Speechless

Many said it would be FTX, and I honestly laughed it off. I never believed they would go down — and yet, here we are. The catalyst for their downfall is the same as it always is — a good business overextending themselves by gorging on cheap credit collateralised by high and rising valuations of assets on their balance sheet. And as money became more expensive and the cycle turned, their nakedness was exposed for all to see. This essay is a simple story. I shall narrate a play-by-play, built around tweets and public statements. I intend to respectfully read between the lines and offer my opini

on on how this all came to be and what the future holds. To that end, I believe the final down candle in this crypto bear market is near, and that we shall emerge from the bear market with less deadweight and more opportunity for those who survived. Before we begin, I sincerely believe that Sam Bankman-Fried (SBF) is a once in a generation trading talent. Even though he just blew up, the empire he put together took a certain amount of panache that is hard to come by. And I must give even more kudos to Baron CZ — when the news broke that Binance might acquire FTX, I sent CZ the following messa

ge: “I fucking love you man. Boss move, much respect.” Let’s begin. It was all a dream, I used to read Coindesk magazine… It all started with a Coindesk article that featured a breakdown of a leak

ed Alameda balance sheet. The financials make concrete what industry-watchers already suspect: Alameda is big. As of June 30, the company’s assets amounted to $14.6 billion. Its single biggest asset: $3.66 billion of “unlocked FTT.” The third-largest entry on the assets side of the accounting ledger? A $2.16 billion pile of “FTT collateral.” There are more FTX tokens among its $8 billion of liabilities: $292 million of “locked FTT.” (The liabilities are dominated by $7.4 billion of loans.) “It’s fascinating to see that the majority of the net equity in the Alameda business is actually FTX’s own centrally controlled and printed-out-of-thin-air token,” said Cory Klippsten, CEO of investment platform Swan Bitcoin, who is known for his critical views of altcoins, which refer to cryptocurren

cies other than bitcoin (BTC). Alameda CEO Caroline Ellison declined to comment. FTX didn’t respond to a request for comment. Other significant assets on the balance sheet include $3.37 billion of “crypto held” and large amounts of the Solana blockchain’s native token: $292 million of “unlocked SOL,” $863 million of “locked SOL” and $41 million of “SOL collateral.” Bankman-Fried was an early investor in Solana. Other tokens mentioned by name are SRM (the token from the Serum decentralized exchange Bankman-Fried co-founded), MAPS, OXY and FIDA. There is also $134 million of cash and equivalents and a $2 billion “investment in equity securities.” The majority of the “assets” on their balance sheet are illiquid FTT tokens and a bunch of shitcoins. Let’s break down why FTT is so important t

o the FTX / Alameda empire. Per FTT’s stated tokenomics, FTX has pledged to use one third of all exchange fees to buy back FTT. SBF owns the majority of Alameda’s equity, while he continuously dilutes his FTX ownership to ship in capital from VC muppets. These VC muppets probably didn’t realise — or maybe they did, which is even worse for their investors — that a good chunk of FTX’s revenue was syphoned from FTX to Alameda through Alameda’s large FTT stake. Presumably, Alameda received a large allocation of FTT for providing essential market making services to FTX, and its participation in the FTT initial coin offering. Ok, so that’s not ideal for FTX investors, but it isn’t what struck the deathblow to FTX’s solvency. The real issue — which folks started to raise questions about in the wake of the Coindesk article — was whether FTX loaned Alameda money (most likely USD or fiat stablecoins) and used Alameda’s FTT stake as collateral. If FTX did loan the funds, that isn’t an inherentl

y fatal issue either — FTX was free to loan out its retained earnings to whomever it pleased. But the most pressing related concern was whether FTX rehypothecated customer deposits to Alameda and took FTT as collateral. And, as a subset of that, whether the fall in the value of FTT or some of the shitcoins on Alameda’s balance sheet would thus render Alameda insolvent. And finally, if Alameda became insolvent, would FTX lend money from client funds to prop it up? Again, these were the questions that people began asking after this article came out. Lucas Nuzzi has an interesting theory on the connection between FTX, Alameda, and FTT. In short, he argues that Alameda blew up alongside Three Arrows Capital and others, but FTX lent Alameda money to survive in exchange for FTT tokens due to Alameda via its participation in the FTT ICO. Then, CZ struck.