How Sam Bankman-Fried Crashed Crypto Giant FTX

Over the summer, a coalition of America’s remaining print magazines — Vogue, GQ, Vanity Fair, and The New Yorker — debuted a glossy, four-page spread featuring supermodel Gisele Bündchen and Sam Bankman-Fried, the 30-year-old crypto-billionaire, effective altruist and Democratic mega-donor. The caption read: “THE FUTURE OF INVESTMENT IS FTX. ARE YOU WITH?”

Bündchen had gone “in” with Bankman-Fried at a company that, over the course of three years, had put him on Bloomberg billionaires list and made him one of the most trusted figures in the volatile crypto industry. FTX was a cryptocurrency exchange, or crypto bank of sorts, where users can deposit money in exchange for Bitcoin or Ethereum or one of their myriad and stupidly named competitors. The “In On” campaign highlighted the couple’s promise that crypto could create “positive change” and “impact for good.”

This seemed ill-timed as it was in June; the implosion of stablecoin TerraUSD had sent crypto into a steep decline that wiped out around $2 trillion from the ecosystem. But it’s even more embarrassing now that FTX has endured a death-rattling liquidity crisis that cratered Bankman-Fried’s net worth by 94 percent, evaporated billions in user investments and triggered investigations by both the Securities and Exchange Commission and the Department of Justice. History has already been compared to Enron and the crypto industry’s “Lehman moment”, although much remains unclear (for example: who is running this anonymous Twitter account named after Baby Yoda, apparently started yesterday, which seems to have some inside scoops?). But here is a brief summary of what we know now:

WHO IS SAM BANKMAN-FRIED?

A summary of Bankman-Fried’s resume would include the following: he graduated from MIT in 2014 and traded international ETFs at Jane Street Capital for four years. He quit in 2017 and took on two other roles that help explain his current fame and growing notoriety. First, he served briefly at the Center for Effective Altruism – a non-profit organization dedicated to the philosophical movement, or “moral crusade” rather, of “effective altruism,” aka EA. The basic concept of EA, reductively, is that one should do good in the most evidence-based way possible.

Vox would later describe Bankman-Fried as a guy who “uses math … for everything,” and that was certainly true for his next venture. He left to start a quantitative trading firm called Alameda Research, where he traded the firm to multi-million dollar daily transactions by exploiting a price anomaly that made it cheaper to buy Bitcoin in Japan than the US. At the end of 2018, he moved to Hong Kong. The following spring he started FTX.

WHAT IS FTX?

FTX wasn’t necessarily promising when it launched in 2019. Cryptocurrencies were recovering from a massive crash last fall, and what remained of the market was already dominated by several exchanges that were already operating, such as Coinbase. FTX’s basic pitch was a low-fee, high-volume trading platform where you could buy not only new currencies, but more sophisticated financial vehicles and derivatives, such as leveraged tokens or options.

Within two years, FTX transformed from a minor competitor to a massive company. First, they acquired the portfolio tracking application Blockfolio, in August 2020 for $150 million. As of March 2021, Bankman-Fried’s net worth was conservatively estimated at $10 billion. Four months after that, FTX raised $900 million in Series B funding, sending the company’s value to $18 billion. Three months later, a second round of funding increased this figure to $25 billion.

IS THAT ALL HE DOES?

FTX made Bankman-Fried rich, but EA arguably made him famous. That’s because as his net worth increased, Bankman-Fried began to act on an important tenet of his philosophy: that athletes should increase their own earning potential in order to increase the amount they can give away. In 2020, he made headlines after becoming one of the tech world’s biggest contributors to Joe Biden’s presidential campaign, donating at least $5 million to Silicon Valley super PAC Future Forward (an LLC he founded kicked in another $5 million), which went on a 100 million dollars in Biden ad blitz. (He later told reporter Teddy Schleifer, who was on the SBF beat before most of the mainstream media, that he had “crunched the numbers on how big of an impact every dollar would have if he donated it.”)

For a minute, Sam Bankman-Fried seemed like he could be the left’s answer to the Koch brothers, and spent to prove it. In 2021, he started a 501(c)4 called “Guarding Against Pandemics,” which spent “hundreds of thousands” on lobbying and advertising to get pandemic preparedness built into Biden’s BBB bill. When that failed, he tried to bring about a similar measure in California; then started another super PAC to support Democratic candidates in the midterms. In May, he announced plans to spend as much as $1 billion on Democratic candidates by 2024.

