The massive fraud perpetrated by Sam Bankman-Fried and his posse of insiders has cost the crypto industry an incalculable loss. There's a numerical figure to attach here — $8 billion worth of customer funds was spent greasing the political wheel and on trifles like luxury real estate and Tom Brady's endorsement. While the industry may very well move on from the embarrassment of SBF's "old-fashioned" embezzlement scheme someday, there is a certain, unalterable harm done from learning the supposed smart money in crypto was incredibly dumb.
Billions were misappropriated to prop up SBF's money-losing hedge fund, Alameda Research. This went towards venture capital bets, which catalyzed the liquidity mismatch that ultimately brought SBF down, as well as plugging holes in Alameda's finances. If at one time befuddled outsiders thought SBF must be making money hand-over-fist, all the evidence now shows Alameda Research was a money sink. Founded as a "market neutral" market maker, Alameda eventually developed into a pump-and-dump firm that inexplicably lost money during the largest bull market to date.
This is a roundup of some of the worst gambles we know Sam Bankman-Fried took during his five years as a crypto-trading behemoth, gleaned from the fallout of FTX, his ex-girlfriend Caroline Ellison's courtroom testimony and on-chain sleuths. For a man obsessed with calculating the "expected value" of his actions, SBF was remarkably bad at gauging reality — in hindsight that may be expected, considering he thought taking the stand at his own criminal trial and likely perjuring himself was a risk worth taking.
Creation and misuse of FTT
On May 8, 2019, shortly after the founding of FTX, Sam Bankman-Fried launched his own exchange token called FTT. The idea was to give the young platform an "equity cushion," apparently at a time when getting loans was difficult for the upstart traders. From the outset, the Department of Justice's cooperating witness Caroline Ellison said SBF had directed Alameda to protect the price of FTT — at first buying the token to prevent it from ever dipping below what SBF saw as a key psychological price level of $1.
Alameda Research had received between 60%-70% of the initial token distribution, and in early 2020, SBF told his technical co-founder Gary Wang to include Alameda's FTT stockpile in calculating its balances. In many ways, this was the original sin of FTX long before SBF directed head coder Nishad Singh to program the "Allow Negative" functionality used as a backdoor to drain customer funds from FTX.
The largely illiquid token, which would have cratered had Alameda been required to sell it, was used as collateral in billions of dollars worth of investments and loans, and created a false impression of Alameda/FTX's conjoined "net asset value" (NAV), which convinced SBF it was okay to borrow billions worth of customer funds, Ellison and Wang both suggested on the stand. Without FTT, many of Sam Bankman-Fried's errancies wouldn't have been contemplated.
Although FTT was often treated as a bet on SBF's potential success, the token did not actually represent equity in the exchange. Yet, SBF often treated it as such. As part of Binance's investment in FTX and SBF's later buyout of Changpeng Zhao, Bankman-Fried had given his would-be competitor a total 23 million FTT tokens. Worth ~$529 million at the time CZ threatened to liquidate his FTT holdings, that was leverage that eventually enabled CZ to deal the fatal blow to his rival at a time when the world was increasingly worried about Alameda's solvency.
Misplaced XRP
Two months before FTX went bankrupt, SBF reportedly circulated plans to wind down Alameda. That never came to fruition, of course, because Alameda had by that point had an unpayable $14 billion debt to FTX. Still, some of SBF's deliberations from the time were entered into evidence, including a Twitter thread he had planned to send had Alameda been dissolved. In the draft, he described Alameda Research as "one of my largest successes–and then, briefly, largest failures–and then again successes."
While there are many "failures" worth mentioning, SBF noted one of his largest was when "the company" lost track of "millions of dollars worth of XRP tokens." He explained: "In February 2018, we got lazy–and our accounting was lazy–and we lost most of what we'd made." In typical verbose SBF style, he continued: "Employees were sad and angry and frustrated, and I had no idea what to do about that."
Although he blamed the company, this loss corresponds with a known attempt by early Alameda employees to toss SBF out of his own company after a string of compulsive and risky trades that lost almost all the trading firm's profits...
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–D.K.
@danielgkuhn
daniel@coindesk.com
