On November 7, 2022 Sam Bankman-Fried woke up with $16 billion.
On November 8, his net worth plummeted to less
than $1 billion according to the Bloomberg Billionaires Index.
It’s one of the greatest single-day financial losses ever.
Bankman-Fried was the co-founder and CEO of the cryptocurrency exchange FTX.
What’s the extra factor X of Sam Bankman-Fried?
Quantum mechanics!
It’s an interesting question and I think the most interesting
about it is there isn’t an obvious answer. Those words ring true now more than ever.
FTX was worth $32 billion but has now filed for bankruptcy on November 11.
He summed up the mess in a series of tweets, including this:
I'm sorry I f*&&ed up, and should have done better.
Ironically, he recently criticized Mark Zuckerberg for bleeding money on the
metaverse, leading to mass layoffs at Meta, which I did a video on.
His fortunes have now taken a similar turn. Or perhaps, his misfortunes are more like the
fictional Russ Hannemann from HBO’s TV show Silicon Valley.
$986 million. I’m not a billionaire anymore, Richard. I’m a 986-ionnaire which isn't even a thing.
I’m out of the three-comma club. The sudden fall of FTX came as a shock
and will have repercussions for anyone interested in investing in crypto.
Yet upon closer inspection, it’s NO surprise FTX failed.
This video will uncover why. Bankman-Fried grew up on the campus of Stanford
University, where both his parents taught law. He worked as a Wall Street trader before
co-founding FTX in 2019 alongside former Google employee Gary Wang.
FTX was backed by high-profile venture capital firms
and became one of the world’s largest digital currency exchanges, where customers buy, sell, and store various cryptocurrencies.
Very excited to talk to Sam Bankman-Fried, the CEO of FTX.
Now you are one of if not the leader of the industry.
The 30-year-old was hailed as the next Warren Buffett and attracted the rich and famous.
FTX has everything I need to buy, sell, and trade crypto safely
NBA star Stephen Curry became an ambassador.
I’m getting into crypto So did the NFL’s Tom Brady
who personally invested in FTX. The FTX brand was everywhere.
On the arena where the Miami Heat play though it will now be renamed.
On Mercedes Formula 1 race cars though those stickers will now be removed.
Sam Bankman-Fried, or SBF as he’s called, became one of the richest people in the world.
His net worth reached a high of $26 billion. You couldn’t tell by looking at him.
He slept on a bean bag at the office and drove a Toyota Corolla.
He did splurge a bit, though. He lives in a luxury
penthouse in the Bahamas with a golden doodle named Gopher and 10 roommates.
Apparently, his roommates “all dated each other” at some point.
A person familiar with the matter told the crypto news site CoinDesk, “The whole operation was run
by a gang of kids in the Bahamas.” Some were former co-workers, some he
met at his alma mater, MIT, and one he dated: Caroline Ellison, the CEO of Alameda Research.
Alameda Research was a trading firm founded by Bankman-Fried.
Although Alameda and FTX were meant to be separate businesses, their ties were unusually close.
CoinDesk reviewed a leaked document that appeared to show that Alameda
held an alarmingly large amount of the cryptocurrency created by FTX, called FTT.
The document revealed 40% of Alameda’s assets were in FTT.
Technically that’s not illegal, however, it proved that Alameda depended heavily on its
sister company rather than relying on independent assets like other cryptocurrencies or a fiat
currency which would have been less risky. Because their financial health was tied together,
the failure of one company would risk destroying the other.
And that’s what happened. So, how did the mess begin?
When the crypto market crashed in the spring, Bankman-Fried tried to
save struggling crypto companies by relying on risky bets from Alameda.
Alameda committed half a billion dollars to finance crypto lender Voyager Digital.
He said he felt a responsibility to act.
First of all it's backstopping customers, to make sure they’re protected. And second
of all, stopping contagion from spreading through the ecosystem.
He was seen as a savior, and that matched the image he wanted to portray to the world;
he promised to give away most of his wealth. But his desire to save other crypto companies
ended up hurting his own companies. When Voyager Digital filed for bankruptcy
protection a month later, Alameda lost $500 million.
Alameda was in trouble.
In order to save it from imploding, Bankman-Fried then propped up Alameda
by secretly transferring $10 billion of customer funds from FTX to Alameda, according to Reuters.
