How Sam Bankman-Fried became crypto’s curliest billionaire in 4 years
Crypto billionaire Sam Bankman-Fried’s parents are both Stanford law professors. Long before founding top market making unit Alameda Research, Bankman-Fried attended MIT and graduated with a degree in physics.
Bankman-Fried then joined Jane Street, one of the most profitable quantitative trading shops in the world, as an ETF trader around 2014.
Exact details of Bankman-Fried’s earnings in that time aren’t totally clear (Glassdoor gives us some indication), but they were enough to leave the firm in 2017 to pursue Bitcoin arbitrage trade in Japan.
This is a brief rundown of how 29-year-old Bankman-Fried amassed his $26.5 billion fortune.
Bitcoin was very expensive in Japan
Arbitrage primarily involves buying an asset on one exchange and selling it for a higher price on another exchange.
It takes advantage of the practical reality that prices for the same asset are not always equal across all markets.
And sometimes price differences between exchanges exist on an international scale.
Crypto traders might remember the “Kimchi premium” in 2017 and 2018, when the price of Bitcoin persisted higher in South Korea versus other countries.
Bankman-Fried was aware of that phenomenon, but he opted for a similar opportunity in Japan.
In October 2017, he founded Alameda Research. According to an interview with RealVision, Bankman-Fried was frustrated with regional Japanese banks not opening accounts for his crypto-focused businesses.
So, he chose a name to fool them. He said banks hesitated to serve crypto companies but welcomed a “research institute.”
Bankman-Fried could easily buy Bitcoin abroad and find a high-priced buyer with Japanese yen. The hard part was setting up infrastructure to exploit Japan’s expensive Bitcoin.
Depositing that yen into a Japanese bank account — and getting that yen out of the country — proved challenging.
Bitcoin traders frequently face difficulty in finding banks friendly toward customers sending large quantities of cash through cryptocurrency exchanges, even well-established platforms like Coinbase.
International arbitrage trading adds even more complexity to the process.
In any case, specifics of how much money Bankman-Fried made during this episode aren’t available. He has however admitted to moving up to $25 million worth of Bitcoin and yen per day (which works out to be $1 billion every 40 days).
Building crypto exchange FTX
“We thought, it’s like 80% chance or so that we just fail to ever get traction,” Bankman-Fried said of FTX’s early days on Howard Lindzon’s podcast in June.
Derivatives-friendly crypto exchange FTX is the most prominent milestone in Bankman-Fried’s career. This month, FTX meme-raised $420 million at a $25 billion valuation from 69 investors including Sequoia and BlackRock.
Like the BNB token that accompanied the creation of Binance, Bankman-Fried created the FTX token in the ERC-20 standard with the ticker symbol FTT.
Internally, FTT was meant to allow leverage for non-margin accounts and reduce the risk of clawbacks that protect an exchange’s liquidity at the expense of traders.
To the average retail trader, Bankman-Fried advertised FTT as a discount coupon for trading fees that — unlike an actual coupon — could go up in price.
FTT has multiplied more than 50 times since September 2019, and has returned 1,600% in the past year.
So, between printing valuable utility tokens, maintaining sought-after stakes in Alameda Research and his FTX exchanges, and his personal trading exploits, Bankman-Fried has seen his wealth explode over the past four years.
Bankman-Fried’s FTX has ‘peculiarities’
All crypto derivatives exchanges will automatically close customers’ leveraged positions once they lose their entire account’s value. This process is called liquidation, and it happens frequently.
FTX, in particular, uses a “three-tier liquidation model” and “rate-limited orders” to close customers’ losing positions. And like Binance and BitMEX, FTX has an insurance fund.
“Insurance” might be a misnomer. Although exchanges have infrequently used insurance funds to provide payouts to customers for legitimate anomalies, these funds are actually akin to slush funds that primarily benefit exchange operators like Bankman-Fried.
Still, there’s a rather long list of oddities about FTX:
- It’s public knowledge that FTX shares collateral across all derivatives tokens in one, universal stablecoin wallet.
- Alameda Research, which created FTX, also runs the exchange’s Over-The-Counter (OTC) trading desk.
- In December 2019, Coinbase bought a substantial amount of FTX derivatives tokens as part of a partnership between Coinbase and FTX. However, in March 2020, Coinbase suddenly delisted all tokens associated with FTX. Coinbase claimed that too many traders did not understand how leveraged tokens work.
- According to FTX’s help pages, FTX does not require KYC for accounts that never exceed $2,000 in daily activity.
- Bankman-Fried has put an inordinate amount of effort into marketing FTX to Americans, despite claims that he never allows Americans to access FTX.com (ostensibly directing them to FTX.us). He also claims he did not sell FTT tokens to US investors (for context: the comparably sized Telegram also claimed that it did not sell its TON tokens to US investors. In reality, US investors purchased 25% of Telegram’s $1.7b ICO.)
- Bankman-Fried is one of Tether’s top two customers. The CFTC fined Tether for making misleading statements and omitting material facts to the public. According to a speech made by CFTC Commissioner Dawn D. Stump, Bitfinex’s claim that Tether is backed 1:1 by the US dollar is “not 100% true 100% of the time.”
But has Bankman-Fried made “legally irregular” moves during his career?
Although his penchant for Tether, internal omnibus wallets (slush funds), and oblique promotion of FTX to Americans are concerning, the most obvious example might be his early days as crypto arbitrageur.
He did mention having to maneuver around American and Japanese banking requirements while figuring out how to profit from international arbitrage and building Alameda Research in his May interview with RealVision.
Read more: [Tether minted most USDT to just 2 firms — Alameda and Cumberland]
This included leveraging proxies and setting up residence in both the United States and Japan — at least on paper.
At the time, he blamed the friction on poorly-designed bank websites and cautious bank tellers.
While some critics have labeled Bankman-Fried’s resourceful maneuvers “bank fraud,” crypto’s curliest billionaire recently moved Alameda Research’s headquarters from Hong Kong to Singapore in response to recent Chinese regulations.
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