Things we're reading today-14th November: From boy genius to dumbest fraud - the possible story of how FTX collpased


Off late the term, “polycrisis” had become a part of mainstream conversations. The credit goes to Historian Adam Tooze and Tim Sahay a policy wonk who writes on climate change. The term is a shorthand for the historic set of cascading and interlinked existential crises that we’re facing today from climate change, war, famines, and political instability.

But are we all dying? Here’s a counterargument that maybe things aren’t as bad as we always assume.

You gotta hand it to economists for coming up will all sorts of fancy names. If you’ve been following the economic conversations over the last decade you would’ve heard of the degrowth movement. It was popularized by people like Jason Hickel, an anthropologist and the author of Less is More: How Degrowth Will Save the World. At the risk of sounding reductive, the idea is that the only way to avoid an apocalypse is to grow less. The problem with that, less growth isn’t an option for frontier and low-income countries. But maybe you can still grow and cut carbon emissions? Looks like that’s the case with some countries

FTX keeps getting crazier

The FTX saga just keeps getting crazier and crazier. If you’re confused and what really happened, things are still murky, but here’s a broad outline.

In 2013 Sam Bankman-Fried (SBF) started working at Jane Street Capital, a market-making giant in the United States. In 2017, he left Jane Street and started Alameda Research, a proprietary trading firm. Given the inefficient markets, it seems like SBF was making a fair amount of money. So how do you go from being a crypto trader to one of the biggest frauds of all time?

Step 1: The legend begins

SBF at Alameda were making decent money by trading and making markets on crypto exchanges. As he was trading and making money, his ego was growing proportionally.

Step 2: Ego expansion

Ego goes from being pea-sized to galaxy-sized. SBF thinks why donate liquidity? He’s not a charity. He worked at a mega market maker, he’s making money, he must be Jim Simmons reincarnate. So he decides to start his own crypto exchange—FTX is born. He creates a new token out of thin air called $FTT and sells it to a bunch of people. Alameda ends up being one of the biggest holders. He also raises money from Changpeng Zhao (CZ), the founder of Binance, which is the largest crypto exchange in the world. $FTT functions more like a loyalty token. Holders of FTT get trading discounts on FTX. So the fate of $FTT depends on the performance of FTX.

Luckily, for SBF, a bull market in crypto is starting. VCs want in on the action, and they are getting into fights to throw checks at crypto founders. SBF peddles a bunch of BS and VCs fall for it—it’s love at first sight. Alameda ends up being one of the biggest traders on FTT.

Step 3: Crypto savior

Given the bull market, FTX grows rapidly and becomes the second-largest crypto exchange. The price of $FTT also grows in tandem. SBF’s profile grows, and he also starts being politically active. He starts lobbying extensively for crypto regulations and starts donating to pro-crypto politicians. This irks pretty much everyone in the crypto industry. SBF becomes crypto Jesus. Not just Jesus, as the crypto market is imploding in May-June 2022, SBF steps in to acquire several companies. He gets labeled as the new J.P. Morgan :joy:

Step 4: Not so genius

All signs point toward Alameda not being so good at trading. They’re bad and they start losing money. But you can’t kill Alameda’s market-making on FTX because liquidity will dry up. Also, nobody really knew the relationship between Alameda and FTX.

Step 5:

Fast-forward to 2022 and the crypto market crash starts. There are several high-profile implosions like Terra-Luna, 3 Arrows hedge fund, Voyager, Block, etc. It’s unclear what happened, but it looks like Alameda suffered losses early this year.

What do you do?

Still unclear, but it looks like: 1. FTX lent Alameda money to cover the losses, with the collateral being $FTT tokens :joy: 2: FTX just illegally used client funds to cover up all the bad trades in Alameda. Here’s a conspiracy theory from Reuters:

“In a subsequent examination, FTX legal and finance teams also learned that Bankman-Fried implemented what the two people described as a “backdoor” in FTX’s book-keeping system, which was built using bespoke software.
They said the “backdoor” allowed Bankman-Fried to execute commands that could alter the company’s financial records without alerting other people, including external auditors. This set-up meant that the movement of the $10 billion in funds to Alameda did not trigger internal compliance or accounting red flags at FTX, they said.”

Step 7: The jilted friend

Remember Changpeng Zhao (CZ) had invested in FTX? In 2019, SBF bought back the stake from CZ for $2.1 billion with a mix of Binance’s stablecoin (BUSD) and $FTT tokens. As part of the deal, Binance had about $580 million worth of FTT tokens.

