How Corruption, Rivalry and Greed Doomed the FTX Cryptocurrency Empire

Sam Bankman-Fried, commonly referred to by his initials SBF, was the youngest billionaire (30 years old) in the United States.  The whiz-kid had it all: the fastest growing cryptocurrency exchange (FTX), the Alameda Research trading firm, and major political connections.  In 5 short years he became a multi-billionaire only to lose most of it in a single day. 

SBF attended MIT and graduated in 2014.  He started working on wall street for Jane Street Capital, a global proprietary trading firm.   He decided to move to Berkley California in 2017 and founded Alameda Research in November of that year.    Soon SBF designed an extremely profitable arbitrage system based on Bitcoin price differences between United States and Japanese crypto exchanges.  This success gave him starting capital to move to Hong Kong where he founded FTX in April 2019.

So, how do you become a multi-billionaire and lose most of it in a single day?!

His rise had to do with his trading brilliance, smart decisions, outgoing charisma, clever marketing, and cryptocurrency knowledge.  Silicon Valley venture capitalists flocked to him as the next crypto mogul, and for a while they were rewarded.  He helped the sporting world embrace cryptocurrency.  Every politician wanted him in their corner. 

His downfall involves deception, illegal activities, large political contributions, misguided SEC priorities, a bitter rivalry, and the misuse of customer funds.  Importantly he had most of his wealth in the FTT cryptocurrency, which is the native token of the FTX exchange.  Some say it was a group of kids, led by SBF, enjoying the highlife of romance, money, and power all living together in an exclusive Bahama penthouse.

FTX Billion Dollar Growth and Expansion

FTX raised $48 million from venture capitalists in December 2019 and January 2020.   Over the next two and a half years, venture capital inflow exceeds $1.8 billion from 44 active investors.   Investments from sports celebrities who were also given the title of “FTX Ambassador” include Tom Brady, Stephen Curry, Shohei Ohtani and Naomi Osaka.   The financial companies include Sequoia Capital, Third Point Ventures, Temasek Holdings, Coinbase Ventures, Binance Labs, SoftBank, Paradigm, and many more.

FTX soon becomes the fastest growing exchange for buying and selling crypto derivatives. In early 2022, estimates valued FTX and its U.S. operations at a combined $40 billion.   Alameda Research also has a venture capital division that has invested in 184 projects and was the lead investor in 32 of these investments according to Crunchbase.

Fueling the growth of FTX is the aggressive and expensive marketing campaign, which includes:

• Sponsorship of the Mercedes Formula 1 (F1) Race Team, the actual cost is not known. Large corporations pay millions of dollars a year for sponsorships.  Petronas pays $42 million a year to be the primary sponsor for Mercedes F1.  The amount FTX paid is less than this but probably over $10 million per year.
• Sponsorship with Major League Baseball, the FTX initials are woven on the uniform of every MLB umpire. The cost for this is unknown.
• Signed a 19-year, $135 million contract for the naming rights to the Miami sports arena where the Miami Heat NBA team plays.
• Paid $210 million to esports organization TSM to change its name to FTX TSM.
• Launched a Super Bowl commercial with Larry David, cost of 6.5 million for a 30 second advertisement.
• Multiple ads with Tom Brady, some of these also featured Gisele Bundchen.
• Partnerships with the NBA Golden State Warriors and NHL Washington Capitals.

Since the founding of FTX, the cryptocurrency market is booming.   Bitcoin hits an all-time high of $69,126 on November 10, 2021.  Frequently other cryptocurrencies move in the same direction as Bitcoin.   This is true for FTT, the native token of the FTX exchange.  FTT is trading at $62.20 off its all-time high of $87.97 on September 7^th, 2021.   It’s been an exceptional year up to now for FTT as it started 2021 at a price just over $5, representing a gain over 1,100%.   

Offshore Crypto Exchanges Accelerate Past U.S. Exchanges

In 2016, four of the leading cryptocurrency exchanges are U.S. companies Coinbase, Kraken, Bittrex, and Poloniex.   Today Coinbase is the only U.S. exchange in the top 10.  Bittrex and Poloniex would both experience severe drops in trading usage after 2017.

In 2017, the significant price increases of Bitcoin and other cryptocurrencies has drawn the attention of U.S. regulators.      Of interest to the SEC are the initial coin offering (ICOs) that are occurring.  In 2016 there is a single SEC enforcement action relating to crypto assets.  In the last six months of 2017 there are five SEC actions, increasing to 16 cases in 2018.   The number of SEC crypto actions continue to increase the next few years.  

