[Introduction] Half a year ago, the collapse of the stable currency TerraUSD and its sister token Luna coin triggered a domino in the currency circle. Sam Bankman Fried, founder of the cryptocurrency exchange FTX, chose to borrow money to finance some companies that were on the verge of extinction; With the bankruptcy of these companies, FTX's inability to pay the loan also surfaced. The recent split with Coin An has made a final conclusion for the demise of FTX. From his wealth of $32 billion to the application for bankruptcy protection, Fred has a track to follow.
Compilation/Tang Feng
A decentralized SWAP project named "Kimchi" (Kimchi) was launched, making the name Sam Bankman Fried appear in people's eyes.
It was 2017 at that time. As a quantitative trader of Jane Street Capital, Fred noticed an interesting thing when he checked the page listing the Bitcoin prices of various exchanges in the world on the CoinMarketCapital website. Today, the price of Bitcoin on each exchange is almost the same. At that time, he sometimes saw that the price difference of Bitcoin on different exchanges was as high as 60%. His instinctive reaction is that he should do arbitrage trading - buy Bitcoin on the exchange with a lower price, and then sell it on the exchange with a higher price to earn a price difference.
Fred once said in September: "That's the easiest fruit to pick."
At that time, arbitrage opportunities in South Korea were particularly "attractive", where the price of Bitcoin listed on the exchange was far higher than that of other countries. People named this price difference after the traditional Korean pickled pickles, and called it "Kimchi Premium".
A month after setting foot in the market in person, Fred set up his own trading company, named after Alameda, his hometown near San Francisco, California, called Alameda Research. This is not only to expand opportunities, but also to devote himself to this transaction. In an interview in September, he said that sometimes the company's revenue can reach $1 million a day.
One of the reasons why Fred became famous for his relatively simple trading strategy is that five years ago, it was not easy to execute such transactions in the cryptocurrency market. To do bitcoin arbitrage trading, it is necessary not only to establish a connection with each trading platform, but also to build other complex infrastructure to support transaction operations. Alameda Research Company has done a good job in this field, and money will naturally come in.
Since then, Fred's "empire" has expanded rapidly.
The beginning of expansion
Stimulated by the success of Alameda Research Company, Fred launched the cryptocurrency exchange FTX in the spring of 2019. The success of this exchange gave birth to a $2 billion venture fund, providing "seeds" for other cryptocurrency companies. For Fred himself, his personal wealth peaked in March this year, breaking through $16 billion.
Fred suddenly became the "spokesman for walking" of cryptocurrency. FTX signs can be seen everywhere in Formula One racing, Miami basketball court, etc. At the age of 30, he began an endless tour of interviews, boasting that his balance sheet could one day buy Goldman Sachs. He has also become a frequent visitor to Washington - he is one of the main donors of the Democratic Party, promising to invest $1 billion in the political campaign in the United States, but later withdrew this commitment.
However, all this is just a mirage.
The price of cryptocurrency fell sharply this year, but Fred boasted that he and FTX enterprises were not affected. But in fact, the overall collapse of the entire industry had a huge impact on his business. In spring and summer, Alameda Research Company borrowed money to invest in some digital asset companies that were on the verge of bankruptcy, hoping to maintain the survival of this industry. Later, it was reported that the company withdrew deposits from FTX customers to meet margin requirements and repay imminent debts. Fred had a "Twitter war" with the CEO of his competitor Binance, bringing the matter into public view.
A series of subsidiaries founded by Alameda Research Company, FTX and Fred have filed for bankruptcy protection in Delaware. He resigned from the leadership of these companies, and his personal wealth evaporated 94% in one day. It is not clear where he is now, but his $40 million Bahamas penthouse is on sale. Now, his big picture is still posted on the FTX advertisement in downtown San Francisco, reminding everyone of his collapsed "empire".
Fred changed from "hero" to "villain" overnight, but there are traces to follow.
In September, Fred said in an interview that one of his basic principles in playing market games is to persist even if there is insufficient information.
"When you can start to quantify and roughly understand what is happening, but understand that there are many things you do not know, you know that it is only an approximation, but in any case, you should try to figure out what trade to do." He said at the time.
By synthesizing various reports, we can describe the whole picture of Fred's investment in cryptocurrency: he is too risky, almost crazy to cover up his mistakes with suspicious, perhaps illegal strategies, surrounded by a group of advisers who are unwilling or unable to stop him.
Where is the cause of the collapse?
It is reported that some time two years ago, Alameda Research Company began to borrow money for various purposes such as venture capital.
