Alameda Research, a small trading firm that Sam Bankman-Fried founded in 2017 at the age of 25, was the start of his crypto empire — and its undoing.
Alameda’s need for funds to run its trading business was a big reason Mr. Bankman-Fried created FTX in 2019. But the way the two entities were set up meant that trouble in one unit shook up the other as cryptocurrency prices began to drop last year.
The main way Alameda made money was straightforward: It bought Bitcoin and other cryptocurrencies in one part of the world and sold them in another, pocketing the difference. It used “leverage” — or borrowed money — to fuel its trades and make bigger returns.
Eventually, as more sophisticated investors like hedge funds piled in, such trades became much less lucrative for Alameda. Still, with the price of Bitcoin and other cryptocurrencies soaring — and expected to keep going up — Alameda had no trouble paying back its loans in either dollars or crypto.
But Mr. Bankman-Fried hit upon an idea: Why not build a cryptocurrency exchange that could bring in revenue to help fund Alameda’s activities?
FTX was born. It moved from Hong Kong to the Bahamas, where Mr. Bankman-Fried built his base of operations, and the exchange took off. In financial presentations to investors, the company claimed in 2021 that it was raking in $1 billion in annual revenue by charging fees to customers who wanted to trade cryptocurrencies on its platform.
The relationship between FTX and Alameda centered on a token created by FTX — called FTT — that the exchange’s customers could use to trade their crypto assets at a discount.
Alameda served as the token’s main market maker, buying and selling a majority of FTT on the exchange. As a major trader, it had the ability to set prices for the token.
As investors, enticed by the trading discounts, embraced FTT to trade on FTX, the newly minted token became one of the biggest sources of trading revenue for the exchange.
FTT was popular with the exchange’s investors, who were enticed by the trading discounts it offered, and Alameda began using its holdings as collateral for more loans to facilitate its trading activities.
Both FTX and Alameda benefited from the token’s rising value. The exchange began using FTT to make dozens of investments worth billions of dollars in other crypto companies. At the same time, Alameda, which held a large stake in the token, began using its FTT holdings as collateral for more loans to facilitate its trading activities.
The intertwined business model, with FTT propping up the two entities, turned Mr. Bankman-Fried into a crypto hero — even if many backers and supporters of the exchange didn’t quite understand how it all worked.
It’s hard to pinpoint the exact moment when Mr. Bankman-Fried’s empire began to spiral out of control, or whether a particular event precipitated it. Early last year, some lenders to Alameda wanted their funds back because they were concerned about the more than $2 billion that Alameda had invested in crypto start-ups.
But the problems cascaded last spring when the crypto market began to teeter, with a number of high-profile failures of companies that FTX had close ties to.
With crypto prices falling, more lenders wanted their money back. The falling prices also reduced the value of FTT, which Alameda had used as collateral for some loans. As the firm struggled to pay lenders back, FTX resorted to using funds that customers had deposited with the exchange for ease of trading to pay Alameda’s lenders back.