The forced shutdown of the cryptocurrency exchange 1Broker by the SEC, CFTC and the FBI occurs on September 28^th 2018.  The SEC stated an FBI agent “successfully purchased several security-based swaps on 1Broker’s platform from the U.S. despite not meeting the discretionary investment thresholds required by the federal securities laws.”   1Broker would then proceed to open a new site which would allow its users to withdraw their funds.   There were no reports of customers not being able to retrieve their funds from 1Broker.

A new crypto exchange, Binance, founded in 2017, has emerged as the global leader in cryptocurrency trading. Due to increased Chinese regulations on cryptocurrency, Binance chooses to relocate from China and incorporate in the Cayman Islands.   It experiences most of its growth after moving.

Getting back to SBF, it is clear why he would leave California to go to Hong Kong to launch FTX in April of 2019.   Many of the features and trading options from 1Broker are similar to the much larger FTX exchange.  It was a smart and necessary decision based on the legal uncertainty occurring in the U.S.   Additionally, he has seen how successful Binance has been running without government regulations to hinder its growth. Not being restrained by U.S. regulations and without fear of being shutdown helps spur the success of FTX.

SBF Buying Political Favor and Influence

SBF’s actions indicate the best way to succeed in the U.S. is to go directly to the politicians.   He makes large political donations, including the second-largest donation to Joe Biden's presidential campaign, over $11 million.   SBF became a member of the wealthiest Democratic super PAC, Future Forward.  The website Opensecrets.org reports he spent over $47 million mainly supporting Democrats during the current political cycle.   SBF was chosen to provide testimony to Congress several times, speaking on how crypto regulation should proceed.   This was strange since FTX International is registered and based in the Bahamas.   

The Pinnacle for Sam Bankman-Fried

In November of 2021, SBF is at the peak of his wealth and power. Most of his fortune is in the FTT token, which has made him the youngest billionaire in the U.S.   He is the leader of 2 companies that are generating exceptional profits.   His marketing campaign is fueling record new users to FTX while his investments in other cryptocurrency projects bodes well for the future.  He has established the political connections to be ahead of the regulatory curve.  He and nine others are all leading the FTX empire while all living together in a Bahama’s high-rise penthouse, all of them in the highest positions of FTX and Alameda Research and many of them romantically linked together.

When things are going well you can feel invincible.  Sometimes overconfidence can push you beyond the edge and you get sloppy.   The environment can change and lead you on a path you cannot control.  Most importantly power can corrupt, and this is the case with SBF.

A Rivalry with CZ the CEO of Binance

Much of this is speculation, the tweets do indicate a back-and-forth rivalry, the start of this feud may have started with this tweet. 

It has never been confirmed that CZ is talking about SBF here.   There is only a select few that have the ability and a futures exchange to try this.    

The next CZ tweet causes the spark that leads the price of FTT downward.   More details about the FTT price dump are later in this article.

There have been other tweets, these were the important ones.  This tweet speaks for itself; however, the rivalry may not be over.

The Cryptocurrency Bear Market Arrives

The crypto bear market arrives in late 2021 and continues into 2022 putting severe stress on multiple cryptocurrency assets.   The next chart shows the steep decline of Bitcoin from late 2021 thru early November 2022.   The altcoin markets have shown more weakness.   Cryptocurrency companies in poor financial shape and/or in leveraged positions against their own native crypto token have gone bankrupt.

Many media outlets portray SBF as a white knight savior as he invests hundreds of millions of dollars for BlockFi, Voyager, Celsius, and others; as these companies are facing severe liquidity crunches.   A research report from protos.com on September 16, 2022 portrays a very different story, analysis shows “that SBF has actually risked very little — sometimes, nothing at all.”  He certainly did not invest hundreds of millions of dollars, but he did get a lot of free publicity.  Click to see the protos.com story Protos article showing SBF is not a white knight  Sadly, this article does not get the attention it deserves when it is published.

Alameda Research Illegally using FTX Funds for Risky Trades

FTX illegally transferred $10 billion of customer funds from its exchange to Alameda Research in order to make risky investments, setting up the potential for a severe loss. 

The safe arbitrage trading mechanism successful in 2019 for SBF has stopped producing large profits.  The cryptocurrency exchanges have increased in size with higher liquidity and now have similar quoted prices.   Multiple firms are now performing arbitrage trading, so the competition has increased while the profit margins have shrunk.

SBF told investors that an affiliated trading firm (Alameda Research) owes the crypto exchange about $10 billion.   FTX loaned over half of the $16 billion it held in customer assets to the Alameda Research hedge fund.  This is contrary to the terms and conditions on the FTX website and opposite to talking points he made to Congress.  This a sophisticated scammer deceiving, taking, and using FTX account funds that belong to individual traders.

A popular saying among investors in the crypto space is “Not your keys! Not your Bitcoin!”. Essentially, it’s a warning never to let anyone else including a centralized exchange hold your coins and tokens on your behalf.  Sadly, FTX is a prime example of unscrupulous behavior by an exchange using customer funds.

