SBF, WTF with FTX?
Binance was an early investor in FTX, and without their support, such an epic scam project wouldn’t have been possible. Along with Binance's backing, FTX figured it would be smart to set their sights on regulators, publicly support the Democrats, and show how “clean” their intentions were.
The exchange quickly took off thanks to savvy marketing (Steph Curry, Tom Brady, Super Bowl ads, buying the naming rights to a baseball stadium in Miami, and so on) and Sam’s own image. Sam, the scruffy guy with the messy hair, hardly looked like the next big shark in crypto. But if your stop-loss was in sight, he’d rush for liquidity without hesitation and issue another margin call for half the market.
And so, headlines about the “Crypto Golden Boy” and the “Next Warren Buffett” started to appear.
Binance and FTX started out as friends. One company helped the other, and in return, the second owed some loyalty and a good cut of the profits. But that friendship quickly turned into competition as FTX rocketed to the top and became the #2 exchange.
Naturally, Binance saw it was best to cash out at the peak when they were asked to exit, so they sold their stake. In return, they received $2 billion worth of $FTT tokens. Now, Binance and FTX were competitors, but Binance held a huge pile of $FTT. You feel that? Something’s starting to smell off.
Then CZ mentioned that SBF had been talking some trash about Binance and discussing it with regulators. The exact motives and goals aren’t clear, but it’s believed Sam wanted to take FTX to the next level, cozy up to regulators even more, and undermine Binance. CZ wasn’t going to put up with these shady moves, so he went on Twitter and publicly announced he’d dump all his $FTT in the market.
Holders of the coin got the hint - this wasn’t exactly good news.
- “Aggressive selling in the market, especially in this volume, is definitely going to drive the price down!” - says Jose, a McDonald’s cashier.
- “Gotta dump this crap right now! Fundamentals are shaky as hell,” - Diego, the handyman, quickly replies.
As a result, $FTT’s price drops by 15-20% overnight.
No one wants to buy the token (people are starting to suspect that Sam really messed up). And when there are no buyers, there’s only one direction left. The coin’s price keeps sliding.
At this point, things are still relatively okay. People remember the $LUNA crash and Do Kwon’s fiasco, but this is Sam! FTX is the #2 exchange, and Alameda (Sam’s first venture), which is tightly linked to FTX, is the biggest crypto fund around - they’re Market Makers, they’ve got the resources, and they’re loaded.
“Do Kwon was an idiot - Sam would never let something like that happen. They’re baiting us to short. It’s as clear as 2x2. Alameda and FTX are the kings of the market.”
But then, information starts to leak that maybe the kings aren’t wearing any clothes.
Alameda’s assets total $12 billion, with about $7 billion in debt, so it’s looking alright… Oh, wait. Over half of Alameda’s assets are in $FTT, which, as we know, is sinking. The majority of the remaining assets are in Solana ecosystem tokens.
If Alameda’s in trouble, does that mean FTX is too? “All right, all right, all right,” says Matthew McConaughey, shaking his head.
FTX and Alameda always had a tight, almost brotherly relationship. No one really questioned the details of their interactions. The fact that FTX gave Alameda priority order flow, letting its sister hedge fund front-run other traders, didn’t raise any eyebrows. What mattered most was that people thought of FTX as an exchange that simply wouldn’t fail and would last as long as crypto itself. Come on, guys! This is Sam!
Waiting for any news, FTX users kept refreshing Twitter, hoping Sam would show up and reassure them. And he did—he posted that “everything’s fine” and there’s no reason to worry. The same way your girlfriend says “everything’s fine” when you ask if something’s wrong. No, everything is definitely not fine.
Around this point in our story, Caroline (Alameda’s CEO) steps in, announcing that Alameda would be happy to buy all the FTT that CZ dumps into the market, as long as the price stays at $22. But why $22? Why not lower? Maybe it has something to do with Alameda’s obligations to other entities.
And... nothing happens. FTT drops below $22.
