A brand new report from the Wall Street Journal has gone deep on the data regarding the recent collapse of Sam Bankman-Fried’s failed crypto hedge fund Alameda Research and its relationship to the later-established crypto exchange FTX.
According to the report the former world-leading hedge fund almost collapsed in 2018 and was propped up for years by a series of false promises that Bankman-Fried made to investors between 2018 and 2021.
How not to trade crypto: a brief history of Alameda Research
Alameda Research was founded in 2017 and according to traders familiar with Alameda Research’s financial activity, the hedge fund made some reasonable profits in the early days of 2018 — clearing somewhere between US$10 and US$30 million by betting on the difference in the price of Bitcoin on Japanese exchanges.
However, things rapidly took a turn for the worse, with the automated trading algorithms at Alameda making some egregious errors that lost them tens of millions of dollars. By April 2018, Alameda Research had witnessed a near 70% decline — roughly US$70 million — in the value of its assets due to some poorly made plays on the price of Ripple (XRP) and other more niche cryptocurrencies.
Because of this, Alameda’s then-CEO Sam Bankman-Fried went on the hunt for extra funding. He did this by sponsoring the inaugural Binance Blockchain Week conference for $150,000 where he lured in potential lenders with promises of “high returns in any regime”.
These loans have no downside — we guarantee full payment of the principal and interest, the pitch deck read.
We are extremely confident we will pay this amount. In the unlikely case where we lose more than 2% over a month we will give all investors the opportunity to recall their funds.”
The deck also bragged of Alameda’s supposed returns over the course of that year, which claimed to have racked up more than 110% in annualised returns between March to October 2018.
Alameda Research red flags were widely ignored
Gaudy promises like these are typically giant waving red flags for those with any experience in the world of those investing. But hype around the wonder boy was real and investors piled cash into what they thought was a cutting-edge crypto trading firm. He returned from the Binance event with tens of millions lining his back pocket.
Bankman-Fried then leveraged Alameda’s reputation as a cutting-edge crypto firm with mysterious secret sauce (borrowing copious amounts of money to front run trades) to launch the crypto exchange FTX, which he marketed to institutional investors as the “safest” place to engage in crypto investing.
In addition to the bombshell revelations that Alameda Research had been struggling to keep its head above water since the start of 2018, recent reports have also found that earlier claims made by Sam Bankman-Fried that the hedge fund and FTX had always operated independently are guaranteed to be false.
Findings from a recent lawsuit brought forward by the Securities and Exchange Commission (SEC) found that Bankman-Fried included a piece of code that allowed Alameda Research to gain an unfair and illegal trading advantage.
Essentially the new line of code allowed Alameda to do what former Alameda Research CEO Caroline Ellison called: “going negative in coins”. This means that Alameda was allowed to borrow near-unlimited amounts of capital from FTX regardless of the amount of collateral it owed.
I’m sorry probably won’t cut it
Despite the growing evidence of downright criminal behaviour perpetrated at Alameda Research, Sam Bankman-Fried remains adamant that the entirety of the FTX collapse comes down to bad book keeping and “poor risk management”, something which he has apologised for at length to a variety of news outlets.
His increasingly transparent efforts to leverage apologies to obscure his nefarious behaviour has even been parodied by the creators South Park, who created a 90 second video of Bankman-Fried repeating the phrase “I’m sorry” over a number of humorously selected FTX-related backgrounds.
To this point, FTX is expected to plead “not guilty” to eight charges of fraud at a lower Manhattan federal court on January 3rd. This is despite recent guilty pleas from former Alameda Research CEO Caroline Ellison and FTX co-founder Gary Wang, who are now both “fully cooperating” with federal prosecutors.
Essentially, this report has established that Alameda was doomed from the outset, but due to years of unbridled arrogance from its founders combined with a seemingly endless bankroll fuelled by crypto market hype, failed to come undone until November last year.
All in all, it can be seen in clear detail that Sam Bankman Fried didn’t just prop up a failing hedge fund with hundreds of millions in borrowed funds, he then used that fund’s reputation to launch and fuel the growth of the now-defunct FTX.
The collapse of FTX has seen both institutional and retail investors lose more than US$10 billion, cementing its place in the history books as one of the largest cases of financial misconduct in modern history.
