How Billionaire Bankman-Fried Survived the Recession and Still Expanded

FTX CEO Sam Bankman-Fried has made bargains amid the industry’s latest carnage and said he still has money to spend if the opportunity presents itself.

It may seem strange. Other multi-billion dollar crypto giants went bankrupt this year. FTX’s main competitor, Coinbase, has seen its shares plunge 70% and laid off a fifth of its workforce as crypto prices crashed.

Nevertheless, FTX appears in one way or another as a lifeline in the industry.

The 30-year-old billionaire says that was the result of stashing away plenty of cash, keeping overhead costs low, avoiding borrowing and being able to move quickly as a private company.

“It was important that the industry get through this in one piece,” Bankman-Fried told CNBC in an interview at FTX headquarters in Nassau, Bahamas. “It’s not going to be good for anybody in the long term if we have real pain and real blowouts — it’s not fair to customers and it’s not going to be good for regulation.”

The crypto industry saw billions of dollars wiped out in the weeks surrounding the implosion of cryptocurrency Terra USD and the failure of crypto hedge fund Three Arrows Capital. Lenders with exposure to Three Arrows were the next domino to fall. In July, FTX signed an agreement that gives it the option to buy lender BlockFi after providing a $250 million credit line. FTX also extended $500 million to struggling Voyager Digital, which later declared bankruptcy, and was in discussions to buy South Korea’s Bithumb.

Bitcoin, the world’s largest cryptocurrency, has lost more than half of its value this year.

While Bankman-Fried’s cryptocurrency exchange FTX is suffering from the decline in digital assets, he said market share growth helped offset the pain.

“I don’t think we’re immune to it,” Bankman-Fried said. “But we’ve put a lot of work into growing our footprint over the last year … and we have a smaller platform for retail — retail tends to be more market sentiment dependent.”

Most of FTX’s volume comes from clients trading “at least” $100,000 per day, he said. Bankman-Fried described the group as “highly engaged, high-volume” users who are “quite sophisticated.” It ranges from small trading companies to family offices and day traders. FTX’s demographics have been less price-sensitive and held up relatively well in crypto’s bear market, according to the company.

In addition to its success with professional traders, it makes an expensive conquest for the American retail public. FTX bought the naming rights to the Miami Heat’s NBA arena, formerly the American Airlines Center. It has courted high-profile investors and brand ambassadors including Tom Brady and Giselle Bündchen, and ran a Super Bowl ad with Larry David.

The cryptocurrency exchange generated roughly $1 billion in revenue last year, CNBC reported in August. Bankman-Fried confirmed that the figures were in the “right ballpark” and this year would see a “similar” number, depending on the severity of the market downturn. He also said that the company is profitable.

He pointed to the low number of employees as a factor in profitability. FTX has roughly 350 employees — about a tenth of Coinbase’s workforce.

“We’ve always tried to grow in a sustainable way – I’ve always been deeply suspicious of negative unit economics, any economy without any kind of real, clear path to profitability,” he said. “We hired a lot less than most places did, but we also kind of kept costs under control.”

Bankman-Fried earned a degree in physics from the Massachusetts Institute of Technology and began his career as a quantitative trader at Jane Street Capital. He bought his first bitcoin five years ago, saying he was drawn to the industry by broad arbitrage opportunities that seemed “too good to be true.” In 2017, Bankman-Fried launched the proprietary trading firm Alameda Research to begin trading the asset full-time. The firm was making a million dollars a day in some cases, buying on one exchange in one market and selling back on other global exchanges, according to the CEO.

Alameda Research still accounts for about 6% of FTX’s exchange volume, according to documents seen by CNBC. While Bankman-Fried remains a major Alameda shareholder, he stepped back from day-to-day operations.

Bankman-Fried said he has worked in recent years to eliminate conflicts of interest in Alameda. “I don’t run Alameda anymore — none of FTX does. We see it as a neutral piece of market infrastructure.”

FTX has seen epic growth since Bankman-Fried launched it with co-founder Gary Wang in 2019. It raised $400 million last January at a $32 billion valuation, bringing its total venture capital funding over the past three years to around $2 billion dollars.

FTX Trading Ltd. is headquartered in Antigua, with FTX Derivatives Markets based in the Bahamas, where Bankman-Fried lives. FTX Trading has acquired companies in Switzerland, Australia, Cyprus, Germany, Gibraltar, Singapore, Turkey and the United Arab Emirates, among others.

