What The FTX Just Happened?
Is there such a thing as an average-looking billionaire businessman?
It depends on the era in question, really. One or two decades ago, no fine upstanding billionaire would be seen in public without a sharp Saville Row suit and Edward Green brogues.
A few decades prior, when the world's billionaires consisted of just one or two angry oil barons with unfeasibly bushy eyebrows, a cravat and monocle might have accompanied the look.
Either way, plenty of non-billionaires dressed the same way, making it almost impossible to identify someone magnificently caked in dough from a regular person.
These days, it's even harder to tell. Elon Musk, Richard Branson, Mark Cuban, and others like them appear, for the most part, just like any other person.
There is no common identifier – of course there isn’t. It’s a silly question, really. And who cares anyway?
There is one thing, though.
Up until last week, If you happened to see a young businessman being interviewed on Bloomberg, appearing on Jim Cramer’s Mad Money, or even taking command of a seminar keynote speech, looking less like he represents a multi-billion dollar company and more like he belongs on the front cover of Bum With a Shopping Cart Monthly, the chances are that the person in question was Sam Bankman-Fried, founder of the second largest cryptocurrency exchange in the world, with an estimated personal net worth of over $26 billion.
I know what you are thinking, and you are right. Who cares how someone chooses to dress? Mind your own business. Live and let live.
In that sentiment, I agree with you, but only to a point; a remarkably dressed-down and shaggy appearance becomes pertinent to this short case study when it is quite obviously part of a contrived strategy.
A strategy of branding yourself as a quirky genius simply by appearing on CNN wearing an old gravy-stained tee shirt and adopting a nervous tick.
I am a unique and rare business leader whose every ounce of genius energy goes into growing my successful business, tick, and nothing else. Hence my shaggy appearance, tick.
It is a branding strategy that almost paid off for Sam Bankman-Fried - also known by the acronym SBF - who does not look like the archetypal crypto billionaire but does, in fact, have the permanent look of someone who just spent two weeks rooted to a couch playing League of Legends and eating cereal out of a giant baking bowl, while taking over ambitious bong hits.
He opposes all the usual billionaire stereotypes and even drives an old Toyota Corolla just to reinforce the ‘man of the people’ image he had created for himself.
This characteristic was lapped up by the media, distracting from a somewhat important question that was seemingly breezed over by Jim Cramer and co: what the hell have you done with your investor's billions?
That distraction no longer serves a purpose now that his gigantic crypto mega-exchange has become the most recent casualty of the brutal cryptoverse, losing most of its $32 billion value in a few short days through quite wild, dramatic, and highly controversial circumstances.
SBF had become one of the most iconic and beloved faces in the crypto sphere through his highly recognizably odd appearance, next-level philanthropy, and substantial political donations. He was Joe Bidens second biggest donor before he even turned 30.
Until last week, SBF was the CEO of FTX, the second-largest crypto exchange in the world.
He was celebrated as the sweetheart of crypto, having been featured on the front cover of Forbes magazine while making regular appearances on the main finance television programs and giving frequent keynote speeches at the main crypto events. For a year or two, he was everywhere.
SBF had crowbarred FTX into the spotlight through lavish advertising campaigns, including millions alone on just one Superbowl advert featuring Larry David. He had seemingly sprung out of nowhere, becoming an instant celebrity in crypto circles, even cozying up with real celebrities such as Jeff Bezos and Leonardo DiCaprio.
But it was all very much a spoof. As it transpires, the second largest crypto exchange in the world was just a small office in the Bahamas, staffed by ten very young, polyamorous, barefoot co-workers who slept on bean bags.
Formative Years & Alameda Research
Born in 1992 and raised in California by Stanford law professor parents, SBF graduated from MIT in 2014 before joining a well-respected New York trading firm. Crypto was in its infancy in 2014, but SBF recognized its potential and began to explore opportunities within the sector.
