How Did Sam Bankman-Fried’s Alameda Research Lose So Much Money?

By Jeff Kauflin, Emily Mason and Nina Bambysheva

Every week after the dramatic collapse of Sam Bankman-Fried’s tangled net of crypto firms, numerous unanswered questions stay. One of many greatest: How did his buying and selling agency, Alameda Analysis, apparently lose billions of {dollars}? These losses seem to have prompted somebody in Bankman-Fried’s operation to improperly transfer buyer funds from buying and selling platform FTX to Alameda, a call that left FTX weak to a withdrawal run that precipitated the sudden chapter.

Many particulars stay unknown, however a blurry image is forming of the attainable causes behind Alameda’s steep losses. We spoke with a half-dozen crypto merchants and buyers accustomed to Alameda to know the main theories. A spokesperson for Sam Bankman-Fried and Alameda’s former co-CEOs Caroline Ellison and Sam Trabucco didn’t reply to Forbes’ requests for remark. We despatched Bankman-Fried questions on messaging app Sign, however he hasn’t but answered them.

Shifting From Arbitrage to Excessive-Danger Bets

The primary idea is that the younger merchants at Alameda, which was as soon as one of many largest crypto buying and selling corporations on the earth, weren’t as subtle as their status urged. Bankman-Fried was considered a superb dealer when he began Alameda in 2018, and he centered on arbitraging worth variations in cryptocurrencies in numerous markets. However the subsequent 12 months, he shifted his major focus to launching his buying and selling platform FTX. He introduced with him to FTX his Alameda colleagues Gary Wang and Nishad Singh, who had been a few of the most proficient individuals on the buying and selling agency, in accordance with Doug Colkitt, a veteran excessive frequency inventory dealer turned crypto dealer.

After bitcoin began to rise sharply within the fall of 2020, Alameda moved away from its preliminary concentrate on making high-speed, market-neutral bets that didn’t rely on predicting if cryptocurrencies would rise or fall. Some merchants believe Alameda modified its technique as a result of it misplaced its aggressive edge as extra skilled corporations like Soar Capital ramped up their crypto buying and selling enterprise.

In March 2021, then 26-year-old Caroline Ellison, certainly one of Alameda’s co-CEOs, appeared to acknowledge this pivot when she tweeted, “Additionally relatable is the purpose the place he realizes he is been losing time making an attempt to commerce forwards and backwards for just a few factors of edge and the best way to actually earn cash is determine when the market goes to go up and get balls lengthy earlier than that.” Going lengthy means betting that costs will rise.

A month later, Sam Trabucco, Alameda’s different co-CEO, tweeted, “we bought … uh, actually lengthy in winter 2020.” As a rationale for why, he added, “it’s the place the cash is.” Each Ellison and Trabucco had simply a few years of buying and selling expertise in standard markets earlier than becoming a member of Bankman-Fried to deal in crypto. That’s a shallow pool of information and expertise to attract on.

In accordance with a number of merchants, lots of Alameda’s lengthy bets most likely suffered massive losses starting in Could 2022, after the dramatic collapse of the steady coin terraUSD and its sister cryptocurrency luna sharpened the decline within the crypto market. “What makes you a hero in bull markets kills you in bear markets,” says Marina Gurevich, chief working officer of London-based Wintermute, one of the lively crypto buying and selling corporations on the earth. Certainly, Bankman-Fried acknowledged in a Twitter conversation with a Vox reporter that it was across the time of luna’s crash when lots of dangerous leverage constructed up in his enterprise.

Layering Leverage on Prime of Large Bets

On high of constructing massive bets, Alameda was possible taking over an excessive amount of leverage–that’s, debt that may amplify wins and losses. A method the agency’s executives apparently did that was by utilizing largely illiquid cryptocurrencies–together with FTX’s personal token, FTT, and a associated one, serum–as collateral to take out loans.