The exchange has spent about half of its money on bailouts and acquisitions, and most recently bought a 30% stake in Anthony Scaramucci’s Skybridge Capital.

“We still have quite a bit left to deploy, if and when it’s useful or important,” Bankman-Fried said.

FTX benefited from being a private company this year. FTX does not have the daily ups and downs of a listed stock, especially growth stocks, which have been hit by higher interest rates this year. Bankman-Fried also said that not having thousands of shareholders allowed FTX to move quickly when trying to close deals in a matter of days.

“I think it makes it much more difficult, practically speaking, to do this as a public company,” he said. When “you have three days from start to finish to transfer the money, you can’t do a public engagement process around the potential terms of a messy situation.”

Bankman-Fried said many of the deals were made in a matter of days, as the team “didn’t sleep much that week.” What is often lengthy due diligence came instead in a truncated Excel spreadsheet. The finances were not audited. At least the team had some expectation of losing money.

“It was unclear whether it would be a net positive or a negative – there was potential upside in a case where things were going well,” he said. “We got to the point where we felt we could do something that would have a non-trivial chance of helping for an amount of money that we were willing to lose if things went wrong.”

It’s too early to say whether Bankman-Fried’s distressed crypto bet will pay off. Some companies have said absolutely no to a rescue package.

After extending a line of credit to Voyager, FTX and Alameda looked to buy and restructure the company. It outlined a plan to buy Voyager’s digital assets and loans at market value. The company responded to the bid, calling it a “low ball bid dressed up as a white knight rescue.”

“It surprised me. It didn’t surprise our legal team,” he said. “I honestly just assumed they would see our offer and just say … sure, we’ll take this.”

Bankman-Fried said there were further discussions and the responses were “disappointing.” The problem, he said, was that the proposal did not charge any fees.

“If you’re in the business of taking fees, then our proposal might not be what you like,” he said. “I think it was a low-ballot offer for consultants who wanted to pay fees in this case. That’s not what I had in mind. I had the clients in mind. But that’s my current best understanding of what happened.”

Bankman-Fried’s latest moves in crypto have drawn comparisons to Warren Buffett’s strategy in 2008. The legendary chairman and CEO of Berkshire Hathaway stopped the bleeding during the financial crisis with a $5 billion investment in Goldman Sachs. That ultimately netted the Omaha-based conglomerate a $3 billion profit.

“There are some parallels,” Bankman-Fried said. “There are probably more differences. First of all, I don’t think Warren Buffett would call me the next Warren Buffett. To the extent that there’s a parallel recently, it’s been looking at what assets are in a place where they need capital pretty badly .”

Bankman-Fried said he finds places where he can “simultaneously make good investments, and help stop them and their customers and ecosystem.” Although sometimes only one is on offer, not both.

He also applauded Buffett’s prowess in long-term value investing. The investor has shown that “you don’t have to have a brilliant innovation or insight, you can do it by just stringing together good decision after good decision over decades and compounding it.”

Like Buffett, Bankman-Fried signed the Giving Pledge: a pledge by the world’s richest individuals to donate the majority of their wealth to charity. Bankman-Fried said he has given away about $100 million this year, focusing on future pandemic prevention. Like Buffett, he lives modestly. Bankman-Fried shares a house with ten roommates and a Goldendoodle named Gopher. He drives a Toyota Corolla, and said he is not interested in the excesses of a yacht or Lamborghini.

But the two humble investors diverge sharply when it comes to their positions on cryptocurrencies.

Buffett and his business partner Charlie Munger have been critical of cryptocurrencies over the years. In 2018, for example, Buffett called bitcoin “probably rat poison squared.” Earlier this year, Buffett said he wouldn’t buy all the bitcoin in the world for $25 because it “doesn’t produce anything.”

Buffett has called the underlying blockchain technology “important” — but hasn’t wavered on the idea that “bitcoin has no unique value at all.” Blockchains are digital databases that store cryptocurrency transactions and in some cases other data. Its main use has been to power cryptocurrencies such as bitcoin. But fans of the technology say it could be used in healthcare, supply chain logistics and other areas of finance.

“I absolutely disagree with that,” Bankman-Fried said. “I should hope so [Buffett] also disagree with that. I don’t think you should run a company if he means it, but I don’t think he actually means it. I think that was very likely hyperbole,” he said. “He’s missed some of the power of blockchain — he’s also missed some of the drive for it in the first place, and what drives people to want a new tool.”