The Gray Cardinal of the Market, Sam Bankman-Fried
Childhood
Just eight years ago, Sam didn't even know what cryptocurrencies were; he was just a kid from a professor's family. But thanks to digital assets, he is one of the most prominent crypto-billionaires today.
Sam Bankman-Fried was born on March 6, 1992, on the campus of Stanford University. Both of his parents work there as law professors. Barbara Fried's field is at the intersection of law, economics, and philosophy, while Joseph Bankman teaches tax policy. Sam grew up on Harry Potter books, San Francisco Giants games, and his parents' political discussions with other West Coast scholars. The family supported their son in his independent exploration of life and freewheeling thinking. He has a younger brother, Gabe, with whom they decided together to stand up for the world against new pandemics.
At 14, Sam was drawn to the direction of "utilitarianism. This idea is a red thread that runs through his later life.
The Wonderful Years of School
Despite - or perhaps because of - his high intelligence, Bankman-Fried hated school.
"It was super-structured," he says in an interview, "I had a lot of disagreement with traditional pedagogy about how school should work . On the social side, I think I've always felt more comfortable with the older generation."
His mother didn't realize how serious it was until one day she caught Sam in tears. That's when she heard her son say, "Mom, it's so boring, it's killing me.
Sam lacked science in school, and his parents noticed his interest in math. So they decided to send him to MathCamp for the summer, where he met Gary Wang and Sam Trabucco.
After arriving from camp, Sam began organizing puzzle-hunters at his school, and in the process his managerial skills became apparent.
"Nevertheless, high school remained a dark period for Bankman-Fried. "I was in a kind of waiting mode before the next chapter started," is how he recalls it. "High school and middle school were not what I was really cut out for."
Flip a coin.
In 2010, he enrolled at MIT to study physics. In fact, he chose college, flipping a coin between MIT and the California Institute of Technology. Sam arrived as a "kind of math nerd" and, as a cultured young man should, fit in with the academic fraternity of the Epsilon Theta ring. True, Sam is really reverent about his MIT ring and often uses it to distract himself from heavy thoughts.
According to his classmates, he had a charismatic personality. He was a frustrated student: the future billionaire spent more time on Starcraft and League of Legends than he did on cramming and studying for classes. He also liked the coziness of a close-knit fraternity house and eventually SBF became their president. It had to do with the fact that when Bankman-Fried spoke, it was obvious what he really meant. It was his leadership and ability to present ideas in a reasoned way that rallied like-minded people around Sam.
At ET, he became friends with Gary Wang, who played a defining role in further ventures. At the same time, SBF is sharply dismissive of formal education, even at MIT.
"Nothing I learned in college turned out to be useful," he says, "except social development. Academically, however, it's all bloody useless. School is just useless for most professions. Everybody knows that's true, some people don't want to agree, but it is."
In his sophomore year, Bankman-Fried encountered "effective altruism(EA)" online, which he considers a turning point in his life.
Effective altruism is a philosophical movement that uses facts and evidence to determine the most profitable ways to make the world a better place. Followers are engaged in finding the most underestimated problem and its solution, the most productive in terms of cost and results obtained.
Sam thought about the fact that his scholarly labors would do far less good than trading. The idea was that it made more sense to get rich on Wall Street and donate $1 million to Mother Teresa than to try to become Mother Teresa.
The beginning of the journey
As a student at a prestigious institution, Sam began looking for a suitable position to pursue the idea. Several friends from the effective altruism community had previously interned at the trading firm Jane Street Capital and spoke warmly of the company. The guys suggested that he also try his hand at trading in order to earn a high salary for the common good. (Nothing would come of it once, they said.)
I'm also curious what is meant by a high salary).
According to Bloomberg :Jane Street pays interns $16,500 a month.
And the salary of university graduates is $275k a year.
