How Sam Bankman-Fried lost US$15 billion and control of one of the world’s biggest crypto exchanges in under 24 hours

Oops, it did it again. Crypto, that is. It appears to have shot itself in the other foot and it’s all because of two warring exchange bosses known by their initials, an immense amount of FUD, a bank run on FTX, and its impending takeover by larger exchange Binance.

We recall referring you to the Stealers Wheel classic Stuck in the Middle With You during the whole Terra LUNA/3AC/Celsius/crypto contagion fiasco. And here we are again, trying to make some sense of it all, but we can see it makes no sense at all.

And the worst of it has all happened in the wake of a rare blood moon lunar eclipse, too.

What’s happened is yet another stupendously bad look for the crypto industry, disgusting for crypto portfolios everywhere, and even more disastrous for FTX boss Sam Bankman-Fried, whose net worth has reportedly plummeted from a whopping US$16 billion to US$991 million in less than a day. (According to an estimate from the Bloomberg billionaires index.)

The Bloomberg billionaires index has been updated estimating SBF's net worth at $991m, down from $16b yesterday pic.twitter.com/33faJNiw7y

— db (@tier10k) November 8, 2022

Here’s what else we know so far. Unpalatable news in digestible bullet point form…

• FTX exchange CEO Sam Bankman-Fried (Aka SBF) had been under fire for weeks after making remarks about crypto regulation, which were considered to be unpopular with the decentralisation-loving crypto community.

• Sentiment regarding SBF and FTX only grew worse after the balance sheet for his trading and venture firm Alameda Research was leaked by CoinDesk, showing an alarming borrower-collateral tie to the exchange’s FTT token. A token that’s proven to be highly illiquid.

WOW

Per CoinDesk, Alameda research has $14.6 billion of assets, against $8b of liabilities.

For assets: $3.66b FTT, $2.16b “FTT collateral”, $3.37b crypto ($292m SOL, $863m “locked SOL”), $134m USD & $2b “equity securities.

Most net equity tied in completely illiquid altcoins.

— Dylan LeClair 🟠 (@DylanLeClair_) November 2, 2022

• After this leak, Binance CEO Chanpeng Zhao (aka CZ) made his move, making the decision to exit Binance’s entire position in the FTT token public on Twitter. To begin with, CZ announced that Binance was selling more than US$584 million in FTT holdings, and said that the full liquidation would take place over a few months to “minimise market impact”.

• He also said this:

Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won't pretend to make love after divorce. We are not against anyone. But we won't support people who lobby against other industry players behind their backs. Onwards.

— CZ 🔶 BNB (@cz_binance) November 6, 2022

… which referenced SBF’s alleged behind-the-scenes lobbying against Binance and helped send Crypto Twitter into a panic.

• It’s been a particularly “alpha” play from CZ, who once helped incubate the FTX exchange in its early days, but who has since fallen out with exchange rival SBF.

• The FTT token subsequently plummeted, with the very real risk that Binance’s FTT sale could spiral both Alameda and FTX into insolvency given the amount tied to FTT as a means of collateral.

• Which brings us to today…

• A day after tweeting that the FTX exchange was essentially “fine”, SBF dropped the bombshell announcement that the exchange’s non-US assets would be sold to Binance.

2) Our teams are working on clearing out the withdrawal backlog as is. This will clear out liquidity crunches; all assets will be covered 1:1. This is one of the main reasons we’ve asked Binance to come in. It may take a bit to settle etc. — we apologize for that.

— SBF (@SBF_FTX) November 8, 2022

4) A *huge* thank you to CZ, Binance, and all of our supporters. This is a user-centric development that benefits the entire industry. CZ has done, and will continue to do, an incredible job of building out the global crypto ecosystem, and creating a freer economic world.

— SBF (@SBF_FTX) November 8, 2022

• CZ has confirmed the deal, and the crypto market initially rallied on the news, but has subsequently tanked as further fears of the “liquidity crunch” sunk in, and withdrawals from the FTX exchange appeared to be effectively paused, according to The Block and other crypto-media sources.

There is a lot to cover and will take some time. This is a highly dynamic situation, and we are assessing the situation in real time. Binance has the discretion to pull out from the deal at any time. We expect FTT to be highly volatile in the coming days as things develop.

— CZ 🔶 BNB (@cz_binance) November 8, 2022

https://twitter.com/cobie/status/1589987245070905344?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1589987245070905344%7Ctwgr%5E6f268b3a2f26f6d5cb4efd01dcc4172436884a24%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fdecrypt.co%2F113917%2Fbinance-ceo-promises-to-implement-proof-of-reserves-after-run-on-ftx

• Bitcoin is currently down 10% and Ethereum -15% over the past 24 hours. Other cryptos, particularly Solana (-20%) – which has funding ties to SBF and FTX – have copped a greater walloping at the time of writing.

Solana getting killed. Market realizing that @cz_binance now owns 10% of the tokens and that he would rather support BNB chain than SOL. Also Solana just lost all the support and investment that FTX and @SBF_FTX were making in the ecosystem.

— Ran Neuner (@cryptomanran) November 8, 2022

• As for FTT? Decimated. It’s down 75%, lying in a pool of its own imploded claret, at US$5.60. A few days ago, it was trading up around US$25. We’ll do an update on price action a bit later in the day.

• Meanwhile, CZ has proffered some lessons from all this for the crypto community:

Two big lessons:

1: Never use a token you created as collateral.

2: Don’t borrow if you run a crypto business. Don't use capital "efficiently". Have a large reserve.

Binance has never used BNB for collateral, and we have never taken on debt.

Stay #SAFU.🙏

— CZ 🔶 BNB (@cz_binance) November 8, 2022

• And he’s also calling for a “proof of reserves” system of transparency from all crypto exchanges, promising to implement it with Binance.

– CZ starves FTX of revenue with 0% trading fees on Binance attracting volume from FTX
– CZ shoots headshot by publicly announcing FTT concerns causing a bank run on FTX and decline in FTT price
– FTX unable to cover holes in balance sheet
– CZ acquires FTX

Thanks for playing.

— Will (@WClementeIII) November 8, 2022

Stockhead is seeking some industry comment on the whole debacle. Stay tuned.