Sam Bankman- Fried was on the map.
The ex-Jane Street Capital quant trader noticed something funny when he looked at the price of the virtual currency on exchanges around the world. Back then, Bankman- Fried told CNBC that he would sometimes see a 60 percent difference in the value of the coin. He wanted to get in on the arbitrage trade and earn a profit by buying and selling on different exchanges.
Bankman- Fried said that the lowest hanging fruit was that.
In South Korea, the exchange-listed price of the virtual currency was more than in any other country. The Korean side dish of salted and fermented cabbage was referred to as the Kimchi Premium.
After a month of personally dabbling in the market, Bankman- Fried launched his own trading house, Alameda Research, to scale the opportunity and work on it full time. The firm made as much as a million dollars a day, according to Bankman- Fried.
The fact that it wasn't the easiest thing to execute on the rails five years ago is one of the reasons why SBF earned street cred. Setting up connections to each one of the trading platforms as well as building out other complicated infrastructure to abstract away a lot of the operational aspects of making the trade are some of the things that have to be done in order to make the transaction work. The money came in because Bankman- Fried's Alameda became very good at that.
The empire grew from there.
The launch of FTX came about because of Alameda's success. A $2 billion venture fund was created by FTX. At its peak in March, Bankman- Fried's personal wealth was over 16 billion dollars.
The FTX logo adorned everything from Formula 1 race cars to a Miami basketball arena, and Bankman- Fried was suddenly the poster boy for the company. The 30-year-old went on an endless press tour, bragged about having a balance sheet that could one day buy Goldman Sachs, and became a fixture in Washington, where he was one of the Democratic party's top donors.
It wasn't a real thing.
Bankman- Fried bragged that he and his enterprise were immune to the plunge in the price ofCryptocurrencies. The wipeout hit his operation really hard. Alameda borrowed money to invest in failing digital asset firms this spring and summer to keep the industry afloat, then sucked off FTX customers' deposits to stave off margin calls and meet immediate debt obligations The mask was pulled off the scheme by a fight between the CEO of the rival exchange and the social networking site.
Bankman-Fried's companies have filed for Chapter 11 protection in Delaware. He lost most of his personal wealth in a single day. It's not clear where he is as his $40 million Bahamas penthouse is up for sale. His face is pictured in FTX advertisements throughout downtown San Francisco.
It was a steep fall. There were many signs.
When it comes to playing the markets, Bankman- Fried told CNBC that one of his fundamental principles is working with incomplete information.
He said there are a lot of things you don't know when you can quantify and map out what's happening. You have to figure out what trade to do even though you are being approximate.
The account is based on reporting from a number of sources. Piecing together bits and pieces from various news sources paints a picture of an investor who over-extended himself, frantically moved to cover his mistakes with questionable and possibly illegal tactics, and surrounded himself with a tight group of advisers who could not or would not stop him from making bad decisions.
According to reports, Alameda began borrowing money for various purposes in the last couple of years.
A wave of titans in the sector folded six months ago due to depressed token prices. $60 billion was wiped out by the failure of a popular U.S. dollar-pegged stable coin project. The collapse brought down one of the industry's most respected hedge funds. They fell along with 3AC in quick succession because they had a lot of exposure to the company.
Everyone was borrowing from one another, which only worked when the price of all those coins went up. By June, the price of ether had fallen by more than 50%.
The source of every implosion in financial institutions is leverage, according to Hart Lambur, a former Goldman Sachs government bond trader.
Lambur said that Lehman Brothers, Long-Term Capital, Three Arrows Capital and now FTX all blew up because of bad leverage that was exploited by the market.
SBF jumped into the mix in June to try to bail out some of the failing firms before it was too late. He tried to purchase these companies at fire sale prices.
Some of the banks in Alameda asked for their money back. Alameda didn't have it because it wasn't liquid. Bankman-Fried told the Times that it was probably not worth it to put the borrowed money in venture investments.
The Journal and the Times reported that FTX used customer deposits in FTX to bail out Alameda. Billions of dollars was borrowed. In an interview with the Times, Bankman-Fried said that Alameda had a large "margin position" on FTX, but he wouldn't say how much.
Bankman-Fried said it was larger than he had thought. The downside risk was very large.
According to both the Journal and the Journal, there was a $10 billion lifeline, but the emergency financing is missing. It was a violation of FTX's terms and conditions to tap customer funds. It would be a violation of securities laws on Wall Street.
The two firms were supposed to be separated by a firewalls. At one point, they had a romantic relationship between Bankman-Fried and Ellison.
