Sam Bankman-Fried: A Closer Look at Crypto’s Former Golden Boy

Until Sam Bankman-Fried’s FTX cryptocurrency exchange files for bankruptcy, the likelihood of a multi-billionaire losing his entire fortune in one weekend seems pretty remote. The charismatic crypto billionaire was a favorite among wealthy investors, but their golden boy quickly turned into their worst nightmare. Let’s dive deeper into the man behind the biggest crisis the crypto industry has suffered to date.

Abnormal returns: a financial gateway drug

In 2013, after graduating from the Massachusetts Institute of Technology (MIT), physics major Sam Bankman-Fried made his first fortune working as a trader for proprietary trading firm Jane Street Capital, a company that would pay traders quantitative beginners annual salaries of $450,000. He acquired an appetite for risk by trading exchange-traded funds, currencies and futures.

In true entrepreneurial spirit, Sam dreamed bigger. He leveraged his newly acquired wealth in 2017 when he founded Alameda Research, the now bankrupt crypto hedge fund behind the collapse of FTX. In 2019, he then founded the crypto exchange FTX to facilitate cryptocurrency exchanges for customers. The birth of FTX coincided with the bull market that sent cryptocurrencies skyrocketing and attracted huge speculative investments.

Sam Bankman-Fried – a humble but resourceful billionaire

Sam’s scruffy looks and humble character made FTX a smash hit among venture capital and private equity firms, and Sam reportedly closed a $210 million investment from Sequoia Capital while playing. League of Legends.

FTX has also become a popular brand in the sports world. FTX promoters included Tom Brady, Stephen Curry, Naomi Osaka and the Mercedes F1 team. Some promoters received equity in FTX for their efforts, with Tom Brady investing $650 million in the exchange. This strong branding campaign propelled FTX to dizzying heights. FTX has partnered with the World Economic Forum and built an infrastructure to provide funds to Ukraine. Sam soon began lobbying politicians for a stronger crypto regulatory framework. Sam donated $5 million to current US President Joe Biden in 2020 and another $50 million to politicians ahead of the 2022 midterm elections.

A sacrificial lamb for the crypto industry

On September 28, 2022, Sam tweeted that FTX was performing a routine portfolio rotation which would have no impact on client funds. On November 2, a CoinDesk report revealed that $4 billion in client funds were transferred from FTX to Alameda Research. The report also leaked details about Alameda Research’s balance sheet, revealing that much of its $14.6 billion in assets were client funds transferred from FTX. The funds were in FTX’s flagship cryptocurrency, FTT, and were used to facilitate several risky trading ventures.

This concentrated exposure prompted Binance CEO Changpeng Zhao (CZ) to shed Binance’s stake in FTT, a move he publicly tweeted about. This, in turn, triggered a huge drop in the value of FTT and a run on FTX deposits. With Sam looking for a potential buyer, CZ agreed to acquire FTX on November 8 to protect depositors, only to reverse that decision shortly thereafter. FTX filed for Chapter 11 bankruptcy on November 11.

Keep your friends close and your management ignorant

People started noticing potential warning signs of FTX’s ultimate demise. Many of FTX’s key employees were friends of Sam from MIT, very few of whom had a background in finance. One of them was Sam’s ex-girlfriend, Caroline Ellison. She was named CEO of Alameda Research and expressed her appetite for risk, publicly endorsing amphetamine-based drugs and bragging that she only needed elementary school math to run the fund. Reports also show that management had no idea what FTX was doing behind the scenes. A former FTX employee told Forbes that its management was “just a bunch of degenerate kids when it comes down to it.”

Conclusion

While it is clear that much of the blame lies with Sam Bankman-Fried and his clique of peers, the revelation also highlights a lack of homework done by investment banks, hedge funds, securities firms private equity and celebrities when investing in FTX. To facilitate proper due diligence in the future, countries’ regulatory frameworks should include well-defined reserve requirements for infant industry players. This will likely need to be different than traditional finance due to the volatility of crypto assets.