Not too long ago, Sam Bankman Fried, the founder of FTX, was the richest man under the age of 30. He had a net worth as high as $27 billion, and he was even making moves to potentially acquire Robinhood. Likely the most impressive part about his success though was that he was one of the few billionaires that were able to maintain a relatively positive public image. Popular finance YouTubers like Meet Kevin, Andrei Jikh, Financial Education Jeremy, and even Graham Stephan constantly pitched FTX as the go-to crypto exchange. They described Sam as a philanthropic hippie who just wanted to help people, and I fed into this perception as well. While I’ve never done a sponsorship with FTX or anyone else for that matter, I did post a rather positive video about Sam Bankman exactly a year ago. And let’s just say Sam was great at playing this philanthropic monk role.
He didn’t live in some sort of California estate with his fellow tech billionaires. Instead, he lived in the Bahamas with 10 roommates and drove a Toyota Corolla. But, likely the most appealing feature of Sam for many was what he was planning to do with all his money. From the very beginning, Sam made it clear that his primary goal in making money was to give it away. He lived by this ideology of earning to give, which was undoubtedly extremely popular with the masses. But, at this point, Sam doesn’t exactly have much to give because the vast majority of his fortune literally got Thanos snapped. In fact, Forbes estimates that Sam is no longer even a billionaire, and the majority of his net worth today likely actually comes from his Robinhood stake. But, how did things U-turn so quickly? Well, let’s just say that Sam went from promising to bail out everyone with his philanthropy to needing an $8 billion bailout himself for FTX. Now, to be clear, FTX says that only the international branch of FTX is under stress and that the US branch is fine, but take that for what you will. According to Forbes, FTX is now worth 0, Sam’s trading firm, Alameda research is worth 0, and FTX.US, well at the time of writing, says its valuation is unclear.
But, by the time you’re reading this, this could very well be 0 as well. So, here’s how Sam Bankman went from being the crypto superstar who made $27 billion in 4 years to lose 94% of his net worth in a single day.
If you’ve only been following media headlines, FTX’s liquidity crisis likely came as a surprise. One day, FTX was one of the most trusted crypto exchanges in the world, and the next day, they suddenly needed a bailout. But, in reality, the FTX situation has been developing for years and can be traced back to the origins of the company. If you take a look at why Sam founded FTX in the first place, you’ll see that it wasn’t due to a strong belief in crypto or bitcoin. In fact, Sam is pretty neutral on crypto as a whole. The reason he started FTX was that he saw the opportunity. Before starting FTX, Sam was a traditional wall street professional working at a trading firm called Jane Street Capital.
There, he specialized in trading international ETFs, but in 2017, he spotted an opportunity to trade something much more profitable: Bitcoin. At the time, there weren’t dozens of crypto exchanges that were all super well funded and had millions of users each. Most people who were into crypto preferred to keep the majority of their holdings in cold storage wallets and only used exchanges to buy and sell crypto. This led to relatively low volume across many exchanges leading to discrepancies in price. On one exchange Bitcoin might cost $10,000 while on another it might cost $10,100. If you were willing to buy it on the first exchange, transfer it over to the second, and then sell it, you’d instantly profit $100 on every Bitcoin you bought. And this is exactly what Sam set out to do with his first company, Alameda Research. After about a year of doing this, he realized that while arbitrage trading itself was quite profitable, the real money was made by the exchanges who were earning $50 or a $100 per Bitcoin without taking on any of the risks that Sam was. So, in early 2019, Sam set out to create his own crypto exchange: FTX.
But there was just one issue: he needed money. Fortunately for Sam, there were plenty of VC firms who were desperate to get into the crypto space including some heavy hitters like SoftBank, Tiger Global Management, and even Blackstone. This has allowed them to raise an impressive $1.8 billion over the past 4 years. Sam would turn around and spend this money on developing the firm, acquiring other crypto companies, and most important social media marketing. They must’ve spent hundreds of millions on marketing because they were everywhere all the time. And when you have so much exposure, you’re bound to get customers whether you’re good, bad, or otherwise. Now, I don’t think Sam was bad per se, but it does seem apparent that Sam was in it for the opportunity more than the crypto itself which is not exactly what you wanna hear. We’ve seen time and time again massive engineering companies and tech giants whether it be Intel, Boeing, and even Apple fall flat on their faces due to leaders who didn’t quite have the technical understanding or belief in the product. And if that’s the case with these juggernauts, it’s not surprising that it’s the case with FTX. But, not believing in crypto was just the first of FTX’s issues.