Castle Island Venture's Nic Carter said that the relationship between datememe and Alameda was problematic. The prop shop and exchange that Bankman-Fried operated was not allowed in regulated capital markets.
The borrowing and lending scheme was more complicated than just using customer funds to make up for bad trading bets. FTX tried to paper over the hole by denoting assets in two cryptocurrencies that were actually created by FTX and Alameda.
Although their real value to most traders is simple speculation, firms usually offer some sort of benefit to users. The ability to earn interest and rewards was promised to owners of FTT. FTT and other coins are vulnerable to market downturns because they are largely unregulated.
The majority of them were proxies for what people thought Bankman- Fried's exchange was worth. The price of FTT reflects investor confidence.
FTX was swindling off customer assets as collateral for loans, and then covering it with a token it made up and printed at will, only a fraction of its supply into the open market, according to a report. The financial acrobatics between the two firms are similar to the moves that sunk energy firm Enron almost two decades ago, in that case, they hid losses by transferring assets to off-balance sheet subsidiaries, then created complicated financial instruments to obscure the moves.
Bankman-Fried was hailed as one of the great young tech entrepreneurs of the age as he continued his press tour. Bankman- Fried got into a public spat with a rival exchange.
The relationship between Bankman- Fried and Binance goes back a long way. A long-term position in the FTX token was taken by Binance as part of the strategic investment it made in FTX.
Next summer is in the summer of 2022. The exchange was criticized in public by Bankman- Fried. It might have been based on suspicions. It could be that it was due to the fact that Binance was a major competitor to FTX, both as an exchange and as a potential buyer of other distressedcryptocurrencies.
Changpeng Zhao, also known as CZ, saw his chance to hit.
A leaked balance sheet shows that a lot of Alameda's assets were held in FTX's token. Questions were raised about the solvency of the trading firm.
On Sunday, Nov. 6, Zhao said that the company had over $2 billion worth of BUSD and Ftt.
He dropped the bomb.
He said that they were going to liquidate any remaining FTT on their books due to recent revelations.
Money was pulled out of FTX by investors. According to Bankman- Fried, the exchange had $5 billion of withdrawals on Nov. 6. Net inflow had been in the tens of millions of dollars.
When new facts come to light, traders react fast because of the unregulated nature of the market.
The head of decentralization finance and digital assets for Moody's Investors Service said that digital players are reacting quicker to news and rumors than traditional players.
The lack of transparency in the market operations can lead to panic reactions and cause a liquidity crunch. Astic said that the developments with Celsius, Three Arrows, and FTX show how easy it is for investors to lose confidence and cause a crisis for these firms.
SBF quietly sought investors to cover the billion dollar hole from the money that had been withdrawn by Alameda. Multiple reports say that the value was as high as $10 billion. In a desperate move, SBF turned to CZ.
The deal had a key term: non-binding, though it was not a binding one. The public revelation that FTX was in need of a rescue caused the value of the company to plunge.
On the day after, CZ claimed he did due diligence and didn't like what he saw, which sealed FTX's demise. Bankman- Fried speculated to the Times that it was never intended to be purchased.
FTX and Alameda both filed for reorganization. FTX, which was valued at $32 billion in a financing round earlier this year, is trying to discharge its debts in court. Bankman- Fried is no longer in charge of the firms.
The new filing shows that FTX may have more than one million debts. The 50 largest ones are going to be listed this week.
In the last 72 hours, FTX has been in contact with a number of regulators in the U.S. and overseas. FTX is being investigated by the SEC and Department of Justice. The possibility of criminal wrongdoing is being looked at by financial regulators in the Bahamas.CEO of FTX Sam Bankman-Fried testifies during a hearing before the House Financial Services Committee at Rayburn House Office Building on Capitol Hill December 8, 2021 in Washington, DC.
The industry is poised to be dominated by a single entity.
William Quigley, co- founder of the U.S. dollar-pegged stable coin tether, said that the strength of Binance comes from all of this. Those are good practices in the market.
There will likely be more institutional trading and custody in the future.
Clara Medalie is the director of research at data firm Kaiko.
"FTX's collapse benefits no one, not even Binance, which will now face growing questions over its monopoly of market activity."
She said that each entity has numerous twisted and over-lapping financial ties to projects throughout the industry.
The firm held onto the FTT token after Bankman- Fried asked for a rescue.
A full disclosure was made last Sunday.
The man never shorted the company. We still have a bag, even though we stopped selling it. It was very expensive.
The report was contributed to by CNBC's Ari Levy and Kate Rooney.