The beneath is an excerpt from the Bitcoin Journal Professional report on the rise and fall of FTX. To learn and obtain the complete 30-page report, comply with this hyperlink.
The Beginnings
The place did all of it begin for Sam Bankman-Fried? Because the story goes, Bankman-Fried, a former worldwide ETF dealer at Jane Road Capital, stumbled upon the nascent bitcoin/cryptocurrency markets in 2017 and was shocked on the quantity of “risk-free” arbitrage alternative that existed.
Specifically, Bankman-Fried stated the notorious Kimchi Premium, which is the massive distinction between the worth of bitcoin in South Korea versus different world markets (as a consequence of capital controls), was a specific alternative that he took benefit of to first begin making his hundreds of thousands, and ultimately billions …
Not less than that’s how the story goes.
The Kimchi Premium – Supply: Santiment Content material
The true story, whereas probably much like what SBF favored to inform to clarify the meteoric rise of Alameda and subsequently FTX, seems to be to have been one riddled with deception and fraud, because the “smartest man within the room” narrative, one which noticed Bankman-Fried on the duvet of Forbes and touted because the “modern-day JP Morgan,” rapidly modified to considered one of large scandal in what seems to be to be the most important monetary fraud in trendy historical past.
The Begin Of The Alameda Ponzi
Because the story goes, Alameda Analysis was a high-flying proprietary buying and selling fund that used quantitative methods to realize outsized returns within the cryptocurrency market. Whereas the story was plausible on the floor, as a result of seemingly inefficient nature of the cryptocurrency market/trade, the purple flags for Alameda have been evident from the beginning.
Because the fallout of FTX unfolded, earlier Alameda Analysis pitch decks from 2019 started to flow into, and for a lot of the content material was fairly surprising. We’ll embody the complete deck beneath earlier than diving into our evaluation.
The deck incorporates many evident purple flags, together with a number of grammatical errors, together with the providing of just one funding product of “15% annualized mounted price loans” that promise to have “no draw back.”
All evident purple flags.
Equally, the form of the marketed Alameda fairness curve (visualized in purple), which seemingly was up and to the correct with minimal volatility, whereas the broader cryptocurrency markets have been within the midst of a violent bear market with vicious bear market rallies. Whereas it’s 100% attainable for a agency to carry out effectively in a bear market on the brief aspect, the power to generate constant returns with close to infinitesimal portfolio drawdowns will not be a naturally occurring actuality in monetary markets. Truly, it’s a tell-tale signal of a Ponzi scheme, of which we now have seen earlier than, all through historical past.
The efficiency of Bernie Madoff’s Fairfield Sentry Ltd for almost 20 years operated fairly equally to what Alameda was selling through their pitch deck in 2019:
- Up-only returns no matter broader market regime
- Minimal volatility/drawdowns
- Guaranteeing the payout of returns whereas fraudulently paying out early buyers with the capital of recent buyers
Said returns by Bernie Madoff’s fund
It seems that Alameda’s scheme started to expire of steam in 2019, which is when the agency pivoted to creating an alternate with an ICO (preliminary coin providing) within the type of FTT to proceed to supply capital. Zhu Su, the co-founder of now-defunct hedge fund Three Arrows Capital, appeared skeptical.
Roughly three months later, Zhu took to Twitter once more to precise his skepticism about Alameda’s subsequent enterprise, the launch of an ICO and a brand new crypto derivatives alternate.
“These similar guys at the moment are making an attempt to launch a “bitmex competitor” and do an ICO for it. 🤔” – Tweet, 4/13/19
Beneath this tweet, Zhu stated the next whereas posting a screenshot of the FTT white paper:
“Final time they pressured my biz accomplice to get me to delete the tweet. They began doing this ICO after they could not discover any extra better fools to borrow from even at 20%+. I get why no person calls out scams early sufficient. Danger of exclusion larger than return from exposing.” – Tweet, 4/13/19
Moreover, FTT may very well be used as collateral within the FTX cross-collateralized liquidation engine. FTT obtained a collateral weighting of 0.95, whereas USDT & BTC obtained 0.975 and USD & USDC obtained a weighting of 1.00. This was true till the collapse of the alternate.
FTT Token
The FTT token was described because the “spine” of the FTX alternate and was issued on Ethereum as a ERC20 token. In actuality, it was largely a rewards based mostly advertising scheme to draw extra customers to the FTX platform and to prop up steadiness sheets. A lot of the FTT provide was held by FTX and Alameda Analysis and Alameda was even within the preliminary seed spherical to fund the token. Out of the 350 million complete provide of FTT, 280 million (80%) of it was managed by FTX and 27.5 million made their solution to an Alameda pockets.