For instance, Bankman-Fried helped incubate the creation of serum, which was launched in 2020. Serum has a low circulating provide of cash–initially, solely 10% of it was freely tradeable, whereas the opposite 90% was locked up for years. However technically, he may extrapolate and assume that, if the circulating provide of serum was value $1 billion, then the market worth of all of the cash in existence was $10 billion. Then he may get loans based mostly on that increased valuation. Bankman-Fried ran this playbook with different digital belongings too, which turned generally known as “Sam cash” to business insiders, crypto investor Jason Choi has written.

Choi concluded not too long ago in a tweet, “That is possible how Alameda/FTX incurred the multi-billion-dollar gap: Alameda pledging illiquid collateral to borrow cash to finance bets, which bought margin referred to as as markets went down this 12 months.”

Investing Borrowed Cash in Different Crypto Gamers

One other capital drain was enterprise investments. In accordance with PitchBook, Alameda made greater than 150 investments throughout the crypto business, together with in bitcoin miner Genesis Digital Mining and now-bankrupt crypto dealer Voyager Digital. Alameda apparently took out loans to fund these bets. Because the crypto market crashed, lenders reportedly tried to recall these funds that have been tied up in these illiquid investments. FTX’s and Alameda’s executives then took the questionable step of making an attempt to pay again a few of these Alameda loans utilizing FTX buyer funds, the Wall Road Journal has reported.

Borrowing for Different Large Spending

The funds of Bankman-Fried’s cluster of firms are so advanced and entangled that vast chunks of it stay a thriller–even to the attorneys, monetary investigators and chapter veterans who’ve taken cost. However in accordance with chapter courtroom filings, FTX executives additionally took out billions of dollars in loans from Alameda to fund every little thing from political contributions to Bankman-Fried’s buy for $650 million of a 7.6% stake in Robinhood. It’s unclear how these loans might have additionally added to Alameda’s losses on high of every little thing else. Alameda itself has excellent liabilities of $5.1 billion in accordance with a submitting Thursday within the Chapter 11 bankruptcy case in Delaware.

Shoddy Report-Retaining and Accounting Controls

A closing–and maybe substantial–contributor to Alameda’s losses: Bankman-Fried’s firms had horrible record-keeping and accounting methods. FTX buyer deposits weren’t tracked, in accordance with a chapter submitting, leaving it unclear within the chapter proceedings what’s owed to clients. An instance of this confusion: the leaked FTX balance sheet exhibits $8.8 billion in liabilities, whereas the Thursday submitting within the Delaware chapter case exhibits solely $6.4 billion. It’s not clear what accounts for the discrepancy, however regardless, the numbers are nonetheless in flux. “This steadiness sheet was produced whereas the Debtors have been managed by Mr. Bankman-Fried, I do not need confidence in it,” exercise veteran John J. Ray III, the brand new CEO of FTX overseeing the chapter wrote within the submitting. Bankman-Fried has tried to chalk up practically the complete downside to “messy accounting + margin.”

Bankman-Fried’s careless accounting habits seem up to now again to the earliest days of Alameda. When crypto enterprise capitalist Alex Pack was contemplating investing in Alameda in early 2019 and conducting due diligence, he noticed they’d misplaced $10 million in a single month–a hefty sum for such a small agency. When Pack requested about it, Bankman-Fried mentioned it was as a result of “commerce errors,’’ Pack recollects.

Pack says he saved probing, however he may by no means determine what occurred. “At one level, they only mentioned, ‘Sorry, we did not have nice document maintaining again then. We will’t reply all these questions.’” Pack handed on the deal. He thought they appeared like sensible merchants however walked away as a result of what he noticed as “important recklessness round danger taking and intensely poor infrastructure and accounting.”

At this time, Pack says monitoring positions in crypto could be notably exhausting as a result of it’s important to construct your personal buying and selling methods, and the duty will get “exponentially tougher” as your e book of enterprise grows. And if Alameda began with unhealthy accounting methods, Pack says it’s “not inconceivable” that they may have ended up with rather more debt than they realized, as Bankman-Fried has claimed.