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

To Jeff Cauflin, Emily Mason When Nina Bambisheva

A week after the dramatic collapse of Sam Bankman-Fried’s tangled network of cryptocurrency companies, an array of unanswered questions remain. How did one of his true biggest companies: his trading company, Alameda Research, supposedly lose huge amounts of dollars?These losses were because of Bankman-Fried’s operations appears to have prompted someone from improper transfer Client funds through the trading platform FTX to Alameda. This decision left FTX susceptible to withdrawal executions and caused a bankruptcy that is sudden

While many details remain unknown, a blurry picture is forming as to the causes that are possible Alameda’s sudden loss. We spoke with half dozen crypto traders and investors. Spokespeople for Caroline Ellison, former co-CEOs of Sam Bankman-Fried and Alameda, and Sam Trabucco decided not to respond. forbes Request for comments. He sent Bankman-Fried a relevant question on the messaging app Signal, but he hasn’t responded yet.

Moving From arbitrage trading to high-risk betting

The first theory is that the young traders at Alameda, once one of the world’s crypto trading firms that are largest, are not as sophisticated as his or her reputation suggests. Bankman-Fried was considered an trader that is excellent he launched his Alameda in 2018, with a focus on arbitrage on cryptocurrency price differentials across various markets. But the year that is following shifted his main focus to launching the trading platform FTX. In accordance with high-frequency that is veteran trader-turned-cryptocurrency trader Doug Colkitt, he brought Alameda colleagues Gary Wang and Nishad Singh to FTX.believeAfter Bitcoin began its sharp rise in the fall of 2020, Alameda focused its initial focus on making fast, market-neutral bets that don’t rely on predicting whether the cryptocurrency will rise or fall. I moved away from what I was supposed to.some traders

As experienced firms like Jump Capital stepped up their crypto trading business, Alameda became less competitive, so it changed its strategy.Caroline EllisonMarch 2021, 26 years old at the righ time murmuredAs one of Alameda’s co-CEOs, she appears to have acknowledged this pivot.

“What is applicable is the fact that I was wasting my time trading some edge points that I realized. The way you actually make money is when the market goes up and long before that. It’s about knowing if you’re going to get the ball.” Going long means betting that the price shall go up.murmuredA Later, Alameda’s other co-CEO, Sam Trabucco, said: conversation on twitter, “We’re… well, winter 2020 is really long. month” As to why, he added, “Where the money is.” Ellison and Trabucco had only a few years of trading experience in traditional markets before joining cryptocurrency bankman-Fried. It’s an pool that is inexperienced of available.

Many of Alameda’s long bets will most likely see heavy losses after May 2022, following the dramatic collapse of stablecoin terraUSD as well as its sister cryptocurrency Luna accelerated the crypto market’s decline, relating to several traders. was covered. Marina Gurevich, chief operating officer of her London-based Wintermute, one of many world’s most cryptocurrency that is active firms, said, “Anything that can be a hero in a bull market will help you in a bear market.” I will kill you,” he said.Indeed, Bankman-Fried

According to a Vox reporter, it was around the right time Luna crashed that many dangerous clout accumulated in Luna’s business.

Leverage big betstrapped for yearsIn addition with the big bets, Alameda probably had leverage that is too much a debt that could amplify wins and losses. It was the use of mostly cryptocurrencies that are illiquid collateral for loans, for example Serum, a token thatwroteBankman-Fried, as an example, helped produce the serum, that has been released in 2020.

Technically, however, they can extrapolate to deduce that then the market value of all coins in existence is $10 billion if the supply of serum in circulation is worth $1 billion. He was then able to get a loan based on that rating that is high. Bankman-Fried has additionally run this playbook on other assets that are digital. This became known as “Sam Coin” to industry insiders and cryptocurrency investor Jason Choi. Tweet.

Choi recently

“This could be how Alameda/FTX suffered a dollar hole that is multi-billion. promised no collateral.”tied up in these illiquid investmentsInvest borrowed money various other crypto playersreportAnother capital outflow was venture investment. Relating to PitchBook, Alameda has made more than 150 of his investments over the cryptocurrency industry, including Bitcoin miner his Genesis Digital Mining and crypto that is bankrupt Voyager Digital. Alameda apparently took out loans to fund those bets.

FTX and Alameda executives then took steps that are questionable make an effort to pay back a few of Alameda’s loans using FTX’s customer funds, reports The Wall Street Journal.

.billions of dollarsBorrowing for any other big expenses bankruptcyThe finances of Bankman-Fried’s gang of companies are very complex and entangled that a deal that is great of remain a mystery, even to the lawyers, financial investigators and bankruptcy veterans who have worked with him. .But according to bankruptcy court filings, FTX executives also

Alameda financed everything from political donations to Bankman-Fried’s purchase of a 7.6% stake in Robinhood for $650 million. It’s unclear how those loans added to Alameda’s losses more than anything else.Alameda itself has $5.1 billion in outstanding debt, according to Thursday’s filing of Chapter 11.

Delaware case.Leaked FTX balance sheetShoddy Recordkeeping and Accounting triedThe ultimate, and perhaps substantial, factor in Alameda’s loss: Bankman-Fried’s company had a record-keeping that is terrible accounting system. According to research by the bankruptcy filing, FTX’s customer deposits haven’t been tracked, leaving it unclear exactly what it owes customers when you look at the bankruptcy proceedings. A good example of this confusion:

Delaware bankruptcy lawsuits show debt at $8.8 billion, weighed against just $6.4 billion filed on Thursday. It is not clear what caused this discrepancy, but either real way, the numbers are still in flux. “This balance sheet was drawn up when the debtor was controlled by Bankman Fried, and I don’t trust it,” said the CEO that is new of, which oversees the bankruptcy. One workout veteran, John J. Ray III, wrote when you look at the filing.bankman fried

It’s about narrowing down almost the problem that is entire “Messy Accounting + Margins”.

Bankman-Fried’s careless accounting habits seem to date back to Alameda’s early days. When cryptocurrency venture capitalist Alex Pack was considering investing in Alameda and conducting diligence that is due early 2019, he learned that Alameda lost ten dollars million within a month. When Pack asked it was due to a “transaction error,” Pack recalls.

Puck says he continued his investigation, but couldn’t figure out what happened about it, Bankman-Fried said. “At some point they said, ‘Sorry, we didn’t have a record that is great then. I cannot answer all those relevant questions.’” Pack approved the deal. He thought they looked like sensible traders, but he walked away because he saw “significant recklessness in risk-taking and very poor infrastructure and accounting.”(*)Today, Puck says crypto that is tracking is generally particularly difficult while he has got to build their own trading system, a job that “gets exponentially harder” as trades get bigger. said. And in case Alameda started with a accounting that is bad, it really is “inconceivable” that Puck, like Bankman-Fried, might have wound up in a lot more debt than they thought. No matter,’ he said. (*).(*)

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