Leveraging his MIT physics and mathematics degree, he figured out and exploited a flaw in the Bitcoin (BTC) trading system and determined an effortless way to make millions by purchasing BTC in America and selling it on Japanese or South Korean exchanges at a higher price.
SBF was the first to capitalize on what is now referred to as international arbitrage trading and made huge profits - some days trading as much as $30 million.
While this seems like a pretty straightforward, uncomplicated trading method, international arbitrage was not a simple strategy to execute in 2014. A complex network of connections and accounts needed to be created in Asia to facilitate the transactions.
SBF became something of a dab hand with this strategy, earning upwards of $1 million daily.
He quit his job in 2017 and created the quantitative crypto (slash hedge fund) trading firm Alemeda Research, using the profits from his arbitrage trading to fund the company.
Business boomed, investors poured in, and his wealth exploded, as did his fame, through high-profile campaigns of altruism and philanthropism, regular TV appearances, and the whole shaggy personal branding thing.
Alongside ex-Google employee Gary Wang, SBF founded the crypto exchange FTX in 2019. For those unfamiliar with crypto practices, an exchange allows you to buy, sell, and store cryptocurrencies.
Think of it as a middleman between the investor and the actual crypto technology (known as a blockchain).
Exchanges have become like traditional banks in some ways, with many people using them as a place to store both regular fiat currency and the cryptocurrencies they have purchased. The FTX exchange created its own ‘native’ cryptocurrency, the FTT token.
These tokens can be purchased on the FTX exchange to buy, sell, and trade other cryptocurrencies or used as a store of value and left inside the exchange.
Over 250 million tokens had been sold within a couple of years, causing the price to reach an all-time high of $80 per token in 2021.
FTX was incredibly successful. In 2020, they acquired a mobile tracking app for $150 million. In July 2021, a $900 million funding round valued FTX at $18 billion.
Later that year, the company sponsored the Mercedes Formula One racing team and, soon after, raised capital at a valuation of $25 billion.
They continued to grow at breakneck speed. In January 2022, FTX raised $400 million, at a value of $32 billion. Celebrity endorsements flowed, with NBA stars Stephen Curry and Tom Brady becoming ambassadors.
In February, an FTX Superbowl commercial aired featuring the comedian Larry David, and in June, they purchased the naming rights to Miami Heat's home stadium to the tune of $135 million.
SBF had become the talk of the crypto world, was applauded and celebrated in equal measure, and was tipped by many to become the world's first trillionaire.
Part of his success is owed to the forward-thinking, progressive nature of the FTX exchange, created to facilitate modern-day banking-style trades for crypto - think futures, shorts, longs, that kind of thing.
This type of crypto trading was impossible with regular American exchanges owing to strict regulations and is probably the main reason he decided to base FTX in the Bahamas - away from unwanted regulatory attention. It worked. FTX was booming.
But then the walls came tumbling down.
SBF took less than one week to go from being heralded as the King Of Crypto to his company filing for insolvency and him stepping down as CEO, and now facing federal investigations. To fully grasp the downfall of SBF, we must first understand how Alameda Research (AR) operated.
The primary purpose of AR was to facilitate trades and generally act as agents between crypto buyers and sellers, using investor funding for investment capital. A hedge fund, in loose terms.
To encourage rapid growth, AR offered all investors a 15% annualized fixed-rate return with no downside. This is a remarkably generous return, if not highly ambitious, given the volatile nature of crypto trading.
Leading voices in the crypto space questioned how such a healthy return was possible, but despite the raised eyebrows, SBF remained unchallenged. It was commonly accepted that the guy was simply a genius, able to operate outside of the usual realms of possibility.
In a strong crypto market, this was achievable - at an extreme push, with the stars aligned and the crypto gods smiling down on you - but 2022 hasn't been the best of years for crypto, with Bitcoin suffering a prolonged bear market and several high-profile ‘altcoins’ crashing.