Six months ago, due to the low price of tokens, the market liquidity was sucked away, and a wave of giants in the encryption field collapsed. First, the collapse of the stable currency TerraUSD and its sister token Luna, which is linked to the US dollar, wiped out US $60 billion of assets and led to the bankruptcy of Three Arrow Capital, which was once one of the most respected cryptocurrency hedge funds in the industry. Cryptocurrency brokers and lending institutions, such as Voyager Digital and Celsius, had a large exposure to Sanjian Capital, so they soon collapsed one after another.
At that time, everyone was borrowing money from each other, and only when the price of all cryptocurrencies continued to rise could this practice be maintained. By June, the prices of Bitcoin and Ethercoin had dropped by more than half.
Hart Lambur, a former government bond trader at Goldman Sachs Group, said: "Leverage is the root cause of every implosion of financial institutions, whether it is traditional assets or crypto assets." When he worked at Goldman Sachs Group, he provided liquidity for US treasury bonds for central banks, fund managers and hedge funds.
"Lehman Brothers, Bear Stearns, Long Term Capital, Sanjian Capital and now FTX have all gone bankrupt because their bad leverage has been sniffed out by the market and used." Lambour said that he is now engaged in diversified financial business.
With the fall of dominoes, Fred also joined the ranks of borrowing money in June, trying to rescue some cryptocurrency companies that were on the verge of bankruptcy before it was too late, and provided them with hundreds of millions of dollars in financing. In some cases, he also tried to acquire these companies at a very low price.
In the wave after wave of bankruptcy, some lenders of Alameda Research asked for a refund, but the company has run out of money. In a recent interview, Fred said that his trading company invested the borrowed money in venture capital, and this decision "may not really be worth it".
It is reported that FTX has quietly misappropriated customer deposits, amounting to billions of dollars, in order to repay debts. Fred admitted this in an interview, saying that Alameda Research Company had a huge "deposit position" in FTX, but he refused to disclose the specific amount.
He said: "This money is much more than I expected. The downside risk is very big."
Some media reported that the rescue fund was about $10 billion, of which $1 billion to $2 billion in emergency financing has now disappeared. Unauthorized misappropriation of customer funds violates FTX's own terms, and on Wall Street, this behavior clearly violates the U.S. securities law.
FTX and Alameda Research, one of the largest cryptocurrency brokers in the world, and the other is one of the largest cryptocurrency buyers in the world. There should be a "firewall" between them, but Fred admitted that they are very close, even he and Caroline Ellison, CEO of Alameda Research There was an edge between them.
Nick Carter of Castle Island Venture, a public blockchain and crypto asset venture capital firm, said that the relationship between FTX and Alameda Research was very problematic: "Fred runs an exchange and a broker dealer at the same time, which is very abnormal, and is not allowed in the capital market that is actually regulated."
The loan plan between the two companies is not just to divert customers' funds to plug the loopholes. It is reported that FTX tries to cover up financial loopholes by using two basically invented cryptocurrencies to replace customer assets: one is FTX Token (FTT), which is the cryptocurrency created by FTX itself, and the other is Alameda, which is the cryptocurrency jointly created and promoted by FTX and Alameda Research Company.
Many companies have been producing cryptocurrency, which is a major source of funding for the cryptocurrency boom in the past two years. These cryptocurrencies usually provide users with some benefits, but for most traders, their real value is simply speculation: hoping that prices will rise. The promise of FTT investors is that they can enjoy lower transaction costs on the FTX platform and earn interest and some rewards, such as free blockchain fees. Although investors can indeed benefit from the appreciation of FTT and other cryptocurrencies, these cryptocurrencies are largely free from regulatory constraints and are vulnerable to market downturn.
Essentially, the value of FTT and Alameda lies in people's judgment on the value of FTX exchange, because most tokens of these two cryptocurrencies are controlled by the exchange. In other words, the price of FTT reflects investors' confidence in the FTX Exchange.
Then came the key point: it was reported that FTX took away the customer's assets as loan collateral, then used the two cryptocurrencies it randomly created to cover up the matter, and only injected a small part of tokens into the public market. The financial "acrobatics" between FTX Exchange and Alameda Research Company is a bit like the collapse of Enron, an energy company, 20 years ago. At that time, Enron covered up its losses by transferring its underperforming assets to off balance sheet subsidiaries, and then created complex financial instruments to cover up this behavior.
At the same time, Fred also shuttled through various media reports. At that time, he was known as one of the greatest young technology entrepreneurs in the contemporary era. The collapse did not begin until he had a public dispute with his competitor, Yuan An.
Breaking face with Coin An, FTX accelerated collapse
The relationship between Jean and Fred almost dates back to the latter's entry. In 2019, King'an announced its strategic investment in FTX, and said that as part of the transaction, the company had built a position of "long-term FTT position to help achieve sustainable growth of the FTX ecosystem".
