The Death of a Statesman
Earlier in the year, I began to worry about a central player in the cryptocurrency market - Sam Bankman-Fried (SBF), CEO of cryptocurrency exchange FTX and, more importantly, crypto investment firm Alameda Research. His entry in the Forbes Billionaires List specifically mentioned that “most of his wealth…is tied up in the ownership of about half of FTX and a share of its FTT tokens.” When the Voyager situation happened in July (when it became clear they had out-and-out lied about everything), there were rumblings around the cryptocurrency industry about who was exposed, and in August, CNBC reported that Bankman-Fried had a deeper relationship with Voyager than was publicly disclosed, including the fact that Bankman-Fried’s Alameda Research owed Voyager around $370 million. Alameda had also helped bail out Voyager. However, they may have also borrowed way more:
Voyager’s financial documents, which are public because the company’s stock traded in Canada, appear to show that Alameda had initially borrowed significantly more than that. The firm’s December 2021 books refer to a $1.6 billion crypto asset loan, with rates from 1% to 11%, to an entity based in the British Virgin Islands.
After reading all of this, I made a brutal call: I believed that Sam Bankman-Fried was not quite as liquid (meaning that he didn’t have much actual, real money) as it may seem:
Please subscribe to my blog!
Specifically, I made one declaration - that I believed Bankman-Fried’s money is tied up in a bunch of loans. And it’s becoming obvious that I was right.
Dear reader, I apologize for how much I must explain here, but I will do my best to make it palatable.
Sam Bankman-Fried is a man who owns lots of things in crypto, but the two principal entities that make up the majority of his wealth are the cryptocurrency exchange FTX.com and Alameda Research, a cryptocurrency trading firm. FTX has a native token called FTT, which is used on the FTX exchange to discount trading fees along with other benefits of some sort.
As an aside, a common thing in cryptocurrency (and real finance) is leveraged loans - you offer collateral to take a loan with someone.
A few days ago, Coindesk published a groundbreaking report revealing that Bankman-Fried’s Alameda Research had $14.6 billion in assets on their Q2 balance sheet, with its largest asset being the FTT token:
That balance sheet is full of FTX – specifically, the FTT token issued by the exchange that grants holders a discount on trading fees on its marketplace. While there is nothing per se untoward or wrong about that, it shows Bankman-Fried’s trading giant Alameda rests on a foundation largely made up of a coin that a sister company invented, not an independent asset like a fiat currency or another crypto.
The financials make concrete what industry-watchers already suspect: Alameda is big. As of June 30, the company’s assets amounted to $14.6 billion. Its single biggest asset: $3.66 billion of “unlocked FTT.” The third-largest entry on the assets side of the accounting ledger? A $2.16 billion pile of “FTT collateral.”
Dirty Bubble Media then analyzed what Coindesk found (and did some of their own research too), and found the following worrying facts:
Alameda Research owns roughly $5.8 billion FTT tokens in June 2022, which is…180% of the current supply in the market. This means that if Alameda ever wanted to sell anything, they would immediately increase the supply of the token, making the token worth less because there are more of them.
Only 180-200 addresses are trading the FTT token, meaning there is not that much of a market even if they want to sell.
The other assets on Alameda’s balance sheet include several projects with which Bankman-Fried has some sort of relationship, and a few do not appear to have any volume to sell into if they need liquidity.
So, while Alameda Research may have “$14 billion” on their balance sheet, a great deal of that is an unsellable token (FTT), a token they have used as collateral. Furthermore, Bankman-Fried’s wealth has largely been tied to FTX and FTT tokens.
All of this wouldn’t be a problem as long as Alameda Research didn’t over-leverage their funds, which they did:
Total liabilities: $8 billion, of which $7.4 billion is “loans,” with another $292 million worth of FTT token owed. The remainder is unidentified by the Coindesk article.
We do not know what those loans are, but we can begin to guess based on the last 24 hours’ news.
To continue, Binance’s CEO CZ said two days ago that they would begin selling their holdings in the FTT token based on this news. Alameda offered to buy all of their tokens at $22 a piece, which CZ declined, saying that Binance would “stay in the free market.”