Another 24 hours go by - plenty of time to show reserves and financial strength, but still nothing. The token keeps dropping, there are more questions than answers, and Sam seems to be in a holding pattern.
Experienced crypto folks start hearing Jimi Hendrix in their heads, getting Vietnam flashbacks and remembering that infamous Do Kwon tweet.
FTX clients start withdrawing their funds - just in case, you know. Maybe it’ll be another Celsius, Voyager, or Luna situation. Better safe than sorry.
Withdrawals top $1 billion. FTX doesn’t have enough liquidity to cover all the requests, so after a while, they halt withdrawals, and Twitter goes silent. What the hell? What’s Sam doing?
Turns out Sam was busy making a “strategic deal” with Binance. A strategic deal? What does that even mean? CZ steps in to clarify: “FTX was having issues, so we’re buying them out to solve these issues, but first, we’ll take a closer look at their overall situation”.
After that tweet, those long-lost feelings reappear: calm, confidence in tomorrow, hope. The collapse of one of the market’s main players has been averted, and everyone can finally go to bed with some peace of mind.
But as everyone’s sleeping, let’s take another look at the relationship between FTX and Alameda, because their relationship is what really played a key role in this crash. Not CZ - this is about FTX and Alameda.
Alameda was SBF’s first project, started before FTX and extremely successful in its own right. Early on, most of Alameda’s earnings came from arbitrage on Japanese exchanges, but when those opportunities dried up, they shifted to becoming Market Makers, using quantitative strategies to make profits.
At the time, the company had a flawless reputation, high returns, and an ambitious founder, who decided to create a place where Alameda could fully implement its strategies to shift capital from retail traders to themselves. That place, as you’ve probably guessed, became FTX.
Initially, Alameda was the only Market Maker for the new exchange. Liquidity was low, traders were hesitant to join a newly opened platform, and were just keeping an eye on FTX, which was already buying up tons of ad space on American TV.
Eventually, as the young exchange grew, Alameda started using data they got from FTX—who’s opening positions, in which direction, and in what volume. The data went straight to Alameda, who used it to their advantage. This meant everything from HFT trading to tracking large capital positions to capture liquidity (essentially, borderline criminal activity).
Data from the world’s second-largest crypto exchange turned Alameda into a money-printing machine. But their relationship went far beyond simply trading data for cash. Alameda used FTX as a reserve for trades elsewhere - a kind of piggy bank.
At the center of the crash was $FTT, a token not exactly known for its liquidity. Alameda held $5.8 billion in $FTT, but if they ever wanted to sell, there just wouldn’t be enough buyers. So, why hold such a huge stash of an illiquid asset? The scheme is pretty simple and doesn’t take much to pull off:
- FTX creates $FTT out of thin air;
- Alameda buys $FTT early on at rock-bottom prices;
- FTX then manipulates the $FTT price upward;
- Alameda returns the now-inflated $FTT to FTX as collateral and borrows client funds from the exchange.
As a result, Alameda held assets worth 2 to 3 times more than FTX had in reserves. This had been going on for a long time and likely would have continued if a crucial part of the scheme hadn’t been disrupted. I’m talking about $FTT and that sudden sell-off from CZ.
When CZ realized that FTX had a multi-billion-dollar hole in its balance sheet, he shot straight for the Achilles' heel of both the exchange and Alameda. SBF had to turn to the very person who was hitting him and destroying his creation for help.
CZ found himself in the position of king of the crypto world and decided not to dive into the mess. The deal to buy the exchange was off, and the crypto market plunged into chaos.
The whole chain of events goes like this:
- CZ dumps $FTT;
- Alameda faces a margin shortfall and looks for liquidity on FTX;
- FTX clients start withdrawing funds like crazy = Alameda’s piggy bank is shattered;
- FTX's assets are basically loans to Alameda that the fund can’t pay back;
- FTX ends up with a multi-billion-dollar hole and becomes insolvent;
- CZ takes out the main competitor.
