A week after the dramatic collapse of Sam Bankman-Fried’s tangled network of crypto firms, countless questions remain unanswered. One of the most important: how did his trading company, Alameda Research, apparently lose billions of dollars? These losses appear to have prompted someone in Bankman-Fried’s operations to transfer inappropriately customer funds from the FTX trading platform to Alameda, a move that left FTX vulnerable to a withdrawal run that precipitated sudden bankruptcy.
Many details remain unknown, but a hazy picture is forming of the possible causes of Alameda’s steep losses. We spoke with half a dozen crypto traders and investors familiar with Alameda to understand the main theories. A spokesperson for former co-CEOs of Sam Bankman-Fried and Alameda, Caroline Ellison and Sam Trabucco, did not respond to Forbes’ requests for comments. We sent Bankman-Fried questions about the Signal messaging app, but he hasn’t answered them yet.
Moving from Arbitrage to High Risk Betting
The first theory is that the young traders at Alameda, which was once one of the biggest crypto trading companies in the world, weren’t as sophisticated as their reputation would suggest. Bankman-Fried was considered an excellent trader when he started Alameda in 2018, and he focused on arbitrating cryptocurrency price differences across different markets. But the following year, he focused mainly on launching his FTX trading platform. He brought with him to FTX his colleagues from Alameda, Gary Wang and Nishad Singh, who had been among the most talented people at the trading firm, according to Doug Colkitt, a veteran high-frequency stock trader turned cryptocurrency trader. trader.
After bitcoin began to rise sharply in the fall of 2020, Alameda strayed from its original goal of making high-speed, market-neutral bets that did not depend on predicting whether cryptocurrencies would rise or fall. would decrease. Some traders to believe Alameda changed its strategy as it lost its competitive edge as more experienced companies like Jump Capital stepped up their crypto trading activities.
In March 2021, then aged 26 Caroline Ellisonone of Alameda’s co-CEOs, seemed to recognize this pivot when she tweeted, “It is also relevant to understand the moment when he realizes that he has wasted time trying to trade a few points ahead and that the way to really make money is to determine when the market is going. going up and getting balls long before that.” Going long means betting that prices will go up.
A month later, Sam Trabucco, Alameda’s other co-CEO, tweeted, “we had … uh, a long time in the winter of 2020.” To explain why, he added, “that’s where the money is.” Ellison and Trabucco had only a few years of experience trading in conventional markets before joining Bankman-Fried to deal with crypto. This is a shallow pool of knowledge and experience to tap into.
According to several traders, many Alameda long bets likely suffered big losses starting in May 2022, after the dramatic collapse of the stablecoin terraUSD and its sister cryptocurrency luna accentuated the market decline of the cryptography. “What makes you a hero in bull markets kills you in bear markets,” says Marina Gurevich, COO of London-based Wintermute, one of the world’s busiest crypto trading firms. . Indeed, Bankman-Fried acknowledged in a Twitter chat with a Vox reporter that it was around the time of Luna’s crash when a lot of risky leverage was building up in his business.
Overlay leverage on big bets
Besides making big bets, Alameda was probably taking on too much leverage, i.e. debt that can magnify wins and losses. One way company executives apparently did this was to use largely illiquid cryptocurrencies — including FTX’s own token, FTT, and a related one, Serum — as collateral to take out loans.
For example, Bankman-Fried helped incubate the creation of Serum, which was released in 2020. Serum has a low amount of coins in circulation – initially only 10% of it was freely tradable, while remaining 90% were locked up for years. But technically, he could extrapolate and assume that if the circulating serum supply was worth $1 billion, the market value of all the coins in existence was $10 billion. Then he could get loans based on that higher valuation. Bankman-Fried also ran this playbook with other digital assets, which became known as “Sam coins” to industry insiders, crypto investor Jason Choi wrote.
Choi recently concluded in a Tweeter“This is likely how Alameda/FTX incurred the multi-billion dollar hole: Alameda pledging illiquid collateral to borrow money to fund bets, which got margin called as markets fell this year .”
Invest borrowed money in other crypto players
Another flight of capital was venture capital investments. According to PitchBook, Alameda has made more than 150 investments in the crypto industry, including bitcoin miner Genesis Digital Mining and now bankrupt crypto broker Voyager Digital. Alameda apparently took out loans to fund these bets. As the crypto market crashed, lenders reportedly attempted to recall funds that were entangled in these illiquid investments. FTX and Alameda executives then made the dubious decision to try to repay some of those Alameda loans using funds from FTX clients, the Wall Street Journal reported. reported.
Borrow for other big expenses
The finances of Bankman-Fried’s group of companies are so complex and tangled that huge chunks remain a mystery, even to lawyers, financial investigators and bankruptcy veterans who have taken charge. But according to bankruptcy court records, FTX executives also withdrew billions of dollars in loans from Alameda to fund everything from political contributions to Bankman-Fried’s $650 million purchase of a 7.6% stake in Robinhood. It’s unclear how these loans may also have added to Alameda’s losses on top of everything else. Alameda itself has $5.1 billion in outstanding liabilities according to a Thursday Chapter 11 filing bankruptcy case in Delaware.
Poor record keeping and accounting controls
A final — and possibly substantial — contributor to Alameda’s losses: Bankman-Fried’s businesses had terrible record-keeping and accounting systems. Deposits from FTX customers have not been tracked, according to a bankruptcy filing, making it unclear in the bankruptcy proceedings what is owed to customers. An example of this confusion: the FTX balance sheet disclosed shows $8.8 billion in liabilities, while Thursday’s filing in the Delaware bankruptcy case shows just $6.4 billion. It’s unclear what explains the discrepancy, but regardless, the numbers are still changing. “This balance sheet was produced while the debtors were controlled by Mr. Bankman-Fried, I do not trust it,” wrote in the filing the training veteran John J. Ray III, the new CEO of FTX. overseeing the bankruptcy. Bankman Fried has tried to attribute almost the whole problem to “messy accounting + margin”.
Bankman-Fried’s negligent accounting habits appear to date back to the early days of Alameda. When crypto venture capitalist Alex Pack was considering investing in Alameda in early 2019 and doing their due diligence, he found that they had lost $10 million in a single month, a considerable sum for such a small business. When Pack asked about it, Bankman-Fried said it was due to “trade mistakes”, Pack recalled.
Pack says he kept probing, but he could never figure out what happened. “At one point they just said, ‘Sorry, we didn’t have great record keeping back then. We cannot answer all these questions.’ Pack forwarded the case. He thought they looked like smart traders, but walked away due to what he saw as “significant recklessness in risk-taking and extremely poor infrastructure and accounting.”
Today, Pack says tracking positions in crypto can be particularly difficult because you have to create your own trading systems, and the task becomes “exponentially more difficult” as your volume of business grows. And if Alameda started with bad accounting systems, Pack says it’s “not inconceivable” that they could have ended up with a lot more debt than they thought, like Bankman-Fried claimed.