It looks like CZ was pissed at SBF’s lobbying efforts to bring in crypto regulations that would’ve made life hard for Binance and also maybe knew how badly the finances of FTX/Alameda were, so he decides to start dumping $FTT tokens.

Step 8: Market value is not realized value

FTT is like a small-cap stock, with very little volumes. As the price starts crashing, Alameda’s CEO offers to buy Binance’s stake at $22 a token, but Binance refuses.

Step 9: The emperor has no clothes

Remember that Alameda was one of the biggest holders of $FTT? As FTX did well, so did the price of $FTT, and it had become a sizable part of Alameda’s balance sheet. So Alameda like any sensible investor decided to use $FTT as collateral and borrow money and do really, really sensible long-term investing—the like of which Warren Buffett would be proud of.

The moment CZ said he would dump $FTT, the price starts cratering. Customers rush to withdraw money and FTT doesn’t have it. Things unravel and in a span of days SBF went from boy genius to that guy who has to sleep under Silk Board flyover.

Friday’s bankruptcy filing provided few details on the group’s financial health but said both assets and liabilities range between $10bn-$50bn, and that the number of creditors exceeds 100,000. A spreadsheet listing FTX international’s assets and liabilities, seen by the Financial Times, point at the issues that brought Bankman-Fried crashing back down to earth. It references $5bn of withdrawals last Sunday, and a negative $8bn entry described as “hidden, poorly internally labled ‘fiat@’ account”. Bankman-Fried told the Financial Times the $8bn related to funds “accidentally” extended to his trading firm, Alameda, but declined to comment further. Earlier this week, he tweeted that FTX international had $4bn in easily tradeable assets when it faced Sunday’s $5bn surge of withdrawals. - Financial Times


There was a time when we used to say “if China sneezes, the world will catch a cold.” China doesn’t have a cold, it has pneumonia. Remember China has a demographic problem, it can’t afford to let people die. But over 50% of its elderly population isn’t vaccinated. So they imposed draconian lockdowns and shut down entire cities like Shenzhen and others which are major economic hubs. Add to that they have an over-leveraged property sector which is 30% of the economy, historic heatwaves, and floods. Maybe there’s only so much pain they can take. Looks like they’re starting to ease some of the lockdowns.

It’s probably not going to help the global economy given that everybody is slowing down at the same time and also consumption demand in China is crashing like a penny stock.

Here to zero pandemic trading story

Non finance

Remember all those books and articles that the lack of sleep is killing you and that watching the screen before bed is bad. But is it? The answer is more complicated. Here’s one guy’s journey to discover if the common wisdom about sleep warnings is true. Long read but you can skim the parts about research.


That said: beware. If this bear market has re-taught us anything, it’s that the macro trumps everything . That’s true for the discount rate, and it’s true for the Belief Rate. Even if you believe in a particular company, the macro Belief Rate can keep it down longer than you can stay solvent. Just like SPACs, startup investing requires more than your own belief; it requires an educated assessment of the beliefs of the funds who will need to lead a company’s next round.

I have no differentiated view on the macro, and if I did, you shouldn’t trust it. People have spent their whole careers thinking about macro and still get it wrong, and I have not spent my whole career thinking about macro. I have no idea what the discount rate will be in a week, a year, or a decade. If interest rates continue to rise, higher discount rates will continue to create a drag on valuations across the board, and especially on growth assets.

But there will be opportunities in the micro, in companies that you believe in more than anyone else does, in ideas that seem crazy to pursue when everyone is focusing on the short-term.

Legends will be made in this downturn. Some of them will be the ones who take the practical advice from a few paragraphs ago, cut costs, get profitable, survive, and come out swinging in the next bull market. Others will be those who, despite what’s rational, continue to think and act long-term, even when long-term trades at a discount. Either in a year or a decade, valuations will rise, big companies will be created, and belief will be restored. For whenever that happens, note to self: Don’t Stop Believing is a better song than it is a trading strategy.


Vert nice read on risk management and some of the reasons why things panned out how they did. :sweat_smile:


This crypto bubble has very many similarities to the way the Housing bubble unfolded :smiley:
Wonder at what rate entities will come out of the closet.

Price drop will suffocate many more.
Even Co. like Tesla who began accepting BTC etc… would have asset drop. Some Financiers would’ve loaned money for crypto collateral.

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