A summer internship surrounded by a "bunch of nerds" eager to identify and implement edgy ideas was to Sam's liking. So after graduation, he took a full-time job at Jane Street. Sam was a trader in Jane Street Capital's international ETF division. He traded a variety of ETFs, futures, currencies and stocks, and developed an automated OTC trading system for Jane Street
In addition to the earning opportunities, SBF liked Jane Street's laid-back atmosphere. Jane Street is a private firm; it trades on its own behalf, not for clients. That means the dress code requirements are very low. Which was key for Sam. He could go to work in shorts and sandals year-round and nobody cared.
What's the point of hiring a physicist straight out of college for an international company not in a fetch-and-deliver position?
It turns out that high-quality stock trading strategies are "super-valuable trade secrets" and no one teaches them in universities. Firms hire people with great potential: mathematical geniuses, people with extensive experience in physics or computer science.
What exactly was he doing as a quantum trader? According to Sam:
"You're just trying to make the right trades, whatever tool led to it, combining computer and human trading. There's a lot of automation, but also a lot of manual control and intuition."
Why was trading so appealing to Sam? Singh, now the lead engineer at FTX, believes that in trading, Bankman-Fried finally found an occupation in which he wasn't bored.
"Trading consumes all of Sam's attention," he says. "There are an infinite number of things you could productively think about while trading, especially in a busy moment."
Often when Bankman-Fried is talking, he is playing a video game in the background, even at the risk of disrespecting another person or organization, because his mind is simply not fully engaged.
Worth the candle
Among Bankman-Fried's close friends, only Gary Wang knew anything about cryptocurrency. In fact, Wang wrote himself a bot for BTC arbitrage trading at MIT in 2012.
With the bot, Wang made a couple thousand dollars in one semester-which wasn't bad for a student-but gave it up when the opportunity to intern at Google came along.
Even though Sam knew little about crypto, as a trader he recognized that it had huge growth potential.
He began contacting friends and convincing them to move to Berkeley and help him start a cryptocurrency exchange there. Wang remembers Bankman-Fried telling him there was only a 20-25% chance of success, but the growth potential was huge. There were a lot of effective altruists at Berkeley, so they could do something with the idea even if they failed. Wang began to develop a prototype trading system.
First there was a manually operated platform, it had a single trading interface on a single exchange, which was a breakthrough because now you didn't have to open several tabs to trade.
Later it became automated trading systems.
In September 2017, Sam quit Jane Street and Wang left Google.
They moved to Berkeley, adding Nishad Singh (now at FTX as head of engineering) to their enthusiastic team, which was the symbolic start of the story.
Alameda Research
In November 2017, SBF left his position as director of public relations at the Center for Effective Altruism (yes, yes, he tried to sit on two chairs at first) and registered Alameda Research.
Due to currency restrictions on offshoring the Korean won and the "kimchi premium" debacle, Alameda Research focused on trying to profit from the Japanese surcharge on bitcoins. In theory, it's simple - buy bitcoin cheap in the US, sell it expensive in Japan. Transfer the proceeds back to the US Rinse and do it again.
At first it seemed a Sisyphean task. But the number of obstacles proved finite, and one by one they were overcome.
Bankman-Fried estimates that the spreads suddenly dried up in early 2018. (He doesn't know why. Perhaps other arbitrageurs began using the scheme as well. On the other hand, as bitcoin prices were falling around the world at the time, demand dried up on both sides of the Pacific, smoothing out prices.)
During the long trading sessions, Bankman-Fried and other traders became frustrated with some offshore exchanges.
To understand these problems, it is useful to think about how a regulated U.S. commodity futures exchange works:
If the trader fails to fulfill a contractual obligation, in case of losses received by the trader - the exchange also bears responsibility for them.
At the end of 2018, Bankman-Fried went to a conference in Macau. There, what he calls the most uncontrollable event in the history of crypto exchanges happened. Bitcoin underwent a technological fork and split into two different coins.
This created a legal challenge for exchanges to figure out how to handle the existing futures contracts for the original coin. Nevertheless, some exchanges' solutions to the issue have been ridiculous.
Alameda Research has written white papers on how exchanges can improve, but in vain. So after meetings with crypto players in the Asian market, Sam had the idea to launch his own exchange.
