It was 2017. The ex-Jane Street Capital quant trading partner noticed something strange when he looked at CoinMarketCap.com’s page listing the price of Bitcoin on all exchanges. Although the price of bitcoin is now fairly uniform across all exchanges, Bankman Fried stated that he used to see a difference of up to 60% in its value back then. He said that his immediate instinct was to enter the arbitrage trade, which involves buying bitcoins on one exchange and selling them back on another exchange. The profit is equal to the spread.

Bankman-Fried stated in September, “That’s where the lowest hanging fruit is.”

South Korea was a great place to arbitrage, as the bitcoin exchange-listed price was much higher than in other countries. The Kimchi Premium was the name given to it, a reference to the traditional Korean side dish of fermented and salted cabbage.

Sam Bankman, FTX, to NYT: If I had concentrated more, I would have been more thorough

After spending a month experimenting in the market, Bankman Fried launched Alameda Research, his trading house. This was named after Alameda, California near San Francisco. He wanted to take the opportunity on board and continue working full-time. Bankman Fried stated in September, in an interview, that the firm could sometimes make as much as one million dollars per day.

SBF, as he is also known, gained street cred for his relatively simple trading strategy. This was partly due to the fact that it wasn’t easy to execute on crypto rails five years ago. Bitcoin arbitrage required setting up connections to all the trading platforms and building complex infrastructure to simplify the operation of making trades. Alameda, Bankman-Fried’s trading platform, excelled at this task and the money started to roll in.

The SBF empire grew from there.

Alameda’s success prompted the spring 2019 launch of the crypto exchange FTX. FTX’s success led to a $2 billion venture fund that seeded other cryptocurrency firms. At its peak, in March, Bankman-Fried’s personal fortune was more than $16billion.

The FTX logo was everywhere. It was on everything, from Formula 1 race cars to a Miami basketball court, that Bankman-Fried became the symbol of crypto. He went on a press tour for 30 years, boasted about having a balance that could eventually buy Goldman Sachs, and was a regular in Washington. he promised to invest $1 billion in U.S. elections before later backtracking.

It was all a dream.

Bankman-Fried claimed that his company and he were safe from the crypto market’s decline this year. His operation was severely affected by the sector-wide collapse. Alameda borrowed money this spring and summer in order to invest in failing digital assets firms. To keep the sector afloat, he then reportedly siphoned FTX customers’ deposits to meet his immediate debt obligations and stave off margin calls. The scheme was exposed after a Twitter battle with Binance’s CEO.

Alameda, FTX, and a number of other subsidiaries Bankman-Fried established have filed for bankruptcy protection. He has resigned from his leadership positions and lost 94% of his personal wealth in one day, like losing your entire bankroll at the casino. His $40 million Bahamas penthouse is reportedly for sale. It’s unclear where he is at the moment.

It was a steep drop from hero to criminal. There were many signs.

CNBC interviewed Bankman-Fried in September about one of his core principles for playing the markets: working with incomplete data.

He said, “When you can kind of begin to quantify and map what’s happening, but you also know that there are many things you don’t understand.” You know that you are being approximate but you still have to try and figure out which trade to make.

The following account was based on reports from CNBC, Microsoft, The New York Times, and The Wall Street Journal. The following information is compiled from multiple news sources. It shows an investor who was overextended and who frantically tried to cover up his mistakes using questionable and possibly illegal strategies. He also surrounded himself with a tight circle of advisors who could or would not stop his worst impulses.

What went wrong during the past year?

According to reports, Alameda started borrowing money in the past two years for various purposes including venture investments.

Six months ago, the crypto sector saw a wave of giants collapse as low token prices drove liquidity out of the market. The first was the collapse of a well-known stablecoin that is pegged in U.S. dollars, terraUSD, or UST. Its sister token luna, also failed, wiping out $60 Billion. Three Arrows Capital (or 3AC), which was one the most prominent crypto hedge funds in the industry, was brought down by that collapse. Voyager Digital, Celsius, and other crypto lenders were exposed to 3AC and fell in rapid succession.

