How Sam Bankman-Fried, who lost $17 billion in the FTX crash, made his first million and what does Kimchi have to do with it
Sam Bankman-Fried is the former head of the FTX crypto exchange, at the peak of his fortune was on the 60th line Forbes list. And this is at the age of 30. As with any success story, the most interesting part is the first million. Thanks to Sam’s trial, in the aftermath of the FTX collapse, a lot of material and information has emerged that makes it possible to understand how Sam’s first million was earned. And it all started long before the crypto-exchange….
Portrait and contacts to help later
Sam Bankman-Fried was born in 1992 as a professor at Stanford Law School. He studied at the Massachusetts Institute of Technology and at the same time worked at the trading company Jane Street Capital. While studying at MIT, Sam blogged about utilitarianism.
Sam’s passion for utilitarianism led Sam in September 2017 to the Center for Effective Altruism, where he served as director of development. It is here that two important acquaintances from the point of view of future earnings will occur:
— Tara Mac Aulay, as of September 2017, was COO at the Center for Effective Altruism Development. It is with Tara Mac Aulay that Sam will open his first company Alameda Research in November 2017.
— Takashi Hidaka, organizer of Effective Altruism Tokyo, we will talk about his role in Sam’s first million later.
Effective altruism is a philosophy and movement that seeks to make the world a better place, in a rational way. Proponents of effective altruism ultimately seek to achieve the maximum increase in the social good.
After working at the Center for Effective Altruism for two months, Sam Sam Bankman-Fried and Tara Mac Aulay set up a trading company, Alameda Research. After several months without incident, in January 2018, the couple found a big opportunity.
Kimchi Premium
The kimchi premium is the price gap for cryptocurrencies on South Korean exchanges compared to foreign exchanges. Data show that between early 2016 and early 2018, the kimchi surcharge averaged almost 4.80%, and in January 2018 it reached almost 55%.
It is assumed that the price difference arose due to two factors:
- the popularity of technology in the country and, as a result, the popularity of bitcoin
- restrictions of the South Korean government, limiting the amount of capital entering the country and exported from it.
Restrictions led to the problem of converting the local currency won into dollars. As traders on South Korean exchanges seek to move money in and out of the dollar, the restrictions created a backlog in demand, temporarily pushing up the price of bitcoin. This phenomenon has been named “Kimchi Premium” after a local dish of pickled cabbage and radish.
For example, on December 15, 2017, the price of the cryptocurrency peaked at $18,479 on Coinbase, a San Francisco-based cryptocurrency exchange. On the same day, the price of bitcoin on the Bithumb exchange in South Korea hit a high of $21,000. By timing their trading correctly, traders could profit up to 14% on bitcoin price differentials. To do this, they would have to buy bitcoin through Coinbase and sell it through Bithumb.
On paper, it looks like an arbitrator’s dream, but in reality, there were problems. South Korean crypto exchanges demanded both a phone number in South Korea and a bank account. Both were almost impossible to obtain quickly, especially for a foreigner. Also for citizens of South Korea, the legal annual limit for transferring funds abroad was $50,000. In addition to this, sending funds from South Korea to the United States led to a large commission.
Sam Bankman-Fried Alamedia was unable to use Kimchi Premium, but this led to the idea of looking for a similar arbitrage link in another market.
Looking towards the rising sun
At the same time, Japan did not have such severe restrictions on transferring funds abroad as Korea, which gave Sam enough freedom of action to implement his arbitrage strategy.
But still there were some problems:
First, Alameda needed to create a Japanese company that would avoid the suspicions of Japanese banks and regulators. Here an acquaintance from the Center for Effective Altourism comes to the rescue. They will collaborate with Takashi Hidaka, an organizer of Effective Altruism Tokyo with over 20 years of banking experience. sphere. Officially, the Japanese division of Alameda will be called Alameda Research K.K. The exploratory part of the Alameda name will help to splurge on small Japanese banks.
Second, while transferring bitcoin to Japan was easy, sending fiat back to the US was not at all. To help them, Sam and Takashi found a Japanese graduate student also associated with Effective Altruism. Every morning he lined up at the bank branch and made telegraphic transfers in the United States.
Here is how Sam describes that period:
“And now they’re like, wait, you’re telling me that two days in a row, you’re sending an international wire transfer across currency, across continent, in the same direction for the same size with no transfer coming the other way. That’s sketchy as s***, right? Where is your money coming from? And we’re like, well, it’s fake internet money. And they’re like, oh, that makes us feel better..”
A similar scheme worked and brought 10% per day, but Sam Bankman-Fried had experience in Jane Street — a trading company and of course understood what needed to be done. He began to look for a loan in order to increase the turnover in this scheme. Here again, he was helped by the contacts he received thanks to the community of effective altruism. Sam borrowed money from Ian Tallin, co-founder of Skype.
Nothing is eternal
The arbitrage opportunity closed after just four weeks of trading in January 2018. Other crypto traders caught on to the trick, and the sudden influx of bitcoin from Alameda and other traders lowered the price of bitcoin.
In total, Alameda earned $20 million in profits.
In 2022, Sam’s net worth will drop from $17.2 billion to nearly 0.But that’s another story… .
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