FTX was born
At Alameda Research, the idea of launching a new exchange was controversial. The company was profitable but "woefully understaffed," and now its best trader and best engineer were leaving for Hong Kong to dive into a new risky project with a 20% chance of success. If it failed, the price to pay for the risk was a reduction in Alameda's influence and growth rate without the benefits.
This venture is now considered a phenomenal decision, but at the time it seemed extremely risky (even for traders) and controversial.
In April 2019, FTX was incorporated in Antigua and Barbuda as a limited liability company, and the following month began operating out of offices in Hong Kong. It took the team four months to write the code that went into the core of the exchange.
The exchange's Twitter account has long said: "Created by traders for traders," and now it says "Created by traders for everyone.
Things were slow at first. A dozen employees worked in the WeWork co-working room in Hong Kong and tried to attract traders to the new exchange. Soon the FTX founder found a profitable niche. He targeted sophisticated investors trading derivatives such as bitcoin options or Ethereum futures. Like Bankman-Fried, many derivatives traders don't believe in cryptocurrencies - they just want to make money.
Such traders conduct significantly more trades and for larger amounts than the average retail investor, and FTX receives more commission (from 0.005% to 0.07% of the transaction amount).
In the first year, Alameda played an important role in FTX. It provided the main liquidity and accounted for half of the trading volume on the exchange.
The relationship between Alameda and FTX leads to questions about its possible ways to make money on the exchange. If a market maker cannot actually make money on spreads, then one of two things is happening:
1. Alameda and others are competing on a level playing field and losing money (mostly subsidizing FTX).
2. The company gets some kind of advantage, for example: primary tracking of trading volume on the exchange.
None of this is illegal, thanks to FTX's legal registration, but it's a gray area, and so far the game is worth the candle.
As time goes on, Alameda and FTX become more and more independent, which may reduce potential conflicts of interest. But the willingness to act within acceptable limits tells us something about Sam's direction and his desire to win, no matter how messy to the observer.
Bankman-Fried believes that both cryptocurrency in general and his exchange in particular are morally defensible decisions:
"You hear very different things about cryptocurrency depending on what country you're in. If you visit half the countries in the world as you live, you would be uncomfortable with having local fiat currency in your bank account. Banks might confiscate it, not for money laundering reasons, but because they would rather have that money in their pockets. You don't own your money."
Further expanding interests and peculiarities of thinking.
Also in 2020, Sam temporarily took over the leadership position at SushiSwap and highlighted a number of offerings, including a tweet he made indicating he was just one of many volunteers for the project after Chef Nomi fled. The latter took $14 million from the developer fund and then returned it with an apology.
As for the peculiarities of thinking in interdependence with games - Sam described it as follows in a tweet:
"There are two types of computer memory: RAM (short-term) and hard disk (long-term). RAM is fast, expensive, and small in size. Hard disks are slow, inexpensive, and have a large capacity. When you reboot your computer, the RAM is completely cleared.
I think I have a lot of RAM and a relatively small hard drive."
Explaining why he often plays League of Legends, Sam noted:
"Sometimes my body is very tired and I want to sleep, but sometimes the tiredness is psychological. The mind is active, and my working memory is filled with all the things that are important to me. That said, most people's short-term memory is reserved for things they will soon forget, but my mind is full of things to remember, do, and think about.
So, no matter what, sometimes my mind is too busy or full of energy-consuming things and I want to put it to rest. I try to sleep, but to no avail, the mind is still obsessed with its cyclical thoughts. The insomnia continues, so I open LoL, go into the game without a second thought, and choose a hero.
The mind has switched to a new and completely different cycle of thought, obsessed with competition and the final blow rather than responsibility. Thus the previous debilitating thought-cycle-is forced to leave active consciousness and rotate alone, but it will soon return. In a few minutes we will destroy the enemy's base and the mind, having discarded thoughts of the League will greet the former thoughts. As you can see, I calmed myself down for 30 minutes and gave myself time to do what normally happens during a short nap. Time to give my mind some rest and reboot. To process my thoughts, integrate them and come to terms with them, at least for a little while. And then back to work."
Politics. Charity. Pandemic.
