The Rise and Fall of Sam Bankman-Fried and FTX

Who Is Sam Bankman-Fried?

Sam Bankman-Fried is the son of two Stanford University professors: Barbera Fried and Joseph Bankman. He attended MIT from 2010 to 2014. And he graduated with a major in physics and a minor in mathematics.

From 2013 to 2017, he worked for Jane Street Capital as an ETF trader.

In 2017, he quit his job at Jane Street and became the director of development for the Center for Effective Altruism (CEA). The CEA is a nonprofit that advocates using reason and science in philanthropy decisions.

That same year, SBF founded Alameda Research, a quantitative trading firm. This is where the story of SBF’s life really gets going.

The Rise of Sam Bankman-Fried and FTX

In January 2018, SBF became interested in Bitcoin and cryptocurrencies. He noticed that the price of Bitcoin on Japanese exchanges was higher than in the U.S. Through his control of Alameda Research, SBF organized an arbitrage trade and moved up to $25 million of Bitcoin each day, buying Bitcoin in the U.S. and then selling it in Japan for a profit.3

Using the money he earned from this trade and others, SBF created his own cryptocurrency exchange, FTX, in 2019. The exchange focused on attracting high-risk traders who wanted to make leveraged bets on cryptocurrency.

FTX quickly drew the interest of VC crypto investors. Binance invested a stake in the company six months after it launched,4 and in January 2022, right after the crypto boom had peaked, FTX raised $400 million in Series C funding.5 These investments put the company at a $32 billion valuation, allowing SBF’s share to catapult him into the No. 1 position for richest crypto investor.

By the time the venture capitalists had put in their final round of funding, FTX had grown to be the second-largest cryptocurrency exchange by volume. Its leveraged derivative products were extremely popular with traders, and it had become so popular that only Binance had higher volumes.

But as they say, what goes up, must come down.

The Fall of FTX and Sam-Bankman Fried

From November 2 to 11, 2022, a series of events led to the collapse of FTX and SBF’s fortune.

November 2: Coindesk report

On November 2, a whistleblower at Alameda Research leaked its balance sheet to the crypto news site Coindesk.6 The document showed that Alameda had a significant portion of its assets invested in FTT, which is the native coin of FTX exchange. This led to speculation that Alameda may be insolvent and that the company may be covering up its bad accounting position with tokens that FTX was printing out of thin air.

November 5-6: Binance sells FTT

By the time the Coindesk report was issued, Binance had already sold its equity in FTX and had received FTT in return.

On November 5, over $580 million worth of FTT was moved from a wallet to a Binance account. The following day, Binance CEO Changpeng Zhao (known as CZ) admitted publicly that this transaction had been initiated by Binance. He announced that Binance was selling all of its FTT “due to recent revelations.” The total amount that would be sold would be $2.1 billion worth.

CZ said that the selloff would be done slowly so as to have minimal market impact.

November 7: “Bank-run” is revealed

On November 7, crypto analytics firm Nansen revealed that over $451 million worth of stablecoin had been withdrawn from FTX over the past seven days.7 This news caused panic among FTX users and led to even faster withdrawals.

Some customers were complaining that their withdrawals were taking a long time to process.

November 8: Binance offers to buy out FTX

On November 8, Sam Bankman-Fried admitted that FTX was suffering a “liquidity crunch” and that it had asked Binance to bail it out. CZ stated that Binance had entered a “letter of intent” to buy FTX but that due diligence had not been performed and he could still pull out of the deal.

November 9: The deal falls through

On November 9, CZ stated that he would not be buying FTX, thanks to “the latest news reports regarding mishandled customer funds and alleged U.S. agency investigations.” The FTX website went offline for nine hours. When it came back up, the front page contained a warning not to deposit because the exchange was having trouble processing withdrawals.

Millions of dollars of assets were owed to customers and could not be withdrawn, including $30 million owed to Coinshares, $18.1 million owed to crypto exchange Hbit, a “significant amount” owed to Galois Capital, and unknown amounts to various users who had failed to withdraw before the withdrawals stopped.

November 10-11: SBF apologizes and FTX files for bankruptcy

On November 10, SBF posted an apology tweet thread.8 On November 11, he resigned from FTX, and the exchange filed for bankruptcy.

Contagion spreads

The FTX collapse caused a contagion to spread through the crypto market, hitting major firms like Sequoia Capital, Genesis Global Capital, Blockfi, and Gemini. It also caused the crypto market as a whole to crash, pushing Bitcoin below $16,000 for the first time since [2020.

Sam-Bankman Fried’s net worth collapse

Because so much of Sam Bankman-Fried’s assets were tied up in FTX equity, Fortune magazine estimated that he lost $16 billion in net [citaiton id=”9″]worth.[/citation]

What Happened and How Can It Be Prevented in the Future?

Since the crisis started, there has been rampant speculation on social media as to what could have caused the collapse of the exchange. The most common explanation is that FTX must have loaned customer funds to Alameda, who used it to invest in risky and illiquid assets. CNBC claims to have an anonymous informant who has confirmed this theory.10 SBF may have simply assumed that withdrawals would remain small and therefore no one would notice that the exchange didn’t have enough cryptocurrency to back customers’ deposits.

However, no one has yet been able to prove this theory one way or another, and we won’t know what really happened until the bankruptcy proceedings are finished. It’s important to emphasize also that SBF has not been charged with any criminal offense at this point.

What is the solution?

In response to the crisis, a number of solutions have been offered to prevent an FTX-like event from happening again. Here are the three most prominent:

• Proof of reserves: Some exchange executives have argued that exchanges should produce a proof of reserves page that allows users to audit reserves in real time, and that users should not patronize exchanges that refuse to do this. Binance, OKX, and Kucoin have pledged that they will have proof of reserves pages within a month.
• Better regulation: Some experts have argued that the FTX collapse is caused by lawmakers’ neglect. According to this view, parliaments and congresses throughout the world have left crypto regulations vague, creating loopholes for people like SBF to get away with actions that wouldn’t be possible in the stock market or in banking. The solution is to come up with clear and fair regulations that will punish bad actors without harming honest participants.
• DeFi: Many developers of decentralized finance (DeFi) apps have argued that the FTX collapse happened because FTX is centralized. The solution, in this view, is for people to stop using centralized exchanges, except as gateways into the crypto world. In other words, users should not keep their crypto in an exchange.

Wrapping Up

So that’s what happened to FTX and Sam Bankman-Fried. The story of SBF serves as a cautionary tale of what can go wrong when entrepreneurs try to cut corners and take too many risks in their business practices.

This story also serves to illustrate the importance of good crypto security.