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On the morning of November 2nd, 2022, FTX was worth $32 billion. Within the span of minutes, everything fell apart. FTX’s trading firm, Alameda Research, had just suffered from a news leak. An article by CoinDesk revealed that Alameda Research held $5.1 billion worth of FTT tokens, which was FTX’s flagship cryptocurrency. While subtle at the time, this was the iceberg that would sink the Titanic. On November 6th, FTX began to sink. The CEO of Binance, CZ, had announced that he would be liquidating $2.1 billion of FTT tokens. This was a declaration of war. CZ had just discovered that Alameda Research was not just a company tied to FTX, but practically was FTX. If he could make Alameda Research sink, FTX would as well. As the FTT token began tanking, so did the value of Alameda Research’s assets. Hundreds of millions of dollars were almost instantly withdrawn from FTX. The bank run had officially begun.

By the end of November 6th, over $5 billion of assets were withdrawn from FTX. FTX only had a little over $6 billion on hand, so that only left $1 billion in cash left for customers to withdraw. The CEO of Alameda Research, Caroline Ellison, was terrified. She tweeted, “CZ, if you’re looking to minimize the market impact on your FTT sales, Alameda will happily buy it all from you today at $22!” CZ knew this was a sign of weakness. He knew that if he kept selling the FTT token, Alameda Research and FTX would go down. So rather than taking on Alameda’s offer, CZ stated, “I think we will stay in the free market”. The CEO of FTX, Sam Bankman-Fried, also known as SBF, was in shock. CZ was about to destroy SBF’s entire career within days. As the withdrawals continued, SBF frantically tweeted, “A competitor is trying to go after us with false rumors. FTX is fine. Assets are fine”. These were all lies, but SBF was desperate. He needed to stop the withdrawals now or the credibility of FTX would be tainted forever. SBF further soothed the crowd by saying, “FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries). We have been processing all withdrawals and will continue to be”. This was, again, three more lies. FTX did not have enough to cover all client holdings. They did invest client assets. And they were not going to continue processing all withdrawals. By Tuesday, November 8th, $6 billion was withdrawn from FTX. Users were trying to withdraw even more money, but FTX simply didn’t have the cash on hand. The numbers on their screen were all a facade. SBF had no choice but to give into CZ’s demands. In a shocking turn of events, he called CZ with an offer to sell FTX to Binance. CZ saw this as a modern opportunity to become the Rockefeller of crypto. FTX was the #2 exchange by volume and Binance was the #1 exchange. If CZ were to buy FTX, he would not just become a crypto giant. He would become the crypto monopoly. But after taking a closer look at FTX’s financials, CZ was appalled by several red flags. SBF was committing fraud. In order to understand why CZ was so horrified by FTX’s financials, we have to rewind all the way back to how SBF started FTX.

Shortly after graduating from MIT, SBF began his career as a quant trader at Jane Street Capital trading ETFs. This experience that SBF obtained at Jane Street set the stage for the founding of Alameda Research. Jane Street is one of the most prestigious trading firms focused on marketing making for ETFs. Market makers aim to buy and sell identical assets near the market price. If a buyer willing to buy an ETF for $100.5 and a seller willing to sell for $100, then Jane Street would buy the ETF from the seller for $100 and sell it for $100.5. This would provide liquidity to the buyers and sellers, because they would be able to buy and sell ETFs almost instantly. As a trader at Jane Street, SBF recognized the potential that market makers have to generate substantial amounts of money. While still trading at Jane Street, SBF was fascinated by a blooming opportunity. In 2017, the price of Bitcoin took off to almost $20,000. This caught the attention of SBF, who recognized an opportunity to use the same strategies he learned at Jane Street but for crypto. According to SBF himself, the reason why he wanted to enter the crypto industry was because of his insane appetite for risk. On Sequoia Capital’s website, SBF stated that he wanted to make riskier decisions to amass larger sums of wealth. So in order to fuel his risk appetite, SBF started Alameda Research, a new quant fund that would engage in arbitrage trading. Arbitrage trading is when you trade identical assets between different markets to make money on the price difference.