In 2012, Sam blogged a bit, typing Nate Silver-inspired thoughts about the dollar value of one swing vote, and in 2016, he spent a day in Pennsylvania visiting registered Democrat homes, expecting to get excited.
"Their eyes said, 'Fuck you,'" he recalled.
The few who opened the door mostly said, 'I hate both candidates. I hate the lack of choice. I hate that you make me talk about it. I want my privacy back. I wish I didn't have to live in a fluctuating state."
In 2020, Sam was in a position to do much more than just knock on doors, so he became the second-largest philanthropist invested in Biden's campaign, while never speaking to the president.
"I think that would be super cool," Sam said. I have a lot to say. There are a lot of things I could say, but I'm pretty sure he wouldn't care."
According to Sam, in keeping with his "earn to give" strategy during his time at Jane Street Capital, he gave more than half of his earnings to charity.
To date, the FTX Foundation, the charitable arm of FTX, has given $21.8 million.
And in June it was revealed that Sam had signed "The Giving Pledge.
An initiative in which philanthropists pledge to give most of their capital to charity. Warren Buffett and Bill Gates were the first to sign it. They promised to give most of their assets either during their lifetime or by will to charity.
The oath is a moral but not a legal obligation; the applicant need only submit a free-form statement to the foundation's management.
Although this may seem like an exaggeration - many billionaires have boundless ambition, so those close to Sam are convinced that Bankman-Fried's risk-aversion stems from his effective altruism.
Media Person in the Crypto
For many people, Sam fully formed as a major personality during the DeFi boom of mid-2020, when he began to make an impact on Twitter. It was a deliberate move: he was happy to go unnoticed in 2018 because Alameda had no need for publicity, mostly fame works to his detriment. But when he launched the innovative crypto exchange FTX in 2019, he needed to build a community around it, and he advocated to be its public face on social media, also if the firm is constantly on the radar, it's harder for regulators to shut it down:
"With FTX as a retail business, the more customers the better. You can create the best product in the world, but if no one knows about it, it's worthless."
One of the hardest and most interesting things was figuring out how to attract users, and a big part of that was raising awareness.Sam caught on and launched a number of innovative markets at FTX including offers of tokenized fractional shares of companies like Tesla, Apple and Amazon, as well as pre-IPO trading at Coinbase.
"If your goal is to scale to 100 million or a billion users, if you want to have the benefits of an application that can grow to the scale of the largest applications in the world, it has to be able to scale to about a million transactions per second. That way, you can just permanently tweak your list of favorites without any help or even considering any other factor, any scaling solution that doesn't fit, if that's your goal."
2022
We are witnessing the most rapid movements in the development of various sectors of the world, including the economy. The speed at which Sam has amassed capital is staggering, so what is he doing now? As the digital asset industry crumbles, the titan of the industry is playing LoL and thinking about ways to prevent disasters as well as profit.
As for exchange competition, last year FTX was one of the top three exchanges by trading volume, shattering the established HBO (Huobi, Binance and Okex)
FTX acquired Japanese cryptocurrency exchange Liquid on Feb. 2, licensed by the FCA (Financial Conduct Authority). As part of the deal, FTX will acquire Quoine Corporation, a cryptocurrency exchange approved by the Financial Services Authority (FSA).
On March 15 FTX was slightly ahead of Binance and was the first to receive a license for a digital exchange in Dubai, something SBF is incredibly proud of
On March 17, determined to keep up, Alameda Research actively supported Stargate, buying up all available tokens that were auctioned off during the launch of Stargate on March 17.
Also on March 22, FTX US acquired game developer Good Luck Games. After that, a group of angry gamers trashed Storybook Brawl on Steam with reviews due to concerns about the potential integration of NFT and blockchain.
On June 18, Alameda Research lent 485 million in cash and bitcoins to Voyager, a brokerage company.
On June 22, Sam made a $250 million loan to bail out cryptocurrency lender BlockFi as digital asset companies continue to suffer from the ongoing market collapse.
