The Good, The Bad and The Ugly: Portraits of 3AC, FTX and Sam Bankman-Fried
Last time I was intrigued enough to write a blog post here, it was the 23rd of May, and the topic was nothing but the epic collapse of Terra Luna. Luna’s magnificent slump was the first decent black swan event of my relatively short crypto journey. Many described it as the biggest of its kind since Bitcoin’s creation. Little did they know, something more magical and monumental was on the horizon…
True crypto enthusiasts will remember the hero of the Luna collapse was — beyond any doubt — a weird looking & talking guy, named Sam Bankman-Fried. In the course of all that bloodshed, tears and fear, Bankman-Fried was seen as the superhero who offered many big actors a lifeline. His then-celebrated Alameda Research acquired several funds with the sole purpose of saving the industry from collapsing. He was smart, generous and powerful…
Many will also remember Zhu Su. A once-admired crypto fund manager who lost it all during that time and became the public enemy number one. Similar to Trump’s love for his Twitter account, Zhu was addicted to communicating with his audience on Twitter. Yet, he went completely silent following to his fund’s (3 Arrow Capital) downfall. All thought that he was gone for good, but –even to Zhu’s surprise- his time for redemption was going to come pretty soon…
Yes, what was I saying? Right, Alameda Research (and FTX)! For those who have been living in a cave, Alameda Research is (or “was,” until very recently) not only the Goliath of the crypto industry but also the most aggressive and the active player. Despite having its genesis only in 2019, until last week, it was estimated to worth around $60 billions. Its founder is Sam Bankman-Fried. Having a degree from the reputable MIT, Sam is known for his magical arbitrage trading success, where he made his first millions (the initial capital he had to had to execute that legendary trade is unknown). He then used all the capital and prestige he made from that arbitrage trade to create FTX (his crypto exchange) and Alameda Research. Since then, he (and his investments) went up only.
With his $16 billion personal wealth (which now sits on $3, according to Bloomberg), Bankman-Fried became one of the most influential people in the world. Forbes was describing him as the next Warren Buffett. A big number of people were expecting him to be the first Dollar trillionaire in the history. He himself was very confidently talking about buying finance giants like Morgan Stanley and Goldman Sachs. Any project he touched was turning into gold. Solana, the most popular crypto currency of the 2021 bull market, again had his blessing and full support. That’s why and how SOL kept rising even when Bitcoin and Ethereum went down.
Everything he did was truly magical… until it wasn’t.
Within the short span of a week (06/11/22–13/11/22), SBF went from hero to zero. Just like that! It all started with a tweet. Changpeng Zhao (Binance’s founder and the CEO, the biggest exchange in the market by a mile) said,
“Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won’t pretend to make love after divorce. We are not against anyone. But we won’t support people who lobby against other industry players behind their backs. Onwards.”
This statement might mean a little to uneducated eyes, but crypto veterans quickly understood that something huge was close at hand. Binance selling all their FTX tokens while there was no apparent reason, comparing FTT to LUNA while FTX was known to be one of the strongest actors in the market, indirectly accusing SBF of lobbying against other players… Being used to the horrendous information asymmetry in the industry, to me, this was nothing but a clear declaration of war. There was something terribly wrong, and I had no doubt that it wasn’t going to take too long to reveal itself. I was so sure that that single tweet would result in either FTX’s or Binance’s demise, the minute I read the tweet, I warned the members of my Telegram channel (consisting of 4 people!) about the high likelihood of a Giga black swan event (I must admit, it was truly disappointing to see bigger teams and organisations failing to respond to the crisis that quickly).
SBF’s reaction to CZ’s aforementioned tweet was pathetic. Instead of taking the confident stance of a man who has nothing to be afraid of (I mean, why not? After all, he was the CEO of the mighty FTX), he was gently begging CZ to bury the hatchet.
“5- Because I respect the hell out of what y’all have done to build the industry as we see it today, whether or not they reciprocate, and whether or not we use the same methods. Including CZ. Anyway — as always — it’s time to build. Make love (and blockchain), not war.”
When SBF realized that his miserable reply had the potential of spooking the stakeholders, he tried to hold his ground more firmly, but it was too little, too late. Everyone, with an IQ of 85, had already come to the conclusion that FTX was in deep trouble. This epiphany led to an immediate bank run that cracked the bare truth wide open: the majestic FTX was insolvent!
While watching FTT’s free fall, I was trying to guess the most likely scenario for what was going to follow. Even though I am proud to have a colourful imagination, what we witnessed next was beyond my wildest fantasies: on his Twitter account, CZ was announcing that Binance was going to acquire FTX to solve the ongoing liquidity crisis, and SBF was thanking him for that! Wait, what? CZ was declaring that he was ready to save FTX from the pit he personally kicked them into a day ago, and SBF was kissing CZ’s… hand! WOW!
Since then, we all watched Binance (after inspecting FTX’s books and setting our eyes on the huge hole in those books), deciding not to carry on with the acquisition. Of course, that created another shock wave on the market participants. It turns out, since day one, FTX had been fooling around with their customers’ funds. SBF was relying on other people’s monies to cover all the losses of Alameda Research. Yes, you read that right! The losses of Alameda Research. The very fund everyone thought was doing fantastic. So much so, it was capable of coming to others’ rescue. Apparently, it was all a charade! Alameda Research was never profitable, SBF was not a genius (at least not in finance), and FTX wasn’t a safe exchange. Even that arbitrage tale was complete fiction.
For those who are curious, the mechanism SBF used to operate is called flywheel scheme. To set a flywheel scheme up, you first create a centralised crypto currency (in our case, FTT). Then, using the network and the initial capital in hand, you pump the price of that token (since you are the sole owner of the circulating supply, not a lot of money is needed to accomplish this goal). Unlike less skilled scammers, you then do not proceed to dump your tokens on crypto degens for just a few million dollars. You have a bigger fish to fry, and that goal doesn’t require you to sell even a single token… Instead, showing hundreds of millions of tokens of this crypto currency on your sister company’s balance sheet, you create the illusion of massive financial power. Using that handsome asset on your balance sheet, you are now ready to hunt some stupid (or, most likely corrupt) fund managers sitting on billions of dollars of “smart money.” Every time you organize an investment round, your scheme is multiplied in value, and you receive hundreds of millions of dollars. This is how a flywheel scheme works. A crypto currency, created out of thin air, attracts billions of dollars of real money into a complete scam.
When run smoothly, such scams can survive during a bull market as there is endless demand for any good-looking asset. It’s only the bear markets which give us the opportunity to take these scams down a peg (if nothing else, for this sole purpose, we should embrace bear markets, no matter how painful they can be). This is why CZ chose this November (rather than November 2021) to run atilt at SBF and FTX. As a market veteran, he knew well, he didn’t have to know the exact state of FTX to be successful in his attempt to take them down. Just a strong first salvo was required. Market would do the rest (and did so).
Following to the collapse of FTX, something strange happened. All the losers of the Terra Luna incident resurrected one by one. After not saying a word for many months, figures like Zhu Su made their poetic returns. You could easily sense the relief they were experiencing.
“Why,” one would ask, “all these public enemies are showing signs of inner peace and calm all of a sudden?”
The answer came from Kyle Davis (co-founder of 3AC); it was Alameda Research who depegged UST, shorted Bitcoin and Luna, and triggered the downfall of Terra Luna ecosystem as a whole.
All these once-legendary people are now finding redemption in SBF’s well-deserved fall. Maybe they will never have such wealth and respect again, but at least they will not be the scapegoats anymore, for we all have finally found the real sinner.
