My understanding is that the rise and fall of FTX was a positive feedback loop turned negative. When FTX had money, they used it to drive up the price of their own crypocurrency, FTT. One of the biggest holders of FTT was Alameda Research, SBF’s hedge fund. They profit nominally from rising FTT, but the only big buyer of FTT is FTX, so how does Alameda turn FTT into cash? It looks like FTX gave Alameda loans on the premise that Alameda’s FTT was strong collateral. It’s a money printer when times are good: FTX profits on customer transactions and loans to Alameda, and Alameda profits on trades.
But it’s an extremely precarious position. If the price of FTT drops, FTX loses money. People get worried about the money they deposited in FTX and try to withdraw. To pay them back, FTX can try to sell FTT coin, but FTT coin is already trading below where FTX bought it. FTX could also try to call back their loans to Alameda, but those loans are collateralized by FTT, so Alameda can’t pay. All of a sudden, customers want their money back and FTX can’t provide it. FTT, FTX, and Alameda collapse.
That’s my current best guess at what happened. We’re going to find out a lot more in the weeks to come, but this is the story that’s currently being reported. Here’s Byrne Hobart’s timeline:
Byrne speculates that FTX’s profitability could be as manufactured as it sounds:
This could have been a completely cynical perpetual motion machine where Alameda makes FTX a better exchange by providing cheap liquidity, and the growth of FTX increases the value of the underlying FTT, giving Alameda more collateral to borrow against for providing more liquidity.
Matt Levine compares it to a bank providing a loan with its own stock as collateral. This is stupid and often illegal because if the loan goes bad, the stock price goes down, making it a double-whammy:
If you go to an investment bank and say “lend me $1 billion, and I will post $2 billion of your stock as collateral,” you are messing with very dark magic and they will say no. The problem with this is that it is wrong-way risk. (It is also, at least sometimes, illegal.) If people start to worry about the investment bank’s financial health, its stock will go down, which means that its collateral will be less valuable, which means that its financial health will get worse, which means that its stock will go down, etc. It is a death spiral. In general it should not be possible to bankrupt an investment bank by shorting its stock. If one of the bank’s main assets is its own stock — is a leveraged bet on its own stock — then it is easy to bankrupt it by shorting its stock.
CZ, CEO of Binance, says enough to help put the pieces together:
- CZ dumps $FTT - Alameda faces external margin calls, looks to FTX for liquidity - FTX depositors have withdrawn; piggy bank is broken - FTX’s assets are loans Alameda can’t repay, against real customer liabilities - FTX in the hole for billions - CZ buys FTX
If this is what happened, then SBF took an incredible gamble with other people’s money and lost big, billions of dollars in customer deposits big. It’s a shame for FTX and the EA community.
My understanding is that the rise and fall of FTX was a positive feedback loop turned negative. When FTX had money, they used it to drive up the price of their own crypocurrency, FTT. One of the biggest holders of FTT was Alameda Research, SBF’s hedge fund. They profit nominally from rising FTT, but the only big buyer of FTT is FTX, so how does Alameda turn FTT into cash? It looks like FTX gave Alameda loans on the premise that Alameda’s FTT was strong collateral. It’s a money printer when times are good: FTX profits on customer transactions and loans to Alameda, and Alameda profits on trades.
But it’s an extremely precarious position. If the price of FTT drops, FTX loses money. People get worried about the money they deposited in FTX and try to withdraw. To pay them back, FTX can try to sell FTT coin, but FTT coin is already trading below where FTX bought it. FTX could also try to call back their loans to Alameda, but those loans are collateralized by FTT, so Alameda can’t pay. All of a sudden, customers want their money back and FTX can’t provide it. FTT, FTX, and Alameda collapse.
That’s my current best guess at what happened. We’re going to find out a lot more in the weeks to come, but this is the story that’s currently being reported. Here’s Byrne Hobart’s timeline:
Byrne speculates that FTX’s profitability could be as manufactured as it sounds:
Matt Levine compares it to a bank providing a loan with its own stock as collateral. This is stupid and often illegal because if the loan goes bad, the stock price goes down, making it a double-whammy:
CZ, CEO of Binance, says enough to help put the pieces together:
Jon Wu has a great thread:
If this is what happened, then SBF took an incredible gamble with other people’s money and lost big, billions of dollars in customer deposits big. It’s a shame for FTX and the EA community.