And earlier today, Binance entered into an agreement to buy FTX, to “help with the “liquidity crunch,” meaning that FTX lacked the ability to cover user withdrawals. The confusing part is that Bankman-Fried said yesterday that “FTX has enough to cover all client holdings (and “we don’t invest client assets”),” and that "[FTX has] >$1bn in excess cash.” This did not appear to be true, considering that he more recently tweeted that "our teams are working on clearing out the withdrawal backlog. This will clear out liquidity crunches.”
In plain English, Bankman-Fried said yesterday that the bank (FTX) had plenty of money, and then this morning said that there was a problem (the bank did not have enough money). Bankman-Fried’s investment firm’s assets are largely made up of a token that Bankman-Fried and his companies own the majority of, and cannot sell, and said token is also likely used to leverage loans.
So How Bad Is It?
When Voyager and Celsius shook out as a result of Three Arrows Capital’s “nothing bad has ever happened to me” strategy, it hurt millions of people and had a huge knock-on effect on the cryptocurrency industry.
The FTX situation is magnitudes worse, because of a few things:
FTX is the third-largest cryptocurrency exchange by volume as of writing, just behind Coinbase and far, far behind Binance, the company that will soon own FTX. They (FTX) have now frozen withdrawals after people tried to withdraw $6 billion in the space of 72 hours.
Sam Bankman-Fried has been the poster child for legitimate cryptocurrency, hailed by major media outlets as the industry’s savior.
Despite his business being in the Bahamas, FTX has made serious inroads to seem like a real company in America, buying the naming rights to the Miami Heat’s stadium and striking a major partnership with Major League Baseball.
We do not know at this time how much money Sam Bankman-Fried owes and to whom he owes it.
Sam Bankman-Fried’s wealth - and, clearly, some part of FTX - is tied to FTT tokens, which are, as of this sentence, at just over
$9 after being at $17 last night . In the process of writing this article, I have written “$12” and “$11.” Edit: I am not going to update this every time, but as of 10:58 pacific, the token is at $8.03.Less than an hour after publishing this, the token has now gone below $4.
This situation is going to develop dramatically over the next 48 hours, and I expect we are going to find out that FTX was, on some level, investing user funds. Bankman-Fried said this wasn’t the case, but he has also been proven to be full of shit, meaning that there’s a chance that FTX was doing exactly the same thing as Celsius or Voyager. If they weren’t, there’s some other reason that they don’t have any money, which is also bad.
The “why” in this case is far less important than the “oh shit!” that is going to hit the markets, because, as I’ve said, Sam Bankman-Fried’s wealth is almost entirely tied to FTX and FTT tokens. This man has bailed out parts of the industry. This man has a hand in many major projects like Solana. And, crucially, this man has an asset firm with $14 billion in assets - or at least that’s how much they were worth before his token tanked. Remember: Three Arrows Capital owes around $3.5 billion, which is less than half of what Alameda has on its “liabilities” tab.
This is also a massive blow to any “legitimacy” that the cryptocurrency industry had. FTX spent 15% of its revenue on advertising and marketing, including a Super Bowl commercial, and it’s reasonable to believe that millions of people consider FTX to be a “trusted” part of the industry that is, well, no longer particularly trustworthy. If Bankman-Fried has intermingled funds from Alameda with FTX, the exchange is insolvent, which means that this will be the new King of Frauds in cryptocurrency.
The one difference is that Binance appears capable of actually letting users withdraw money from FTX, though that - along with the close of the Binance-FTX acquisition - still needs to happen. But any user that kept money in FTT is currently panicking, and anyone with money in FTX is likely pulling it out as we speak, which I recommended people do in August.
To really hammer it home: this is an incredibly bad situation, because this industry desperately needed Sam Bankman-Fried to keep being the respectable gentleman of the cryptocurrency world. Having SBF attend events with Bloomberg and say smart things about the economy was useful, because it suggested that there were executives in this industry that could both legally visit America and not commit massive amounts of fraud.
It’s hard to say what the end times might look like for cryptocurrency because it’s very hard to kill something decentralized. BTC has dropped under $19,000 in the last hour, and it may drop more. There is every chance I publish this article and things get significantly worse, or change dramatically. That’s the problem with the news.
In any case, the industry is about to lose one of its largest pumpers, cheerleaders and figureheads. This was their respectable spokesman. This was their straight man.
And there’re signs he’s as crooked as the rest of them.
Where’s Your Ed At is a free newsletter, but if you like my work and want to kick me a few dollars, you can do so here.