In the summer of 2022, Fred pressed the regulatory authority to investigate the security of the currency and made a public criticism of the exchange. At present, the specific reason is not clear, which may be based on reasonable doubt, or it may simply be because Jin'an is the main competitor of FTX: it is not only a friend of the exchange, but also a potential buyer of other troubled cryptocurrency companies.
But then, Zhao Changpeng, CEO of Jin'an, quickly seized the opportunity to fight back.
On November 2, CoinDesk, the world's leading blockchain media and digital community, released a leaked balance sheet. This document showed that a considerable part of the assets of Alameda Research Company were held in the form of FTT, which led to external doubts about the company's solvency and FTX financial status.
On November 6, Zhao Changpeng said on Twitter that Yuan'an has FTT and BUSD worth about 2.1 billion dollars, and the latter is its own stable currency. He then threw out a heavy bomb: "Due to the recently exposed news, we have decided to liquidate all the remaining FTT on the book."
One stone provoked a thousand waves, and FTX investors began to rush to withdraw their capital. According to Fred's data, on November 6, investors withdrew about $5 billion, while before that, the average daily net inflow of the exchange was tens of millions of dollars.
The light speed withdrawal of investors highlights the fact that the basically unregulated cryptocurrency market often operates in an information vacuum, which means that when new facts are exposed, traders will react quickly.
Fabian Astic, director of decentralized finance and digital assets at Moody's Investors Service, said: "Cryptocurrency players react faster to news and rumors, which leads to a liquidity crisis in the cryptocurrency market much faster than in traditional financial markets."
Astick said: "The opacity of market operations often leads to panic reaction, which leads to liquidity contraction. The development history of Celsius, Sanjian Capital, Voyager and FTX shows that cryptocurrency investors are prone to lose confidence, and then withdraw large amounts of funds, leading to the death of these companies."
FTT plummeted with the large-scale divestment, and Fred also began to quietly seek investors to make up for the gap caused by FTX's misappropriation of customer funds. According to several reports, this gap may be as high as $10 billion. However, all the people he was looking for refused. In despair, Fred had to ask Zhao Changpeng for help.
Zhao Changpeng said in a tweet publicly released on November 8 that Yuan'an agreed to acquire FTX Exchange, but this transaction has a key legal term: non binding. The news that FTX needed to be rescued was suddenly made public, which led to the collapse of FTT value.
The next day, Zhao Changpeng claimed that he had done due diligence, but was not satisfied with the results, and almost concluded that FTX was doomed. Fred speculated in an interview that Zhao Changpeng had no intention of acquiring FTX from the very beginning.
On November 11, FTX and Alameda Research filed for bankruptcy protection. In a financing round earlier this year, FTX once had a valuation of $32 billion, but now it has frozen transactions and customer assets, and sought to get the bankruptcy court to approve debt relief. Fred is no longer the boss of these two companies.
A new bankruptcy application document shows that FTX may have more than 1 million creditors.
FTX's lawyer wrote in the document that the exchange has contacted dozens of regulatory agencies, including the U.S. Attorney's Office, the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission. It is reported that the U.S. Securities and Exchange Commission and the U.S. Department of Justice are investigating FTX's suspected civil and criminal violations of U.S. securities laws. It was also reported that the Bahamas' financial regulatory authority was also conducting an investigation because the exchange may have engaged in criminal misconduct.
Now, Coin Safety can be said to have occupied an absolutely dominant position in the industry.
"All these developments have obviously made the currency security more powerful," said William Quigley, the co-founder of Tether, a stable currency linked to the US dollar. "Zhao Changpeng claims that Yuan'an has no debt, and does not use BNB as collateral. In the highly volatile cryptocurrency market, these two things can be said to be reassuring."
Quigley added that it is likely that more institutional transactions and custody transactions will be transferred to Cai'an.
Clara Medalie, research director of Kaiko, a data company, said: "The whole idea of the cryptocurrency industry is based on disintermediation and decentralization. Therefore, the growing dominance of monetary security has triggered reasonable concerns about how further centralization will affect ordinary traders."
Meidali said in an interview: "The collapse of FTX is not good for anyone, even for Coin An, who will now face more and more questions because of its monopoly market activities." She speculated that the market participants that we see now affected by the collapse of FTX and Alameda Research Company may be just the tip of the iceberg.
"Each entity has entangled and overlapping financial links with various projects in the whole industry, and these projects may lose support or even collapse now," she said.
At the same time, Yuan'an also suffered huge losses due to the collapse of FTT. According to Zhao Changpeng, after Fred asked for help, Yuan'an still held this cryptocurrency.
On November 14, Zhao Changpeng wrote on Twitter: "It was completely open to say that Coin An never short FTT. After Fred called me, we stopped selling FTT. Now we still have a big bag in our hands. This call is really expensive."
