The crypto empire controlled by disgraced FTX founder Sam Bankman-Fried was fragile for years, with cracks starting to show up already in 2022, a new report has suggested.
According to the report, published by the Wall Street Journal on New Year’s Eve, Bankman-Fried’s crypto trading firm Alameda Research “never was particularly good at investing.”
Alameda “took big gambles, winning some and losing plenty,” and a proper risk management was lacking, the report said about the trading firm, which was known for its close ties – and unrestricted access – to FTX.
The report contradicts earlier statements from Sam Bankman-Fried, who has insisted Alameda prospered until the crypto crash started in November of 2021. By that time, Bankman-Fried was already out as CEO of Alameda, and the firm was jointly led by Caroline Ellison and Sam Trabucco until August 2022, and then by Ellison alone.
Caroline Ellison has apologized for her role in the collapse of Alameda and FTX. She has agreed to plead guilty to seven offenses, which include charges of wire fraud, securities fraud, and money laundering.
“Complete lack of risk-management framework”
According to the Wall Street Journal report, the lack of formal processes and a framework at Alameda was so apparent that Austin Campbell, a digital asset trader at CitiBank, grew skeptical of the firm when the bank and Alameda was exploring a partnership back in 2020.
Speaking with the WSJ, Campbell was quoted as saying:
“The thing that I picked up on immediately that was causing us heartburn was the complete lack of a risk-management framework that they could articulate in any meaningful way.”
Japanese arbitrage
As has been widely reported on, Sam Bankman-Fried and Alameda originally made its fortune by exploiting an arbitrage opportunity between crypto prices in Japan and the rest of the world back in 2017 and 2018. When that price gap closed, however, Alameda had to find other ways to make money.
As reported by the WSJ, Alameda’s trading algorithm was already at that time losing money, often making wrong bets on price moves.
By the spring of 2018, Alameda’s assets had shrunk by two-thirds, standing at about $30m, the report said. It added that “a big loss on XRP” was the primary reason for decline in equity. The operation then required ever-larger investments from external parties to stay afloat, with Bankman-Fried at one point offering lenders returns of up to 20% per year.
Bear market begins
Still, Alameda continued to operate and make profits for years, until problems again started to pile up towards the end of the 2021 crypto bull market.
In late 2021, Alameda started to pump as much as $1bn into crypto miner Genesis Digital Assets, which had operations in Kazakhstan. The investment was described as Alameda’s largest venture investment “by far,” but unfortunately it happened right before the crypto market started to collapse in 2022.
“The timing was terrible: The price of bitcoin soon collapsed, and with it the profits of miners,” the WSJ report said.
Following the price crash, defaults started spreading throughout the industry, with Bankman-Fried coming to the rescue several times to prop up failing firms.
The problems compounded when Alameda lenders started asking for their money back. And since many of the firm’s investments were illiquid and not profitable, Bankman-Fried saw only one way out; he pushed the trading firm to borrow billions of dollars from FTX – funds that the exchange held on behalf of its customers.
Despite his aggressive moves to keep the business afloat, it appears Bankman-Fried towards the end understood that Alameda’s business practices were not sustainable.
“I think it might be time for Alameda Research to shut down. Honestly, it was probably time to do that a year ago,” he admitted in a document he showed others a few months before the bankruptcy, according to the WSJ.
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