On December 12, 2022, Sam Bankman-Fried, former CEO of crypto trading firm FTX was arrested in the Bahamas. It all happened after the U.S. Attorney for the Southern District of New York shared a sealed indictment with the Bahamas government. Sam Bankman-Fried (SBF) is soon expected to be extradited to the United States of America. To understand what happened we have to go back a few years.
Sam Bankman-Fried, is an American-born guy who took his bachelor’s degree from the Massachusetts Institute of Technology (MIT). In April 2019 Sam Bankman-Fried founded FTX, a cryptocurrency and derivatives exchange. It started its business the next month i.e. May 2019.
Binance’s CEO Changpeng Zhao bought a 20% stake in FTX for a reported sum of $100 million.
But FTX started growing like crazy. Within a short time frame, FTX became the world’s second-largest cryptocurrency exchange in the world. They spent humongous sums on marketing, which helped them grow more quickly than others. Sam Bankman-Fried became the “king of crypto”. Fortune magazine predicted that Sam Bankman-Fried might be the next Warren Buffett.
Sam Bankman-Fried was going big on crypto even when the world was in a moment of crisis. He could have built an empire like the Oracle of Omaha. FTX shifted its headquarters from Hong Kong to the Bahamas. In January 2022 FTX raised Series C funding of $400 million at a valuation of $32 billion. Things were going in the right direction for Sam Bankman-Fried and FTX.
Binance and FTX started things as friends but now they have become competitors. Binance became the largest cryptocurrency exchange, while FTX became the second-largest cryptocurrency exchange in the world. Coinbase and others were smaller than these two. With all this going on Binance decided to sell its stake in FTX which it bought when FTX was starting its business.
Sam Bankman-Fried and FTX decided to go ahead with this option and buy out the stake of Binance in FTX. But instead of giving money, they decided to give the amount to Binance in the form of an FTT token. Basically, it was a token that FTX created for use in its trading fees. They decided to buy a share of Binance for $2 billion. Binance agreed to take $2 billion in the form of FTT tokens.
Now Binance and FTX became friendly competitors of each other in the world of cryptocurrency exchange. Binance owned a huge amount of money in FTT tokens. One thing to keep in mind here is that the FTT token didn’t have a huge trading volume. On December 6, 2022, Changpeng Zhao came out and said that Sam Bankman-Fried is saying things to the regulators. Basically, he wanted to say that Sam Bankman-Fried was lobbying in such a way that it would hurt the business of Binance.
So Changpeng Zhao announced publicly on his Twitter account that he is going to dump the entire amount of $2 billion which he held in FTT tokens. This news created panic among the people who already hold the FTT token. Those people thought that it might just crash the price of FTT. So they also started to sell their holdings in FTT. As the supply of FTT increased the price of FTT went down like crazy.
People stated panic sell. The price of FTT dropped by 15-20% overnight. Now nobody wants to buy FTT. Now enters into the scene, the hedge fund which Sam Bankman-Fried started himself. It was called Alameda Research. They were like kings. But soon it became evident that the king himself has no clothes to wear.
Alameda Research had about $12 billion in assets. They had around $7 billion in liabilities. But an important thing here is that around half of the assets of Alameda were in FTT tokens. By now the value of the FTT token was plummeting and it soon became illiquid. The value of its assets began to go down. Alameda Research might die soon.
If Alameda Research goes into trouble then FTX might as well face some troubles. They were kinda like sister companies. Their relationship was unclear for the past many years. But people thought that FTX is a blue chip company. Sam Bankman-Fried is a genius. He might have something in his mind to get FTX out of trouble as soon as possible. Sam Bankman-Fried tweeted as well that things are fine.
Even Alameda Research’s CEO came and said that
they would buy the FTT token even at $22.
24 hours passed nothing happened. If Alameda had the financial strength to do that they could have done it. People who had accounts with FTX started freaking out. They started to withdraw their money from their accounts. Soon people had withdrawn about $1 billion. FTX was facing a liquidity crunch.
FTX didn’t have enough money at its disposal to pay back people’s money. Then on November 8, 2022, Sam Bankman-Fried came out and said that they are entering a strategic deal with Binance. Changpeng Zhao cleared things up. Basically, he said that FTX was in trouble, and we came to save them. Binance decided to acquire FTX but after doing proper Due Diligence.
But after some time Binance came with a
resounding no. They withdrew their offer. FTX was left with no options. Sam
Bankman-Fried was also left with no options. He resigned from the position of
CEO of FTX. John Ray III became its CEO. Then on November 11, 2022, FTX filed
for Chapter 11 bankruptcy.
Not only FTX became bankrupt, but the wealth of Sam Bankman-Fried also eroded as well. In October 2022, he had an estimated net worth of around $10 billion. However, on November 8, 2022, in between the FTX solvency crisis, his net worth was estimated to have dropped 94% to around $1 billion. When FTX filed for bankruptcy, he was estimated to have no material wealth.
What started as a promising journey, ended with bankruptcy. Now Sam Bankman-Fried has to face the charges against him. And we will have to wait and see what the future now holds for Sam Bankman-Fried and the crypto world.
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