Recent revelations shed light on how the troubles Sam Bankman-Fried “SBF” Alameda’s crypto trading firm began long before the tough year we all had in 2021; in part due to the collapse of its sister company FTX.
A closer look reveals that Alameda has never been good at investing and that SBF’s involvement in the company has remained substantial even after he left as CEO in October 2021.
The trading company risked a lot of money and got back some of it, but it also lost a lot. And SBF has repeatedly sought to borrow cash and cryptocurrency to fund these bets, even offering double-digit interest rates to its lenders.
Alameda, as it expanded, invested billions of dollars in bets on the future success of the cryptocurrency industry, billions that federal prosecutors say were stolen from FTX customers. He placed bets on obscure cryptocurrency exchanges and a host of blockchain tech companies, and he also made political contributions and real estate purchases.
When it finally collapsed in 2022, it was a massive event. Both companies filed for bankruptcy protection in November, leaving their consumers owed billions of dollars and weakening confidence in the cryptocurrency industry as a whole.
SBF claims that poor record keeping and a banking problem led to the theft of customers’ money and enabled Alameda to cover huge losses with funds meant for FTX. It was reported last week by the Wall Street Journal that during a hearing on January 3, he would most likely plead not guilty to fraud charges.
The disgraced crypto figure appears to have established Alameda with the intention of donating a portion of its earnings to Effective Altruism, a movement whose stated goal is to channel charitable contributions to causes that will have the most great impact.
He borrowed money from wealthy people who were already involved in the trading business in order to expand his business. Skype co-founder Jaan Tallinn lent him a substantial amount of Ethereum, over $100 million, and he came back with a stash of cryptocurrency.
Binance Blockchain Week kicked off in January 2019 with around 1,500 attendees in Singapore. The symposium, which Alameda sponsored for $150,000, was meant to be a forum for planning the development of the emerging crypto industry. Attendees said SBF’s goal at the meeting was to network with potential new lenders for Alameda.
The firm distributed brochures to potential lenders claiming it had $55 million in assets under management; however, the vast majority of these funds were borrowed to finance the company’s operations.
For SBF, Alameda was a way to expand FTX. The company was the main market maker on the exchange, meaning it was always willing to buy and sell at any time. People familiar with hedge fund tactics say it has sometimes taken the losing side of a trade to lure customers to the exchange.
Recent complaints filed by the Securities and Exchange Commission and the Commodity Futures Trading Commission, the nation’s top market regulators, allege that SBF engineered a scheme that allowed Alameda to borrow money from the exchange.
He tasked his co-CEO, Gary Wang, with creating programming that would allow the company to maintain a negative balance on FTX regardless of the amount of collateral it deposited with the exchange.
In addition, SBF prevented the sale of Alameda’s FTX collateral in case its value fell below a certain threshold. This amounted to a line of credit extended by FTX to the hedge fund.
The criminal also ordered his former flame Caroline Ellison to inflate the value of a cryptocurrency used by Alameda as collateral by increasing his purchases of that asset.
Note that SBF stated in a maintenance this,
“FTX was a full-time job. I no longer had enough brain cycles to understand everything that was going on in Alameda if I wanted to.
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Elena is an expert in technical analysis and risk management in the cryptocurrency market. She has over 10 years of writing experience – hence, she is an avid journalist with a passion for finding new insights into the age of crypto.