Is Sam Bankman-Fried Crypto’s Bernie Madoff? This Crypto Hedge Fund Manager Thinks So

Apparently, the collapses of Three Arrows Capital, crypto change FTX, and different crypto-related companies weren’t sufficient to place institutional buyers off of cryptocurrency. Information from Bitstamp reveal that registrations by institutional buyers rose 57% in November — when the collapse of the crypto change FTX was entrance and middle within the information headlines.

Now a month later, allegations about funds from buyers in Bankman-Fried’s hedge fund, Alameda Analysis, being commingled with funds from FTX buyers proceed to pour out. One crypto hedge fund supervisor with no publicity to FTX suggests Bankman-Fried may very well be the Bernie Madoff of the crypto world.

Sam Bankman-Fried, visionary or alleged scammer?

In an interview with ValueWalk, CK Zheng of digital belongings hedge fund ZX Squared famous that the crypto markets comply with cycles identical to different conventional belongings. In every cycle, one thing goes improper, together with some “loopy issues.” He believes we’re within the late levels of the crypto winter as he expects the de-leveraging course of to wrap up quickly.

Zheng additionally notes that with each cycle, one thing has occurred with larger gamers. He additionally supplied some recommendations about why FTX, particularly, collapsed, pointing to Bankman-Fried’s charisma as a type of mesmerizing pressure for cryptocurrency.

“Clearly, there are quite a lot of causes behind it, and it is surprising, clearly, the best way they did it,” he says. “A 30-year-old that individuals assume is a visionary and a genius, however clearly, when the reality finally comes out, it is actually mind-boggling. He’s principally a Madoff of the crypto world that occurred, actually, in a brief interval of two or three years. Madoff did it over 30+ years, and the unhappy information is that there is so many respected buyers who get fooled by a 30-year-old particular person.”

What actually occurred with FTX and Alameda?

He even went as far as to say that Bankman-Fried seemed to be a scammer. CK finds the best way Bankman-Fried talks to be significantly attention-grabbing. In fact, he famous that the FTX co-founder might be very clever, based mostly on the best way he informed the story of his crypto change to stylish buyers, presenting himself effectively.

Zheng additionally highlighted the allegations that FTX funds had been commingled with the funds invested in Bankman-Fried’s hedge fund, Alameda Analysis. He famous that FTX was the second-biggest crypto change, including that commingling the funds from each entities was “ridiculous.” Moreover, he says that this subject occurred with “a twist,” utilizing a coin issued by FTX itself as collateral. He discovered the state of affairs to be “much more weird in comparison with the normal finance house.”

In an interview with The New York Instances
NYT
throughout the DealBook Summit on Nov. 30, Bankman-Fried claimed that he “unknowingly” commingled funds” between Alameda and FTX prospects. The problem got here to mild when CoinDesk questioned Alameda’s stability sheet, noting that a lot of it consisted of FTX’s native crypto token, FTT.

These tokens reportedly landed on Alameda’s stability sheet when FTX loaned greater than half of its buyer funds to the crypto hedge fund, which then allegedly used these funds to put bets on different cryptocurrencies and assist different struggling crypto corporations.

The issue with company bankruptcies

The actual issues started when Binance founder Changpeng Zhao introduced his intention to promote the billions of FTT that Binance held, which despatched the token plummeting. Initially, it regarded like Binance would possibly come to FTX’s rescue, however after the preliminary overview, it found that the opening was too massive. FTX’s chapter submitting indicated that it had $10 billion to $50 billion in liabilities.

“The problem there may be mind-boggling, given there’s 130+ authorized entities that FTX is doing all types of enterprise with out actually good management,” Zheng opined. “I am positive there’s going to be a prolonged authorized course of to sorting issues out. There’s like a million-plus customers. Their belongings are frozen in FTX as we speak, and also you principally have a liquidator who has managed Enron, the liquidation that period. To repeat the method right here as we speak, it should take a very long time to kind out.”

He added that there is not a lot FTX prospects can do. They only have to attend till the chapter is sorted out, much like what occurred within the Enron and Lehman Bros. bankruptcies. Zheng notes that it took a decade to kind all the things out in these circumstances.

How did FTX idiot quite a few enterprise capital funds?

Along with fooling many buyers, quite a few enterprise capital funds and different institutional buyers had invested in FTX, including some well-known and extremely revered corporations. Amongst these taken in by Bankman-Fried had been Third Level Ventures, Sequoia Capital, Tiger International, Altimeter Capital Administration, BlackRock
BLK
, SoftBank’s Imaginative and prescient Fund 2, Temasek Holdings, and Lightspeed Enterprise Companions. Zheng mentioned he is scratching his head about how so many massive names in enterprise capital had been fooled.

