Bankman-Fried’s digital asset trading shop opened in 2017, but within two years of its inception it was trading around $600 million-$1 billion a day. Much of its funding has been based on borrowing, often using other cryptocurrencies as collateral to make highly leveraged bets, according to industry participants. The company, run by a small cadre of executives and ultimately controlled by Bankman-Fried, had close ties to FTX, a sprawling cryptocurrency exchange that allowed clients to bet on the price of digital tokens like bitcoin using complex derivatives. Bankman-Fried founded FTX about a year and a half after Alameda. As of this week Alameda owed the stock market $10 billion, according to people familiar with the matter. “The tipping point is not FTX, it’s Alameda and the credit risk they were taking,” said Rosario Ingargiola, founder and CEO of Bosonic, a crypto settlement service. Sam Bankman-Fried founded FTX about a year and a half after Alameda Research © Timon Schneider/Dreamstime Alameda ultimately ignited the flame that eventually engulfed FTX. A report by crypto publication CoinDesk on Nov. 2 claiming that $5.8 billion of the $14.6 billion in assets on Alameda’s balance sheet were coins issued by FTX, known as FTT, sparked deep concerns about the relationship between the two nominally separate entities. The report also said that a large portion of Alameda’s FTT had been used as collateral for loans to an unknown party. “That in itself should raise alarm bells, but the bigger question is: who had accepted billions of dollars worth of FTT as collateral?” asked Clara Medalie, an analyst at Kaiko, a cryptocurrency market research provider. The story deepened market suspicions about Alameda’s health and whether it was reeling from heavy market losses suffered in the spring crypto crisis. The balance sheet snapshot included the period when many big crypto names collapsed. Bankruptcy filings for one of them, Voyager Digital, revealed that Alameda owed the lender $376 million. In an initial indication of the liquidity problems facing Bankman-Fried’s empire, Alameda valued its holdings in FTT at nearly 200 percent of FTT’s prevailing market capitalization of $3.1 billion, according to the report.
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Caroline Ellison, Alameda’s chief executive, said Sunday that the balance sheet reflected only one of the company’s corporate entities and that the business had more than $10 billion in assets that were not reflected in the numbers. But the market was not convinced. A little more than an hour later on Sunday, Changpeng Zhao, CEO of rival exchange Binance, said it would dump FTT tokens worth at least $580 million in response to “recent revelations” and cited the example of luna, the cryptocurrency that collapsed overnight in May, creating a period of intense market turmoil. FTX customers also rushed for the exits. The stock market faced record withdrawals of about $5 billion on Sunday, and Bankman-Fried admitted this week that it had only $4 billion in readily tradable US dollar assets to cover it. Bankman-Fried put the miscalculation of his clients’ leverage down to “poor internal labeling of bank accounts.” On Monday, as FTX faced heavy withdrawals, Alameda sought to sell the most liquid assets. A snapshot of Alameda’s balance sheet, seen by the Financial Times, showed it was trying to liquidate shares it held in retail broker Robinhood, crypto tokens and seek a loan from FTX’s EU arm. However, only $1.8bn was immediate available despite its heavy obligations to FTX. By Tuesday clients were reporting difficulty withdrawing their funds, which only fueled market fears. “FTX is neither a trading company nor a lender, so in theory, they should have access to the equivalent of 100 percent of their clients’ funds at all times,” Medalie told Kaiko. Jean-Marie Mognetti, chief executive of CoinShares Asset Management, which has a $30.3 million exposure to FTX, said Bankman-Fried’s trading venue is “not an exchange, it’s much broader.” “Everything is integrated in this complicated way, which creates this black box,” he added. At the same time, FTT token holders also sold heavily, worsening Alameda’s position. A record 309 million FTT was traded on Tuesday, equivalent to more than $1 billion, according to Kaiko data, which traders attributed to FTX selling other assets in a bid to defend its currency’s price. However, the FTT price was still down 80% on Monday and Tuesday. Loans secured against FTT were underwater, creating a vicious cycle that Bankman-Fried sought to break. Looking for a lifeline, he turned to his arch-rival — Zhao at Binance — who agreed on Tuesday to buy the exchange. FTX “asked for our help,” Zhao tweeted, adding: “There is a significant liquidity crunch.” But after less than 48 hours of due diligence, on Wednesday Binance pulled out. Zhao cited concerns about FTX’s business practices and investigations by regulators. Sam Bankman-Fried on Thursday apologized via Twitter for the crisis: “Sorry. That’s the biggest thing. I screwed up and I should have done better” © Lam Yik/Bloomberg With his best bet gone, Bankman-Fried sought an alternative, asking investors for up to $8 billion to plug a hole in FTX’s balance sheet. He reached out to crypto exchange OKX, stablecoin provider Tether and Justin Sun, founder of cryptocurrency Tron, for cash infusions — but none materialized. Investors who were so ready to back him earlier in the year, such as Sequoia Capital and SoftBank, wrote down their investments. Bankman-Fried took to Twitter on Thursday to apologize for the crisis that befell his crypto empire. “I’m sorry. That’s the biggest thing. I screwed up and I should have done better,” he said, adding that Alameda would be closed. In a last ditch effort, he tried to reassure the market that FTX was solvent but not liquid and that users of her American arm was “fine.” Recommended It was too late. Within 24 hours, FTX and Alameda had filed for bankruptcy, and Zhao predicted the impact would push the industry into a crisis similar to the crash of 2008. US regulators are looking into FTX’s lending products and management of client funds, said a person with knowledge of the matter. For many the reason was clear. “It’s all rooted in lack of transparency and conflict of interest,” said Anish Puaar, head of European equity market structure at marketing firm Optiver. “You’ll never have a major stock exchange like the London Stock Exchange or Deutsche Börse so closely tied to a trader.”