And on June 27 the news emerged that Sam was preparing to conclude a partnership with Robinhood and Robinhood's share price went up by more than 20% after it was reported that SBF might acquire the firm. There has been no official confirmation, but in May Bankman-Fried bought 7.6 percent of Robinhood at an undervalued price. A potential merger of the two companies would strengthen FTX's appetite for stock trading and make the company bigger, as Robinhood has nearly 23 million accounts. The merger will also be a boost for Robinhood's cryptocurrency trading operations, which recently launched the feature in its wallet.
According to analysts, Sam's savior role shows that he is now positioning himself as the lender of last resort in crypto. There is a historical analogy here: J.P. Morgan, a leading banker before the Federal Reserve System came into existence, intervened twice to prevent an economic collapse in 1893 and 1907.(In 1913, the U.S. Federal Reserve was created by the government because of concerns about the degree of influence Morgan and similar personalities had on the markets.)
Some regulators have opposed the bailout. They argue that the ongoing "crypto-winter" will benefit the industry in the long run by displacing weaker companies.
"Cryptocurrency has no bailout mechanism," SEC Commissioner Hester Pierce told Forbes . "When things get a little more complicated in the marketplace, you end up finding out who can really get through."
Bankman-Fried explained on Twitter that his role was not necessarily to bail out individual firms. Later (30.06) it was reported that they refused to buy Celsius, because of the "$2 billion hole" in their balance sheet.
"Cryptocurrency should be guided by certain basic principles, including financial transparency and a free market. Perhaps most important is the idea that autonomous code, not humans, should determine winners and losers in markets, ensuring that everyone plays by the same rules."
In his interview with NPR, Bankman-Fried noted that the Fed was the main driver of the markets' collapses. The biggest increase in interest rates since 1994 accelerated inflation and destroyed capital markets. Thus, according to Sam, the central bank is stuck "between a hammer and anvil.
The crypto industry's main hope for not repeating the fate of traditional corrupt companies lies in real decentralization. Open protocols cannot prevent unscrupulous actions, but they can provide investors with the information they need to make their own decisions.
For his part, Bankman-Fried is willing to work with regulators . He said he would spend more than $1 billion on political donations, in part to earn the attention of officials. Changes need to be made, especially if the biggest cryptocurrency players are going to get in on the game going forward.
But the real changes, challenges, and opportunities in the crypto industry will come at the level of protocol, not under the control of any individual.
Conclusions
Simultaneously open and mysterious, finding loopholes and effectively altruistic, the SBF exhibits a rare set of characteristics almost perfect for being at the tip of the crypto blade. It feels at home amidst the chaos, able to calculate and adjust to risk the ever-changing shape of the market.
Certainly family has played no small part in influencing Sam's outlook. He, like many, was bored in school and at MIT. SBF preferred boring couples to socializing with people he was interested in, who later became the backbone of his adventurous companies. Most of the leadership, it was acquaintances from the math camp, MIT, and former jobs, because he spent most of his life outside the typical leisure time of most people.
Whatever happens, remain yourself and act, calculate the risks. Because even if you like games and despise white-collar jobs, with the right effort, the world will appreciate it as a highlight rather than a defining ingredient to get things done.
According to Trabucco and Allison, the company, which trades billions of dollars daily in the crypto markets, will remain focused on generating big profits, even after Sam leaves. Today, Alameda Research is to the crypto market what Citadel and Susquehanna are to traditional stocks: a quant and market-maker giant. And judging by Twitter - the behind-the-scenes games promise to get more interesting.
As for FTX, in the foreseeable future, the FTX Foundation should be fully revealed, which means: new scholarships (example FTX EA Fellowships for efficient altruists) and grants for "good" startups that will improve the long-term prospects of humanity. In a tough bear season, companies are focused on saving drowning people, mostly in the U.S., but not forgetting the emerging markets of Africa and India.
In other words, Alameda's and FTX's interests have expanded beyond cryptocurrencies and gained more influence from the outside. They are directly involved in shaping legislation and trends around the market.
And whether Sam Bankman-Fried can achieve his audacious goal of convincing regulators to develop new rules to adjust the world to a fait accompli of progressive reality, we will know in the future.