How FTX Lost $32 Billion in 11 Days

The Rise of Sam Bankman-Fried and FTX

• 💡 Sam Bankman-Fried (SBF), an MIT graduate, founded Alameda Research in 2017, exploiting crypto arbitrage opportunities and quickly making over a billion dollars.
• 🚀 In 2019, SBF launched FTX from the Bahamas, a tropical tax haven with friendly crypto regulations, aiming to own a crypto exchange rather than just trade on one.
• 📈 FTX experienced impossible growth, handling billions in daily trading volume by 2021 and raising $400 million from sophisticated investors like Sequoia Capital, valuing it at $32 billion.

The Illusion of Success and Hidden Fraud

• 💰 FTX engaged in a massive spending spree, including Super Bowl ads and celebrity endorsements, while SBF cultivated an image as a media darling and proponent of effective altruism.
• ⚠️ Behind the scenes, FTX and Alameda Research, though supposedly separate, shared everything, with Alameda having a secret backdoor to borrow unlimited customer funds from FTX.
• 💸 Alameda's risky trades often went bad, leading them to cover losses by taking billions of dollars from FTX customer accounts, which were supposed to be safe and available for withdrawal.

The Collapse and Aftermath

• 📰 The house of cards began to fall on November 2, 2022, when a CoinDesk article revealed Alameda's balance sheet was largely made up of FTT tokens, a cryptocurrency created by FTX.
• 📉 Binance CEO Changpeng Zhao (CZ) announced the sale of Binance's FTT holdings, triggering a classic bank run as customers rushed to withdraw $6 billion from FTX, leading to halted withdrawals.
• 🚨 FTX filed for bankruptcy on November 11, 2022, with the new CEO, John Ray III, stating he had never seen such a complete failure of corporate controls, including using QuickBooks for billions of dollars.

Trial, Conviction, and Lessons Learned

• ⚖️ SBF was arrested and extradited to the US, facing charges of wire fraud, securities fraud, and money laundering, with his inner circle (Caroline Ellison, Gary Wang, Nishad Singh) testifying against him.
• 🏛️ On November 2, 2023, SBF was found guilty on all seven counts and later sentenced to 25 years in federal prison, with the judge noting his lack of remorse and risk of recidivism.
• ✅ Key lessons from the disaster include the importance of due diligence, recognizing that charisma is not a substitute for corporate governance, being wary of rapid growth warning signs, and ensuring the real separation of entities.