The Downfall of FTX

Born on the 6th of March 1992 Sam Bankman-Fried grew up in a wealthy family, he sailed through school at the top of his class and attended MIT where he graduated with a degree in physics and a minor in mathematics. However his interests were elsewhere. With the popularity of cryptocurrency booming, millions of investors were rushing to the industry. Sam was one of these people with his sights aimed at the biggest crypto of them all – Bitcoin.

Bitcoin was the one cryptocurrency everyone wanted and you could make millions overnight. While Sam grew up in a rich family the thought of that kind of wealth made him dedicated on getting rich out of this. He would not rest until he was a billionaire and he knew Bitcoin would take him there.

While the price of Bitcoin changed day to day there was a difference in how much Bitcoin could be bought and sold for in different countries. He began to wonder, what if he bought Bitcoin exclusively in countries with a low price and then resold in countries with a higher price? This process is called Arbitrage and although it sounds dodgy it is completely legal. More than that it’s a risk-free investment strategy. To Sam there seem to be no downsides, at worst he wouldn’t make any money but if he could do it the right way, the smart way, he could be a billionaire. 

In 2017 Sam quickly set up a trading firm named Alameda research and began recruiting employees. In particular he wanted to work with people who believed in altruism, the concept of putting others first, donating wealth and doing as much as possible for the good of the world. His goal, he told his team, was to make one billion dollars from Arbitrage. They would use this money for good, donating to charities and helping the less fortunate.

“I want to get rich not because I like money but because I wanted to give that money to charity”, said Sam Bankman.

In a world full of greedy wannabe billionaires Sam Bankman Fried was a breath of fresh air. 

“Sam ran the shop, Sam ran everything, we all trusted him and believed him. It was a dictatorship in a good way. A benevolent dictatorship”, said one of Sam’s early employees.

Arbitrage was going well for Alameda research and all of Sam’s publicity was positive. The media loved this idea of a young guy, a nerd, making his own way in the world. They loved his lack of selfishness and how outspoken he was about altruism and giving back. 

“Last year this 29 year old guy donated 50 million dollars. Next year he is planning to donate 500 million dollars a year. Next decade he will probably give away more than 10 billion dollars”, it was being said by one of popular social media channels.

It was only natural for Sam to expand and he began looking to start his own cryptocurrency exchange, partially funded by the CEO of Binance, Sam launched his exchange successfully. It was called FTX, short for Futures Exchange. 

The description of the FTX website reads: “FTX crypto exchange: built by Traders, for everyone.” 

It fit perfectly with Sam’s image. A new crypto exchange that was accessible to anyone who wanted to take part. Like everything else Sam had done, it was an instant success. Sam made the magazine in cover of Forbes, everybody in the crypto circle publicly praised him. He was the anti-Elon Musk, a modern-day Robin Hood. 

He was a guest on countless podcasts and interview shows where the hosts praised his quick rise to success. It was easy for anyone to get in touch with Sam, in fact he made an effort to be as accessible as possible. If you wanted an interview you got an interview. 

In its first two years FTX made more than two billion dollars. Sam’s initial crypto goal making a billion dollars had been more than doubled. It seemed like the more he had, the more he wanted to give. Huge donations to charities, political campaigns and sports stadiums it seemed as if there was no limit to what he was willing to give.

However generosity wasn’t all that Sam was famous for, the other part of his reputation was how willing he was to take risks. Risks that the rest of his team warned him against:

“Sam wanted to take riskier decisions than the others wanted to take” 

The more that Sam’s risks paid off the more risks he was willing to take. It was a self-fulfilling prophecy. Every time Sam pressured FTX into making a risky bet it would be successful. In Sam’s mind the risk no longer mattered. People in the world of crypto trading began to wonder how long he could continue like this, but the progress didn’t seem to drop. 

The crypto industry was increasingly unstable and risky Investments became dangerous. Popular hedge funds began to file for bankruptcy. Funds such as Three Arrows Capital, Voyager and BlockFi suffered massive financial losses and had to file for bankruptcy by July and in June of 2022 Sam’s original company Alameda began to struggle too.

Sam’s Robin Hood persona couldn’t resist the temptation to ride in on a white horse and save the day. FTX began to bail out failing crypto companies by issuing financial lifelines and buying assets. FTX made an announcement they were going to buy out the remaining assets of Voyager for a price tag of 1.4 billion dollars. 

Alameda research was in danger of going down. In September 2022 a massive quantity of FTX tokens worth 4 billion dollars were removed, placed into a digital wallet and then sent back to FTX on the same day. Sam made a tweet saying that this kind of rotation of tokens was normal for FTX and wouldn’t have any consequences for FTX users as the wallet that the tokens were transferred to belonged to FTX. 

Both parts of Sam’s tweet were not true. The four billion dollar transfer wasn’t routine, it was in fact the biggest transfer that had ever taken place in the FTX exchange and the wallet that received the tokens wasn’t FTX’s wallet. It belonged to Alameda research, Sam’s other company. Sam had a secret to making sure that Alameda research’s risky bets were a success.

Reportedly he used deposits made by customers of FTX to provide the funds for Alameda. On the outside he was running two separate companies, when in reality he was using each company to give the other a leg up. Alameda was using FTX’s token as collateral while FTX relied on Alameda to increase token value. While this strategy which is known as leverage can sometimes create much greater gains it also opened up both companies to the potential for enormous potentially career-ending financial losses. 

In early November Sam began calling crypto giants like Sequoia capital and asking for additional funding. None of the firms that Sam contacted agreed to give him any money. This time his rushed presentation was very vague and there were clear holes in FTX’s books that Sam couldn’t explain. With rejection after rejection Sam swallowed his pride and got on the phone to his rival. He asked Changpeng Zhao, Binance’s CEO, to bail the company out but Zhao refused. 

Sam sent a message to his remaining staff promising that he would keep fighting. He posted a tweet stating that FTX users are fine, to reassure the rest of the public that despite the rumours about FTX falling to pieces everything would be okay. Later that same day FTX and Alameda research were both forced to file for bankruptcy. Within 24 hours of his optimistic tweet Sam had suddenly resigned as CEO of FTX. All at once loyal FTX customers noticed that their cryptocurrency wallets were draining fast.

By the time midnight hit on the day of Sam’s resignation, more than 400 million dollars of crypto had vanished and nobody knew where it had gone. The official FTX Twitter account stated that a hacker had withdrawn the money but the culprit was never revealed. Nick Percoco, an executive at another crypto exchange tweeted that they knew who the hacker was but revealed no further details. 

A report revealed that out of all the funds that had been transferred back and forth between Alameda and FTX around 1 billion dollars was missing but nobody could provide answers about where the money was or who had transferred it. On one day Sam Bankman-Fried was worth 15 billion dollars and his public reputation was priceless, the next day he was worth nothing and he had lost his golden reputation as the lovable hero of cryptocurrency. Later on he was he was the subject on Federal investigators that started the research which is still under way.