s $32 Billion Crypto Empire Vanished Overnight

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Sam Bankman-Fried had become famous from the Kimchi Swap. In 2017, he identified the price of bitcoin to be higher in Korea than it was in the rest of the world. This was called the Kimchi Premium.

After this, he created his own trading house called Alameda Research. Through this, SBF was able to develop connections to each one of the trading platforms, as well as build out other complicated infrastructures to abstract away a lot of the operational aspects of making the trade. He became huge and earned exponentially more every day. He became the face of crypto and his FTX logo was everywhere.

As crypto prices dwindled this year, Bankman-Fried boasted that he and his enterprise were immune. However, it was all a scam. His Twitter feud with Binance CEO brought this to light. 

Alameda, FTX, and a host of subsidiaries Bankman-Fried founded have filed for bankruptcy protection in Delaware. He’s stepped down from his leadership roles and lost 94% of his personal wealth in a single day.

Bankman-Fried told CNBC in September that one of his fundamental principles when it comes to playing the markets is working with incomplete information.

“When you can sort of start to quantify and map out what’s going on, but you know there are a lot of things you don’t know,” he said. “You know you’re being approximate, but you have to try to figure out what trade to do anyway.”

The downfall is claimed to have started when Alameda started borrowing money for various purposes, including making venture investments.

Everyone was borrowing from one another but the price of all those crypto coins was only going downhill. 

“Leverage is the source of every implosion in financial institutions, both traditional and crypto,” said Hart Lambur, a former Goldman Sachs government bond trader who provided liquidity in U.S. Treasuries for central banks, money managers, and hedge funds.

?Lehman Brothers, Bear Stearns, Long-Term Capital, Three Arrows Capital, and now FTX all blew up due to bad leverage that got sniffed out and exploited by the market,” said Lambur, who now works in decentralized finance.

Alameda’s lenders started asking for their money back. But Alameda didn’t have it!

“FTX and Alameda had an extremely problematic relationship,” Castle Island Venture’s Nic Carter told CNBC. “Bankman-Fried operated both an exchange and a prop shop, which is super unorthodox and just not really allowed in actually regulated capital markets.”

They did not just use customer funds to make up for bad trading bets. FTX tried to cover it by denoting assets in two crypto tokens that were essentially made up — FTT, a token created by FTX, and Serum, which was a token created and promoted by FTX and Alameda, according to financial filings reported by Bloomberg’s Matt Levine.

Investor confidence in FTX was reflected in the price of FTT.

In 2019, Binance announced a strategic investment in FTX and said that as part of a deal it had taken “a long-term position in the FTX Token (FTT) to help enable sustainable growth of the FTX ecosystem.”

In 2022, Bankman-Fried started pressing regulators to look into Binance and criticizing the exchange in public. 

Now, the Binance CEO, Changpeng Zhao, known as CZ has the chance to retaliate and that’s exactly what he is doing. 

He said, “Due to recent revelations that have come to light, we have decided to liquidate any remaining FTT on our books,” he said.

Investors raced to pull money out of FTX. On Nov. 6, according to Bankman-Fried, the exchange had roughly $5 billion of withdrawals, “the largest by a huge margin.” On an average day, net inflows had been in the tens of millions of dollars.

On Friday, Nov. 11, FTX and Alameda both filed for bankruptcy.

“Binance clearly comes out stronger from all of this,” said William Quigley, co-founder of the U.S. dollar-pegged stablecoin tether. “CZ claims Binance has no debt and doesn’t use its BNB token as collateral. Both of those are good practices in the highly volatile crypto markets.”

“The cryptocurrency industry’s entire ethos is founded on disintermediation and decentralization, so Binance’s ever-growing dominance raises reasonable fears over how to further centralization will affect the average trader,” said Clara Medalie, director of research at data firm Kaiko.

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