“I am positive they in all probability do a certain quantity of due diligence,” he famous. “The query can be clearly a governance subject. There was no board in FTX. Mainly, one individual would do a lot of the administration, and it is exhausting to think about when you’ve gotten a hedge fund embedded within the centralized change with the cash issued by themselves, I do not perceive how folks in VC miss many of those dangers. I feel possibly a technique to consider it in hindsight is that the crypto market has quite a lot of wrong-way danger. One factor goes improper, and lots of issues will go improper, all collectively on the identical time.”

The ZX Squared chief provides that many individuals do not value in these sorts of dangers in a bull market. Most enterprise capital corporations invested earlier than the bubble burst, so he instructed that these dangers may not have been highlighted or priced in accurately.

“I am positive there’s many issues enterprise capital corporations do, possibly they do quite a lot of conventional metrics when it comes to revenues, development and all that stuff, however cryptocurrency may be very completely different,” he clarifies.

He added that it is troublesome for many who do not perceive crypto companies to distinguish one crypto agency from one other. Moreover, Zheng factors out that sure behaviors “manner past what a rational individual ought to do,” together with some that will not be authorized or are accomplished by a foul actor, could also be troublesome to detect at a really early stage.

The allegations

Bankman-Fried is accused of being concerned within the commingling of investor cash between FTX and Alameda Analysis. Nonetheless, in an interview at The New York Instances’ DealBook Summit final week, he mentioned he was “frankly stunned by how massive Alameda’s place [in FTX] was.” In an interview with New York magazine, he added that he hadn’t run Alameda “for the final couple years” and “was not deeply conscious of” the hedge fund’s funds.

Nonetheless, Forbes revealed on Friday that Bankman-Fried had shared with it particulars of a few of Alameda’s main holdings at the very least 5 instances since January 2021. The discussions reportedly lined questions on his web value and included particulars about sure transactions and the numbers of FTT, Solana
SOL
and Serum tokens Alameda held — as not too long ago as August.

Earlier than co-founding Alameda Analysis in 2017, Bankman-Fried interned on the proprietary buying and selling agency Jane Avenue Capital in 2013, returning to work full-time there after graduating from MIT. He owned about 90% of Alameda as of August 2021, one other piece of proof that makes it troublesome to assume he had no concept what the hedge fund was doing.

Attributable to his background in funding administration, the ZX Squared CIO believes Bankman-Fried in all probability used a certain quantity of conventional technique to construct Alameda.

“I am positive it grew in all probability extraordinarily quick, however the one market, particularly when Luna and Three Arrows blew up throughout the second quarter, relies upon what kind of leverage Alameda had at the moment, and possibly they get harm fairly badly at the moment,” he mentioned. “Clearly, there’s nonetheless hypothesis. It is as much as the regulators and chapter court docket to search out out what precisely, how a lot cash they misplaced throughout the Luna stage, the lack of the market crash at the moment, and the way a lot they used buyer funds to assist their Alameda enterprise.”

ZX Squared’s technique for avoiding problematic crypto corporations

Zheng defined how his digital asset hedge fund, ZX Squared, has been capable of dodge the various bankruptcies which have swept all components of the crypto market. They do not use a platform like FTX. The truth is, ZX Squared had no publicity to FTX. Moreover, they solely commerce bitcoin and Ethereum
ETH
as a result of they’re much more well-established than a lot of the altcoins.

“We do not contact any of the altcoins,” he opines. “That is not clear to us, how they make their cash. We do not use leverage. We use choices to hedge a lot of the publicity we now have. By deleveraging our danger, we really scale back our danger publicity, and through the use of choices… we are able to scale back the danger, however by growing the risk-adjusted return. So we considerably outperformed bitcoin within the final 12 months by 45% or so.”

The usage of choices has been a well-established technique in conventional finance for many years, providing CK’s hedge fund safety whereas buying and selling such a brand new asset class. He tries to be prudent when buying and selling bitcoin and ether to guard his fund’s funding within the present bear market.

“I nonetheless imagine this asset class, for those who do it appropriately, it is a unbelievable asset class to take a position for the long run,” he declares.

Beware good storytellers

With a lot harm having been accomplished to the crypto markets and fears of contagion, CK advises buyers to not belief something — with out trusting and verifying. He added that trusting and verifying are rule primary all through the monetary world, and FTX’s collapse taught this lesson once more.

“Some individuals are a very good storyteller, however for those who simply take heed to their story with out verifying, you are inclined to get an issue,” he mentioned.

It’s normal to search out quite a lot of storytellers with new digital belongings which can be nonetheless within the infancy stage, however till you’ll be able to confirm what they’re saying, it is only a story.

Michelle Jones contributed to this report.