The Dems, not surprisingly, seemed to like him back; that same year, Senator Cory Booker interrupted his testimony before Congress to tell him that he had “a much more brilliant afro than I once had.” Journalists were also interested in him, not least for his contributions to media companies – giving $5 million to ProPublica and supporting Ben Smith’s start-up venture, Semafor.

But Bankman-Fried’s promises have begun to fail or disappear over the past year; his $12 million investment in an Oregon House candidate imploded; his California ballot initiative failed to qualify for the midterms. He backed away from the $1 billion donation estimate, stopping donations at just under $40 million.

WHY IS EVERYONE ANGRY?

Drit hit the tab for Bankman-Fried in early November, after CoinDesk wrote a story about a leaked document from his quant trading firm, Alameda Research. That particular document was Alameda’s balance sheet, which detailed its sizeable portfolio: $14.6 billion in assets.

What stood out was that much of Alameda’s assets were held in FTT – a token issued by FTX itself, which “gives holders a discount on marketplace trading fees.” Nearly one-fifth of Alameda’s assets—$5.82 billion—were one of two types of FTT. “While there is nothing unfortunate or wrong about that,” CoinDesk wrote, “it shows that Bankman-Fried’s trading giant Alameda rests on a foundation that is largely a coin that a sister company invented, not an independent asset like a fiat -currency. or another crypto.”

Four days later, one of FTX’s biggest rivals took advantage of the situation. Changpeng Zhao, the head of exchange Binance, announced that his company would offload its entire share of the FTT token — an estimated $580 million — due to “recent revelations that have come to light.” The news sent FTT holders into a selloff, cratering the price by 80 percent in about 48 hours.

According to Reuters, Bankman-Fried told employees that about $6 billion in crypto had been withdrawn from the firm in three days. It is now clear that the increase in withdrawals put FTX in a massive bind, as much of their holdings were utilized. They just didn’t have the money on hand to pay everyone who tried to get their money. On Tuesday, FTX suspended withdrawals – anyone with money still on the platform could not get it out. However, it looked like FTX had found a solution to cover the withdrawals: Bankman-Fried had reached a non-binding agreement with Binance to buy FTX’s multi-billion international assets. That bailout would help them cover the withdrawals.

The rescue operation was short-lived. On Wednesday, Binance walked away from the deal, explaining, “The issues are beyond our control or ability to help.” As of Wednesday evening, it appeared that FTX was headed for bankruptcy. As Bankman-Fried told shareholders, “I’ve been fooling around.”

WHICH CELEBRITIES SHILLED FOR FTX?

Many crypto companies have celebrity backers. And FTX had its fair share of stars happy to jump into bed with a project that is about to become a huge disaster.

• Gisele Bundchen and Tom Brady: In addition to Gisele’s photo shoot, the now-divorced couple did a $20 million ad campaign for FTX that started during last year’s NFL season. according to The Hollywood Reporter, this campaign “surpassed all commercials except for a Chevrolet ad,” and led to “nearly half a million searches for the new trading platform in the minutes following the two broadcasts during the game.” They also received a stake in the firm, and an “unspecified amount and type of crypto.”
• Steph Curry: Last September, Curry tweeted “Just getting into the crypto game…do you guys have any advice??” He must have gotten some good advice, because the next day, the Golden State star was a “global ambassador” for FTX. Unfortunately for Curry, his payment was a stake in FTX. His charity, Eat. Learn. Play, also collaborated with FTX’s non-profit initiatives.
• Naomi Osaka: Tennis queen Naomi Osaka signed a “long-term partnership agreement” with FTX in March, to “produce content” and bring women to the platform. She got a stake that is now worth love.
• Shohei Ohtani: The MLB megastar, the first player to receive All-Star treatment as both a pitcher and hitter, became a “global ambassador” for FTX last fall. His payment was a stake in the company and the compensation “paid entirely in cryptocurrency.” Talk about a double threat.
• Aaron Jones: Packers’ running back Aaron Jones did some green last September, when he joined FTX’s ambassador list. You’ll never guess what he was paid with. It was FTX equity and crypto. He also announced that he would invest a portion of his future marketing income through FTX, and that he and his brother would become FTX shareholders through their family’s LLC. Downfall!
• Larry David: Mr. Seinfeld himself created a 60-second ad spot for FTX in February, marking the company’s first “anti-sponsor,” to address the world’s crypto skeptics. Unfortunately, the skeptics are looking pretty good right now. Hopefully this will come up Curbside.
• Miami Heat: Last year, FTX paid $135 million to rename American Airlines Arena, the NBA home of the Miami Heat, to “FTX Arena.” It was to last 19 years! Let’s see how it goes.