Guaranteeing a 15% return to investors in addition to lavish sponsorship deals must have become something of a challenge.
Then, breaking news. In November 2022, the well-respected crypto news website Coindesk leaked an AR balance sheet indicating that FTX was lending funds (including its native FTT token) to AR to finance trades, settle customer balances, and cover market losses. The amounts were staggering; allegedly, $10 billion had been transferred over to AR.
It has been further revealed that $1.7 billion of customer funds have completely vanished. Customers, it should be noted, who had used the FTX as a store of value, no different from a traditional bank.
Alameda had publicly announced that they had assets worth billions and were highly profitable.
The Coinbase leak exposed this as a lie, and the truth paints a very different picture: with Alameda’s $10 billion in assets, a whopping $8 billion of that was FTT tokens created and managed by them, in comparison to approximately $5 billion in liabilities.
At the time of the Coinbase leak, FTT's total available market cap was just $3 billion. The amount of FTT they owned exceeded the amount trading in circulation. The industry term for this, apparently, is illiquid.
A key element of the fiasco/exposure occurs when Binance, the chief competitor to FTX and investor in the FTX exchange, enters the fold. But first, let me introduce you to Caroline Ellison.
Ellison was a junior trader for Jane Street, the trading company that SBF worked for upon leaving MIT. They met, had a brief relationship, and stayed in touch after SBF quit his trading job. Ellison went to work for SBF at AR.
Later, when SBF created FTX (please try and keep up with the acronyms), he promoted Ellison to CEO when the previous one resigned. At just 27 years old and only two years out of school, she was put in charge of a multi-billion dollar company with hundreds of subsidiaries. What could possibly go wrong?
As the fallout from the Coinbase leak unfolds, The CEO of Binance, Changpeng Zhao, decided to make a rather brilliant move by posting a tweet announcing that Binance will sell its entire stock of FTT tokens, totaling $500 million.
If this wasn't reason enough to cause a bank run, Ellison then makes matters infinitely worse by responding with a tweet saying that FTX will happily “buy it all” for $22 (per token). At this point, FTT is worth $25.
She had unwittingly alerted the entire crypto world that FTX needed to keep the price at a $22 minimum. At any other time, this wouldn't have been a red flag. But with the Coinbase leak, red flags were poised and ready to be raised.
With this rather mature mistake, FUD kicks in (fear, uncertainty, doubt) amongst investors, large and small, and a bank run ensues. Holders of FTT scramble to sell the token on the FXT exchange, but due to FTXs undeclared liquidity issues, they cannot keep up, and withdrawals are paused, creating even more widespread FUD.
More rumors abound that FTX is insolvent, cheating the books, but specifics are vague. Then Binance offers a bailout, providing a nonbinding letter of intent.
Investors breathe a sigh of relief, but it is short-lived; 48 hours later, Binance tweeted that they have reviewed FTX’s books and no longer wish to become involved.
The final nail in the coffin, then.
More information transpires that FTX has $8 billion in customer exchange deposits that it cannot meet. This is where the fiasco goes next level from immoral and dubious to illegal and criminal, and the feds start investigating.
FTX, AR, SBF, and any other acronyms you care to indulge, is now dead and buried.
All SBFs companies have now filed for bankruptcy protection, and he has lost all of his personal wealth. Remember, this happened over a single week. Shocking, really.
His $40 million Bahamian penthouse is now up for sale. Interestingly, the ownership of this stunning property wasn't something he talked about previously. I guess it clashed with the whole Corolla-driving shaggy-genius image.
Details are still emerging, and there are so many things we haven't touched on. The $600 million hack that transpired the day after FTX paused all deposits, for example.
The polyamorous relationship with his ten staff (allegedly). Rumors of amphetamine addiction among himself and his team (again, allegedly).
The $40 million donated to lobby politicians aimed at creating new regulations that would ultimately crush his main competitors.