Hart Lambur, an ex-Goldman Sachs government bond trader, said that leverage is what causes every implosion in a financial institution, traditional and crypto. He provided liquidity in U.S. Treasuries to central banks, money managers, and hedge funds.

‘’Lehman Brothers and Bear Stearns, Long-Term Capital and Three Arrows Capital all blew up because of bad leverage that was exploited and sniffed out by the market,” stated Lambur, who is now in decentralized finance.

In June, Bankman-Fried joined the fray to help some of the failed crypto companies. extended hundreds of millions in financing. In some cases, he tried to purchase these companies at fire-sale prices.

Some of Alameda’s lenders demanded their money back amid the bankruptcies. Alameda did not have the money because it wasn’t liquid anymore. Bankman-Fried explained that the trading company had borrowed the money and placed it in venture investments. This was a decision that was “probably not really worth it”, he said to the Times Sunday.

The Journal and the Times reported that FTX borrowed money from customers to pay off its debt obligations. This was done in order to quietly bail out Alameda. The amount borrowed was estimated to be in the millions. In an interview with the Times, Bankman-Fried acknowledged the move, saying Alameda had a large margin position on FTX. However, he refused to reveal the exact amount.

Bankman-Fried stated to the Times that it was “substantially larger than I thought it was.” “In fact, the downside risk was very substantial.”

Reuters reported that the Journal and had both estimated that $10 billion was the lifeline. Reuters reports that between $1 billion and $2 billion is missing from that emergency funding. FTX’s terms and conditions prohibit the use of customer funds without authorization. It would be a violation of U.S. securities laws on Wall Street.

They were supposed to be separated by firewalls. The two companies — one of the world’s largest crypto brokers and one world’s largest crypto buyers — were actually quite close. They were actually quite close, with Bankman-Fried admitting to the Times that they had a romantic relationship at one time between Alameda CEO Caroline Ellison and Bankman Fried.

Nic Carter, Castle Island Venture’s CEO, said that “FTX and Alameda had a very problematic relationship.” “Bankman Fried operated both an exchange as well as a prop shop. This is extremely unusual and not allowed in regulated capital markets.”

The lending and borrowing scheme between the two companies was more complicated than simply using customer funds to cover bad trades. FTX attempted to cover up the gap by denoting assets with two crypto tokens that were essentially fake — FTT, a token made by FTX, as well as Serum, which was a token promoted by FTX. According to financial filings by Matt Levine, FTX created and promoted Serum.

Crypto tokens are created by firms all the time. It’s an integral part of how the crypto boom in the past two years was funded. They usually provide some kind of benefit to users. However, their true value to traders is speculation, that is, the expectation that the price will increase. FTT owners were promised lower trading costs for FTX, as well as the opportunity to earn interest and rewards such as waivers of blockchain fees. Investors can make a profit when FTT or other coins rise in value. However, they are largely unregulated and susceptible to market downturns.

These tokens were essentially proxy for what people thought Bankman Fried’s exchange was worth since it owned the majority. The price of FTT reflected investor confidence in FTX.

The main point is that FTX was reportedly siphoning customer assets as collateral for loans and then covering it up with a token it created and printed at will. It drip-fed only a small fraction of its supply to the open market. The financial tricks between the two companies resemble the moves that nearly two decades ago sank Enron energy firm — Enron basically hid its losses by transferring underperforming assets off-balance sheets subsidiaries and then creating complicated financial instruments to hide the moves.

All this was going on, Bankman-Fried continued with his press tour and was hailed as one of the most important young tech entrepreneurs of our time. Then Bankman Fried, a rival exchange, got into a heated argument with Binance.

What went wrong over the past two weeks?

Binance and Bankman Fried have been friends since the very beginning of their time together. Binance made a strategic investment in FTX in 2019 and stated that it had taken a “long-term position” in the FTX Token, (FTT), to enable the ecosystem’s sustainable growth.

Fast forward to 2022, when it was the summer of 2019. Bankman-Fried asked regulators to investigate Binance, and criticized the exchange in public. It is unclear why it was done. However, there could have been legitimate suspicions. It could have simply been that Binance was a significant competitor to FTX as both an exchange and potential buyer of distressed crypto companies.