FTT holders benefited from extra FTX perks corresponding to decrease buying and selling charges, reductions, rebates and the power to make use of FTT as collateral to commerce derivatives. To assist FTT’s worth, FTX routinely bought FTT tokens utilizing a share of buying and selling charge income generated on the platform. Tokens have been bought after which burned weekly to proceed driving up the worth of FTT.
FTX repurchased burned FTT tokens based mostly on 33% of charges generated on FTX markets, 10% of web additions to a backstop liquidity fund and 5% of charges earned from different makes use of of the FTX platform. The FTT token doesn’t entitle its holders to FTX income, shares in FTX nor governance choices over FTX’s treasury.
Alameda’s steadiness sheet was first talked about on this Coindesk article displaying that the fund held $3.66 billion in FTT tokens whereas $2.16 billion of that was used as collateral. The sport was to drive up the perceived market worth of FTT then use the token as collateral to borrow towards it. The rise of Alameda’s steadiness sheet rose with the worth of FTT. So long as the market didn’t rush to promote and collapse the worth of FTT then the sport might proceed on.
FTT rode on the backs of the FTX advertising push, rising to a peak market cap of $9.6 billion again in September 2021 (not together with locked allocations, all of the whereas Alameda leveraged towards it behind the scenes. The Alameda belongings of $3.66b FTT & $2.16b “FTT collateral” in June of this yr, together with its OXY, MAPs, and SRM allocations, have been mixed price tens of billions of {dollars} on the prime of the market in 2021.
The worth of FTT with a aspect profile displaying FTT buying and selling quantity on FTX (logarithmic scale)
FTT Market Cap (logarithmic scale) – Supply:CoinMarketCap
CZ Chooses Blood
In one determination and tweet, CEO of Binance, CZ, kicked off the toppling of a home of playing cards that in hindsight, appears inevitable. Involved that Binance can be left holding a nugatory FTT token, the corporate aimed to promote $580 million of FTT on the time. That was bombshell information since Binance’s FTT holdings accounted for over 17% of the market cap worth. That is the double edged sword of getting nearly all of FTT provide within the fingers of some and an illiquid FTT market that was used to drive and manipulate the worth larger. When somebody goes to promote one thing large, worth collapses.
As a response to CZ’s announcement, Caroline of Alameda Analysis, made a vital mistake to announce their plans to purchase all of Binance’s FTT on the present market worth of $22. Doing that publicly sparked a wave of market open curiosity to put their bets on the place FTT would go subsequent. Quick sellers piled in to drive the token worth to zero with the thesis that one thing was off and the chance of insolvency was in play.
Finally, this state of affairs has been brewing for the reason that Three Arrows Capital and Luna collapsed this previous summer time. It’s probably that Alameda had important losses and publicity however have been in a position to survive based mostly on FTT token loans and leveraging FTX buyer funds. It additionally is sensible now why FTX had an curiosity in bailing out firms like Voyager and BlockFi within the preliminary fallout. These corporations could have had massive FTT holdings and it was essential to preserve them afloat to maintain the FTT market worth. Within the newest chapter paperwork, it was revealed that $250 million in FTT was loaned to BlockFi.
With hindsight, now we all know why Sam was shopping for up the entire FTT tokens he might get his fingers on each week. No marginal patrons, lack of use circumstances and excessive threat loans with the FTT token have been a ticking time bomb ready to explode.
How It All Ends
After pulling again the curtain, we now know that every one of this led FTX and Alameda straight into chapter 11 with the corporations disclosing that their prime 50 collectors are owed $3.1 billion with solely a $1.24 money steadiness to pay it. The corporate probably has over 1,000,000 collectors which are due cash.
The unique chapter doc is riddled with evident gaps, steadiness sheet holes and an absence of monetary controls and buildings that have been worse than Enron. All it took was one tweet about promoting a considerable amount of FTT tokens and a rush for patrons to start out withdrawing their funds in a single day to reveal the asset and legal responsibility mismatch FTX was going through. Buyer deposits weren’t even listed as liabilities within the steadiness sheet paperwork offered within the chapter courtroom submitting regardless of what we all know to be round $8.9 billion now. Now we will see that FTX by no means had actually backed or correctly accounted for the bitcoin and different crypto belongings that clients have been holding on their platform.
It was all an internet of misallocated capital, leverage and the shifting of buyer funds round to attempt to preserve the boldness sport going and the 2 entities afloat.
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This concludes an excerpt from “The FTX Ponzi: Uncovering The Largest Fraud In Crypto Historical past.” To learn and obtain the complete 30-page report, comply with this hyperlink.