You would think that running a brokerage is relatively straightforward if you have customers. You charge customers a fee for connecting buyers and sellers, and it’s as simple as that. If FTX just stuck to this, they likely wouldn’t have run into any issues at all. But, as you might’ve guessed, brokerages often get greedy and look for um creative ways for generating extra revenue. In the case of FTX, this can be traced back to 2 risky practices, the first of which is noncash collateral. Whenever you have cash lying around at a bank, brokerage, or really any financial institution for that matter, it’s rarely kept as cash. Usually, the institution will take the cash and invest it to generate more revenue. They figure that only a very small portion of their customers will actually be withdrawing money at any given time. So, they keep some cash collateral for this, but the rest gets invested. Usually, most traditional institutions are forced by law to keep this collateral in cash, but when we’re talking about crypto brokerages, the rules aren’t as clear. Sam decided that it was a great idea to keep this money not in US dollars, Euros, Pounds, or even Bitcoin. He decided to keep it in a token that FTX themselves created called FTT. For the longest time, this seemed like a brilliant play given that the FTT token had rallied from just a few dollars to $70.
But, the thing to note is that such tokens not only outperform Bitcoin to the upside but also to the downside, and let’s just say Bitcoin hasn’t been performing so well. This itself likely added significant pressure onto Sam’s companies but the real crisis didn’t come until people started pointing this out on the internet. For obvious reasons, FTX customers started to feel a bit uneasy with FTX storing so much money in the FTT token. And the nail in the coffin came when Binance founder, CZ, announced that they were going to liquidate all of their FTT within the next couple of months. This essentially sparked a bank run FTT, causing FTT to fall back to where it started meaning that FTX’s collateral was now worth a lot less. Ideally, FTX should just be able to sell their investments and make up for any discrepancies in withdrawals but that brings us to their second risky practice which includes highly volatile leveraged investments. Usually, financial institutions invest their reserves into highly liquid safe investments like money market funds, bonds, and mortgages. In the past, we’ve seen that even that can lead to issues, so it’s no wonder why using these reserves to engage in leveraged crypto trading led to issues. And the worst part about all of this is that financial stress often operates in negative feedback loops. When customers hear that a given institution may be illiquid, they get scared and withdraw their money. This leads to the institution truly becoming illiquid even if they weren’t illiquid before. And given that most of the influencers who pitched FTX are now telling investors to withdraw their money, well if everything else didn’t already cause a financial crisis at FTX, this definitely did. And let’s just say it’s bad, it’s $8 billion bad.
If the $8 billion deficit didn't convince you that the FTX situation was bad, just listen to what Sam tried to do. Sam was so desperate to get a bailout that he approached his biggest competitor Binance and asked them to buy FTX out. At first, Binance agreed as this seemed like a slam dunk. Binance was already the largest crypto brokerage by far in terms of trading volume and acquiring FTX would just further solidify their position. But, it just took one look at FTX’s balance sheet for Binance to realize that this company was something that they’d like to stay far far away from. Binance would make an official statement that they would not pursue the FTX acquisition due to mishandling of customer funds and alleged US agency investigations. And that brings us to where we are today with Sam scrambling to put together $8 billion which is by no means an easy feat even for FTX. Here’s the thing, even at the peak, FTX was only worth $12.3 billion, so Sam is essentially asking investors to pay 66% of their peak valuation just to bail out the company. Who knows how much more money they’ll need to survive this exodus of customers? From an investor’s perspective, it makes no sense to pay so much money and voluntarily take on such a massive gamble. In fact, existing investors are already doing the exact opposite by writing off FTX as a complete loss. Sequoia, for example, sent out a letter to their partners stating that “Based on our current understanding, we are marking our investment down to $0.” And if you can’t convince existing investors who already have skin in the game to invest more money and save their investment, it’s gonna be virtually impossible to convince anyone else. So, personally, I think that it’s just a matter of time until FTX does officially go bankrupt if they haven’t already by the time you’re watching this. And even if by some miracle they survive, you probably don’t want to be keeping your crypto at an institution that doesn’t even believe in crypto and now has a history of mismanagement.
Whether FTX does end up collapsing or not, you can bet that regulators are going to use this situation as justification to crack down on the crypto industry. And honestly, that’s probably for the best. There’s a reason the banks and traditional brokerages are regulated so heavily. It’s because if they aren’t, it usually leads to ending customers like you and me being hurt. We’ve already seen two brokerages collapse this year: Celsius and Voyager, and FTX may just be an addition to that list. And the truth is, while I’m sure Sam is devastated that his company is on the brink of collapse and that his net worth has collapsed from $27 billion to not even a billion, it’s not like anything really changes for him. He still has a 7.5% stake in Robinhood, and unlike FTX, Robinhood actually has cash. In fact, Robinhood has $10 billion in cash and its cash reserves are literally worth more than its market cap. So, it’s more than likely that Robinhood will survive this recession and see the light of day at which point Sam will not only become a billionaire again but a multi-billionaire and even a Deca billionaire. The ones that are truly left holding the bag are FTX’s 5 million customers, Voyager’s 3.5 million customers, and Celsius's nearly 2 million customers. I mean, these three companies alone will have affected over 10 million people and that’s just the people affected by their direct fallout. If we’re talking about indirect effects, it’s likely tens of millions more. And if crypto really is the future, it appears to me that regulation is a must, but that’s just what I think. Do you agree? Comment that down below.