He reportedly built a “back door” in FTX’s accounting software that let him move billions
of dollars without flagging the transactions to anyone, including external auditors.
But Bankman-Fried says it’s not how it looks.
In text messages to Reuters, he wrote:
"We didn't secretly transfer”
"We had confusing internal labeling and misread it” without elaborating further.
The story gets crazier.
A large portion of customer funds is now missing.
At least $1 billion worth of customer funds have mysteriously vanished, reports Reuters.
And the story gets even crazier.
Someone also stole hundreds of millions of remaining funds at FTX.
The new CEO of FTX confirmed that there was a hack, and
the company is cooperating with law enforcement.
It could lead to criminal charges.
When the financial ties between FTX and Alameda first surfaced in the article by CoinDesk,
it worried Binance, the world’s largest cryptocurrency exchange.
Binance was an early investor in FTX. It decided to offload
$580 million of FTX’s native token, FTT. Binance co-founder and CEO Changpeng Zhao
confirmed his company’s mass-selling was “due to recent revelations”,
alluding to the cozy ties between Banknan-Fried’s two companies.
Binance’s mass-selling caused the price of the token to plummet.
Then, other customers also pulled out, fearing this was yet another failing crypto company.
They rushed to withdraw $6 billion in just three days…and FTX couldn’t meet demand.
As FTX looked doomed to die, Binance offered it a lifeline by agreeing to acquire the company.
Changpeng Zhao, or CZ, as he’s commonly known, planned to bail out his archrival. (Archie)
But…then the bailout didn’t happen. Binance backed out “as a result of
corporate due diligence” and also mentioned the reports of mishandled customer funds and
alleged US agency investigations. U.S. regulators are reportedly
investigating whether FTX illegally used customer funds to prop up Alameda.
FTX’s sudden fall from grace has further tarnished an industry that’s
still recovering from the collapse of crypto prices in May amid rising interest rates.
The spectacular fall of FTX could bring more regulation to the crypto industry.
Currently, the U.S. bans a risky type of crypto trading in which
investors borrow money to make huge bets on the future price of crypto.
FTX’s American arm is for basic trading to comply with U.S. regulations.
Bankman-Fried had lobbied lawmakers for more friendly regulations and
donated millions to the Democrats, including $5 million to Joe Biden’s
2020 presidential campaign and groups supporting him.
The fallout from FTX will take months or even years to resolve as lawyers decide whether
the exchange can even operate. Then there’s the issue of customers who want their money back.
FTX halted withdrawals until further notice.
The question for consumers and companies is how much they’ll
be able to recover through the bankruptcy process.
FTX’s new CEO is veteran Wall Street bankruptcy lawyer John Ray, who handled the cleanup of Enron,
which was the largest bankruptcy in U.S. history at the time.
Enron had liabilities of $23 billion. FTX’s liabilities may be double that amount,
as much as $50 billion, according to a legal filing in U.S. Bankruptcy Court in Delaware.
When Bankman-Fried resigned as CEO, he said: “I’m really sorry, again, that we ended up
here. Hopefully this can bring some amount of transparency, trust, and governance.”
For customers…those are just empty words.
Crypto is still a new and relatively untested market.
Despite the pains right now, many believe it is the future of finance.
If you’d like to learn more about how crypto works, you can
learn about the math and technology behind cryptocurrencies through hands-on puzzles.
On Brilliant’s website or app, you can learn the mechanics of maintaining and securing
a cryptocurrency, and then, you can decide for yourself if crypto is a fad or the next big thing.
My viewers also love Brilliant's Computer Science Fundamentals course,
where you can learn the fundamentals of computer science - and no coding is required.
It’s great for those who are in school or if you’re already in
the workforce and want to brush up on core computer science concepts.
Brilliant is great for anyone who wants to improve their STEM skills.
You can start your math journey by looking at fractions, percents,
and ratios in everyday contexts.
I love their Logic courses that help improve my critical thinking skills.
Brilliant is FREE to try out if you head to the custom link in my description:
brilliant.org/newsthink. And the first 200 people who use my custom link will get 20%
off Brilliant’s annual Premium subscription, which gives you access to all of their course offerings.
Thanks for watching. For Newsthink, I’m Cindy Pom.