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Alice is a trading firm. Alice borrows $1 billion, Alice then uses $1 billion to go out and buy $1 billion of assets. To become insolvent, the value of Alice's

Alice is a trading firm. Alice borrows $1 billion, Alice then uses $1 billion to go out and buy $1 billion of assets. To become insolvent, the value of Alice's assets has to fall below the value of her liabilities. Otherwise, Alice can simply liquidate her assets to repay her debts. The only way this can happen is if the value of Alice's assets falls below the cost basis in which she purchased those assets (plus some relatively minor short-term secured interested rate). For a trading firm engaged in mark-to-market accounting that condition represents a loss in the income statement. This isn't strange voodoo, this is just simple accounting identities.

gamblor956 4y ago
To put it bluntly: Alice becomes legally and technically insolvent if the market value of the acquired assets falls below $1 billion: the value of the assets is no longer sufficient to pay off the $1 billion loan.
- dcolkitt 4y ago
  So you agree with me? For Alice to become insolvent the price of her assets has to fall below her cost basis. Alameda's cost basis on Solana is the seed round at approximately ten cents, and it's currently trading at $30. Similar story for all the Solana protocol tokens. I don't know what Alameda's cost basis is on FTT (if it's even holding a significant amount financed with hard currency), but we can almost certainly say it's close to the seed round price because the founder of Alameda is literally the founder of FTX. To make this story make sense Alameda at one point must have bought some asset that has fallen significantly from its cost basis. What exactly is this supposed asset? Because Alameda certainly isn't known for going out and taken levered long exposure on BTC, ETH or other post-seed liquid tokens.
  - shorthistory 4y ago
    Still doesn't explain why they are holding $5.8B FTT
  - gamblor956 4y ago
    No, I don't agree with you. Solana is only worth $33 right now at the current spot rate, but at the volume that would need to be liquidated to pay off Alameda's debts, the price would crash to pennies because the amount would represent over half of the daily trading volume in Solana for the past month. (For comparison, in the stock market, selling the equivalent a single-digit % of the daily volume of a stock can tank the stock.) Similarly, Alameda owns 80% of FTT, which has a 24h trading volume of less than 20% of Alameda's debts, and fewer than 250 active daily traders. It would be literally worthless if Alameda tried to liquidate enough to pay off its debts. And as the linked blog points out, FTT is just a shitcoin exchanged between two related entities on their accounting books, meaning that at least $5.8 billion of the value of FTT, i.e., 80% of the putative value, is purely made-up. OTOH, as the Voyager debt was collateralized entirely with shitcoins, it's possible that the other $7+ billion in Alameda debt was also collateralized in shitcoins. If that's the case, than Alameda should be solvent because it appears they actually have about $100m in cash assets. But if not, they are legally insolvent.
  - NotYourLawyer 4y ago
    Cost basis has nothing to do with insolvency. If a company is mismanaged badly enough, it can easily become insolvent even if its investments are doing fine.

gamblor956 4y ago

To put it bluntly: Alice becomes legally and technically insolvent if the market value of the acquired assets falls below $1 billion: the value of the assets is no longer sufficient to pay off the $1 billion loan.

dcolkitt 4y ago
So you agree with me? For Alice to become insolvent the price of her assets has to fall below her cost basis. Alameda's cost basis on Solana is the seed round at approximately ten cents, and it's currently trading at $30. Similar story for all the Solana protocol tokens. I don't know what Alameda's cost basis is on FTT (if it's even holding a significant amount financed with hard currency), but we can almost certainly say it's close to the seed round price because the founder of Alameda is literally the founder of FTX. To make this story make sense Alameda at one point must have bought some asset that has fallen significantly from its cost basis. What exactly is this supposed asset? Because Alameda certainly isn't known for going out and taken levered long exposure on BTC, ETH or other post-seed liquid tokens.
- shorthistory 4y ago
  Still doesn't explain why they are holding $5.8B FTT
- gamblor956 4y ago
  No, I don't agree with you. Solana is only worth $33 right now at the current spot rate, but at the volume that would need to be liquidated to pay off Alameda's debts, the price would crash to pennies because the amount would represent over half of the daily trading volume in Solana for the past month. (For comparison, in the stock market, selling the equivalent a single-digit % of the daily volume of a stock can tank the stock.) Similarly, Alameda owns 80% of FTT, which has a 24h trading volume of less than 20% of Alameda's debts, and fewer than 250 active daily traders. It would be literally worthless if Alameda tried to liquidate enough to pay off its debts. And as the linked blog points out, FTT is just a shitcoin exchanged between two related entities on their accounting books, meaning that at least $5.8 billion of the value of FTT, i.e., 80% of the putative value, is purely made-up. OTOH, as the Voyager debt was collateralized entirely with shitcoins, it's possible that the other $7+ billion in Alameda debt was also collateralized in shitcoins. If that's the case, than Alameda should be solvent because it appears they actually have about $100m in cash assets. But if not, they are legally insolvent.
- NotYourLawyer 4y ago
  Cost basis has nothing to do with insolvency. If a company is mismanaged badly enough, it can easily become insolvent even if its investments are doing fine.