- By Amy Castor and David Gerard
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The 2021–2022 crypto bubble made a lot of traders look like geniuses. Then the bubble popped, the tide went out, and the traders turned out to be hugely overleveraged formerly-lucky idiots.
Sociologists know that when a cult prophecy fails, most cultists exit the cult, and the remaining factions turn on each other.
Crypto watchers know that this can also be exceedingly funny.
Imaginary assets, real liabilities
Sam Bankman-Fried’s boosters compare him to the legendary banker J. P. Morgan. He’s spent the crypto collapse bailing out ailing companies to keep the entire market afloat.
Bankman-Fried runs three large crypto enterprises:
- Alameda Research, his crypto hedge fund;
- FTX, his unregulated offshore crypto casino that doesn’t allow US customers;
- FTX US, his exchange for US customers that purports to operate under US law and accepts actual dollars.
On November 2, Coindesk’s Ian Allison posted an explosive story on a partially leaked balance sheet for Alameda. [CoinDesk]
Of Alameda’s $14.6 billion in claimed assets, $5.8 billion is FTT — FTX’s internal exchange token. You can use FTT for cheaper trading fees and increased commissions. FTT is also traded outside FTX.
Allison also noted that $5.8 billion is actually 180% of the circulating supply of FTT!
Alameda’s liabilities are listed at $8 billion, most of which is $7.4 billion of loans — quite a bit of that from FTX.
Alameda is super cashed-up … if you account for FTX’s own FTT token at mark-to-market, and not what you could actually get for that much of their private illiquid altcoin.
To make matters worse, Dirty Bubble notes that a lot of Alameda’s other assets are crypto tokens from other Sam Bankman-Fried enterprises. [Dirty Bubble Media]
Alameda and FTX seem to have printed FTT, pumped its price using customer assets — FTX was quite open that it was the FTT market maker, and there’s no other real demand — and used the mark-to-market value of their illiquid made-up token as collateral for loans, or as evidence that pension funds should invest in crypto companies.
This works great while number is going up!
Regular readers will know that this sort of flywheel scheme is precisely what Celsius Network tried to run with their CEL token and Nexo with their NEXO token. Celsius is bankrupt, and regulators have noticed that Nexo is only solvent if you allow them this particular tricky bit of accounting.
Alameda CEO Caroline Ellison said the leaked balance sheet Coindesk got a hold of was “incomplete,” and there were $10 billion in assets not listed there. [Twitter, archive]
The crypto world spent a few days wondering if Alameda was the next Three Arrows Capital.
CZ pulls the plug
Large flows of FTT were noticed on the blockchain on November 6. Binance CEO Changpeng Zhao confirmed that this was Binance selling off its FTT: [Twitter, archive]
“As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books.”
The remaining FTT that Binance sold was worth $530 million. [Bloomberg]
CZ was also annoyed at Bankman-Fried’s lobbying efforts for crypto regulation in Washington: “We won’t support people who lobby against other industry players behind their backs.” [Twitter, archive]
The crypto market is incredibly shaky. Alameda and FTX operate as separate corporations, but the market seems to think they’re closely entwined. Trouble at Alameda leads to worry about FTX.
So panicked holders, thinking Alameda might be insolvent, started withdrawing funds from FTX as fast as possible — and hardly deposited anything at all.
FTX paused all withdrawals on the Ethereum, Solana, and Tron blockchains around 11:37 a.m. UTC on November 8, according to Steven Zheng at The Block. [The Block]
Finally, just after 4 p.m. UTC, Bankman-Fried and CZ announced that Binance was buying FTX. Specifically, they have a non-binding letter of intent, pending due diligence. [Twitter, archive; Twitter, archive]
Essentially, CZ started a bank run on FTX, then swooped in to buy his competitor after breaking it. CZ did to Bankman-Fried what Bankman-Fried has been accused of doing to a string of others.
At present, this is only a letter of intent, not a done deal — CZ is making Bankman-Fried suffer. He could just let FTX go hang.
How screwed are FTX and Alameda?
CZ said FTX was in a “significant liquidity crunch.” This is the sort of “liquidity crunch” that everyone else calls “insolvency.” If it were just liquidity, FTX could have borrowed against its assets and found another way out of this. [Twitter, archive]
We don’t know for sure that Alameda was trading with FTX customer funds — but this sort of fractional reserve operation is the only not-entirely-fraudulent reason that FTX could have run out of customer funds in this way.
Bankman-Fried claimed on November 7 that “FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries).” This appears not to have been true, and he later deleted the tweet. [Twitter, archive]
If FTX couldn’t get its funds back from Alameda quickly, that would have then led to the liquidity crunch.
What about FTX US?
Bankman-Fried was quick to reassure customers that FTX US was not affected and that it was “fully backed 1:1, and operating normally.” So at least FTX US explicitly claims it isn’t playing the markets with your deposits. [Twitter, archive]
FTX US is also attempting to buy the remains of the bankrupt Voyager Digital, a deal that we think is likely to go through.
The separation of customer funds and platforms is the whole point of FTX US versus FTX. It’s there to make Sam look good to regulators.
But it’s all Sam Bankman-Fried. It’s Sam’s left pocket versus his right pocket.
We think that if your paycheck goes into FTX US, you probably want to stop doing that immediately.
What happens next? It’s contagion time!
Alameda has likely been borrowing against the FTT it held — the FTT that is now crashing. (Earlier today, FTT was worth $19; as we post this, it’s trading at $4.60.)
Binance might rescue FTX, but it’s sure not going to rescue Alameda.
This means a series of margin calls by everyone who’s lent to Alameda. If Alameda defaults, those lenders will likely end up with worthless FTT.
BlockFi and Genesis have a pile of money in Alameda. BlockFi is or will be owned in some unspecified manner by FTX US, but that doesn’t make the books balance — there’s already a rumor of a 24-hour margin call by BlockFi against Alameda. [Twitter]
Remember that Three Arrows Capital collapsed when their UST turned out to be worthless. This then took out a pile of other crypto trading firms — most notably Celsius Network and Voyager Digital.
We’re left with two questions:
- Who is lending to Alameda?
- Who’s lending to those lenders — and risks going down in turn?
The crypto market is not happy. Bitcoin has been up and down like a yo-yo today, from $19,500 just before 4 p.m. UTC to a peak of $20,500 and a trough of $17,500.
We predict more market excitement to come — specifically, a possible Alameda collapse, a chain reaction of lender failures, and attempts to cover sudden balance-sheet holes, much as we saw after the Terra-Luna and Three Arrows collapses.
But Caroline Ellison from Alameda insists there’s another $10 billion behind the sofa or something. Maybe it’s all fine!
Image: FT Alphaville