And then there is the whole ‘effective altruism’ thing - a belief he held (and spouted quite freely during TV interviews at every given opportunity) that he wanted to save the world and donate his entire fortune to good causes.
This might have seemed like a bold, extremely generous ambition at the time. Still, with the benefit of hindsight, one wonders if that was just another branding exercise in keeping with his dressed-down, extremely casual appearance. Probably.
No one is entirely sure where SBF is, at least at the time of writing. He has put out a couple of tweets expressing his sorrow, but details regarding his actual location are vague.
There are rumors of Argentina. Sightings in Brazil. Speculation that he has a secret mansion somewhere in the Bahamas. He could be anywhere.
He is not hiding, per se, but he is certainly not going out of his way to make his whereabouts known.
As it stands now - November 17th, 2022 - SBF hasn't been charged with a crime, but you would imagine it's only a question of time. He is probably praying that those political donations serve a purpose because before this fiasco, he didn't seem to get much in return for them.
With a government bail-out impossible (remember, this was a company located in the Bahamas), there is probably very little chance of investors seeing their money back. For some people, that's hundreds of millions.
For now, we can only speculate what happened to the missing funds. But one thing is sure: he wasn't spending it on clothes. Or beds. Beanbags, maybe.
Opinion - Red Flags
As the crypto world reels in shock from the whole fiasco, disaster, calamity (whatever adjective you chose to go with, there are many) widespread 20/20 hindsight is abound. There were staggering red flags, but people chose to ignore them. Why, and how?
Some extremely clever people, well-versed in all things crypto, chose to invest in SBF. These people are famed for due diligence and are not prone to investing without caution.
It seems that they exercised none of these traits, however, and simply threw money at an apparent genius, believing he would come good.
But again… Why?
Surely SBF’s quirky genius branding couldn't fool some of the sharpest investors in the world purely because he drives an old Corolla?
Did his shaggy image really hold so much stock with Binance? Did Temasek throw $210 million at SBF simply because he seemed like an eccentric crypto sage?
Surely Softbank, with its presumably vast due diligence department, didn't look at SBF’s sage-like qualities and say, “yeah, the guy is a genius. I'm sure it will all work out. Believe everything he says.”
It appears that's exactly what they did. It's hard to imagine that his image alone would carry such unique weight, but we can only assume that he appeared to most people as a once-in-a-lifetime crypto prodigy, and the investors themselves threw caution to the wind, owing to a trait usually reserved for amateurishly naïve investors. FOMO.
FOMO, it seems, can strike even the most astute investors. SBF created a genius image, reinforced it with his incredibly unique appearance, and some of the world's leading investors were hoodwinked; deeming it unnecessary to investigate the books properly. There really is no other conclusion to arrive at.
The New York Times reported, during the first few days of the collapse, that SBF commonly shut down any attempts at investor due diligence during meetings by saying, “FTX is my company, and I plan to run it with little oversight. Investors should "support me and observe."
One of the main investors, Sequoia, mentioned in a previous and now deleted article (but you can see it here) that its partners were not just impressed with SBFs vision but also his quirky nature - referencing one incident in which SBF was playing League of legends during a Zoom meeting with them.
It beggars belief, doesn't it?
So. What lesson to take from this? Well, it's two-fold. Firstly as an investor, extreme due diligence is essential and a prerequisite. Dig, and dig very deep, at all times.
Don't be blinded by anything other than common sense reasoning, books, and balance sheets. Everything else is irrelevant, including sentiment.
Secondly, what lesson to take as a startup looking for investors? I am a little shell-shocked at the moment, and as a result, my advice might not be the most earnest, but all I can think of is this:
Dress like a bum, drive an old Corolla and sleep in a bean bag. That's all you need to pull in nine figure investors, apparently. If you have a Nintendo, take it along to any investor meetings, and play it with your feet up on the meeting room desk.
I have an old sweatshirt with a rather stubborn curry stain caked in - you can borrow it if you like.