In a tweet after the FTT price crash, SBF states “FTX U.S. users are fine”, acting as if he did something helpful.  The fact of the matter is U.S. law requirements and protocols prevented him from using those funds.   FBS knows to violate U.S. laws will bring jail time.  FTX U.S. is significantly smaller than FTX International, it’s like saying it’s OK that I burnt your house down, but you still have the tool shed in the backyard.   

The FTX Empire Crumbles

Forbes estimated SBF’s net worth was $17.2 billion on September 27, 2022.  Most of this was from his ownership of the FTX exchange and its native FTT cryptocurrency tokens.  The FTT token price is now at $24.50.  While this is significantly lower than the all-time high of $87.97, it is still much higher than the initial price of $1.00 from April of 2019.  He also appears on the cover of Fortune magazine with a large caption “The Next Warren Buffett?”.    It is clear mainstream media has no clue about the deceiving tactics SBF is performing. 

On October 19^th 2022, SBF delivered a detailed “blueprint” for regulatory oversight and industry standards in the digital asset space.    The FTT price is $23.00, a few days later the FTT price is $26.04.  The SBF blueprint will force Decentralized exchanges to have additional regulations, this is a strategic maneuver to make FTX stronger.   He is counting on his political clout to make this happen.

November is on hand, and it will be a cruel month.  This is the painful part for individual investors in the FTT token.   The human impact should not be overlooked as it hits our hearts, confidence, and trust for the blockchain technology we strongly believe in. 

On November 4^th,  a Coindesk article about Alameda Research, reports that the Alameda Research balance sheet is dominated by holding of the FTT tokens.   This gets major attention in Twitter.

On November 5^th, the Quantify Crypto Trend algorithm turns bearish.   The algorithm is designed to detect smaller moves that often occur before a larger move.   This is an indication the selling pressure is starting for FTX.

On November 6^th, CZ Tweets that Binance will be selling any remaining FTT tokens.   FTT is still above $24 before this tweet.  This generates a response from the CEO of Alameda Research, Caroline Ellison, boasts that they will buy out his share at a then 10% discount of $22.  She is implying that Alameda Research does have the liquidity to handle the large amount of FTT tokens Binance has.   She also tweets about the strong Alameda Research balance sheet.

Late in the evening on November 7^th the price of FTT is just above $22.   During the next four hours, selling pressure sends FTT down to $15.57.   A short-term buying recovery pushes the price briefly back to $21.29.  However, the order flow of buys ends abruptly.   Over the next four hours the selling pressure overwhelms FTT and nobody can save it. It falls all the way to $2.50. A stunning 89% drop in 18 hours.

Later in the afternoon on November 8^th, CZ hopes to come to the rescue.

Potential Outcomes

• It should be illegal for a person like SBF to own and control an exchange and a hedge fund at the same time. The Glass-Steagall act of 1933 was created after the 1929 stock markets crash.   It forced commercial banks to refrain from investment banking activities to protect depositors from potential losses.  It was believed that commercial banks took on too much risk with depositors' money.  Most of the Glass-Steagall laws were repealed in 1999.   Something has to be done with links between hedge funds and cryptocurrency exchanges.  SBF clearly abused his FTX customers, costing them billions of dollars.
• Many in the U.S. Congress want to implement the SBF “blueprint” for cryptocurrency regulation. The legacy of this scandal may turn out to be the person responsible for the largest cryptocurrency fraud in history will be the author of U.S. cryptocurrency policy.  Hopefully this does not occur.
• Is this a reason to have more DeFi usage? Using a software wallet backed up to a hardware wallet performing individual financial transactions is looking very appealing.   This is a your keys your Bitcoin solution.
• What happens to Sam Bankman-Fried? He deserves jail time for sure, however he is in a safe haven in the Bahamas.   There will probably be more Sam Bankman-Fried ventures; he still has political friends, charisma, and past success.   He may end up being an anonymous or silent partner behind the scenes of a project.   Remember SushiSwap, Chef Nomi and how SBF came to the rescue?   

https://quantifycrypto.com/ provides real time technical signals and analysis to support your trading decisions. We have the fastest live price feed of all cryptocurrency informational platform. Our proprietary trend algorithm calculates the predicted direction of future price moves. It is specifically tailored for the cryptocurrency market. Our state-of-the-art displays are designed to provide maximum amount of significant data on a single screen.

None of this is meant to be financial advice and I do not have any financial expertise. Although I worked at the New York Stock Exchange for over 23 years, it was as a developer supporting computer systems, not as a stock trader.

Full discloser: I do own Bitcoin and other Altcoins.