Whatever the reason, Binance CEO Changpeng Zhao (known as CZ) soon saw an opportunity to strike.

CoinDesk published a leaked balance sheet that showed Alameda had significant assets in FTX’s illiquid FTT to token. This raised questions about the solvency of the trading firm and FTX’s financials.

Zhao posted on Twitter on Nov. 6 that Binance owned approximately $2.1 billion in FTT and BUSD, its stablecoin.

The bomb was then dropped by him:

He stated that “due to recent revelations which have come to light, we decided to liquidate any FTT remaining on our books,”

Investors raced for money out of FTX. Bankman-Fried reported that the exchange had approximately $5 billion in withdrawals on Nov. 6. This was “the largest by an enormous margin.” On average, net inflows were in the tens to millions of dollars.

The rapidity of withdrawals demonstrates how the unregulated crypto market operates in an information vacuum. This means that traders must react quickly to new facts.

“Crypto traders are reacting faster to news and rumors, which in turn creates a liquidity crisis much quicker than one would see in traditional finance,” stated Fabian Astic (head of decentralized finance, digital assets, Moody’s Investors Service).

“Opacity in market operations can often lead to panic reactions which, in turn, create liquidity shortages. Astic stated that the developments with Celsius, Three Arrows, and Voyager show how easy it can be for crypto investors to lose confidence. This prompts them to withdraw large amounts and causes a near-death situation for these companies.

The FTT token’s value plunged along with mass withdrawals. Bankman-Fried sought investors to fill the multibillion-dollar gap left by Alameda. Multiple reports suggest that this value could have reached as high as $10 trillion. All of them declined and, in desperation, SBF turned to CZ.

Zhao posted a tweet on Nov. 8 stating that Binance had agreed to purchase the company. However, the deal contained a key term: it was non-binding. FTT’s stock price plunged after the sudden revelation that FTX needed a bailout.

Zhao stated that he had done his research and did not like what he saw. This effectively sealed FTX’s fate. Bankman-Fried suggested to the Times that Zhao had not intended to purchase it.

Friday, November 11, FTX (and Alameda) both filed for bankruptcy. FTX, which was valued at $32 million during a financing round earlier in the year, has been frozen and customers’ assets are being held hostage and seek to discharge its creditors before the bankruptcy court. Bankman-Fried has been removed as the head of either firm.

A new bankruptcy filed posted Tuesday indicates that FTX could have more than 1,000,000 creditors. It will file a list this week of the 50 largest creditors.

Lawyers representing the exchange stated that FTX had been in touch with “dozens” regulators in the U.S. and abroad in the past 72 hours. This included the U.S. Attorney’s Office and the Securities and Exchange Commission. The SEC, Department of Justice, and the Department of Justice are reportedly looking into FTX’s civil and criminal violations of securities law. The possibility of criminal conduct is also being investigated by financial regulators in the Bahamas.

William Quigley, co-founder of the U.S. dollar-pegged stablecoin token, stated that Binance emerges stronger from this. CZ claims Binance doesn’t have any debt and doesn’t use its BNB token as collateral. These are both good practices in volatile crypto markets.

Quigley stated that Binance will see more institutional trading and custody.

“The entire ethos of the cryptocurrency industry is founded upon disintermediation, decentralization, so Binance’s ever-growing dominance raises reasonable concerns over how further centralization might affect the average trader,” Clara Medalie (director of research at Kaiko), said.

Medalie stated that “FTX’s fall benefits no one” and added that Binance will be facing growing questions about its monopoly on market activity. He speculated that this is just the tip of the iceberg for market participants who are affected by Alameda and FTX.

She stated that each entity had many overlapping financial ties to industry projects, which now make them vulnerable to losing support or going under.

Binance, however, took a shower on the FTT token’s collapse. Zhao claimed that Zhao held the token after Bankman-Fried requested a bailout.

Zhao tweeted Sunday, “Full disclosure.”

“Binance never slashed FTT. We still have some of these bags, even though we stopped selling FTT after SBF called us. It was a very expensive call.