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Okay, but... how? How did they manage to lose so much money by running a popular exchange that should bring in tons of fees? Even if they were gambling with par

Okay, but... how? How did they manage to lose so much money by running a popular exchange that should bring in tons of fees? Even if they were gambling with part of the deposits, how can they lose 90% of all assets? You'd have to be actively trying to lose money to be this bad... Also, where does Alameda fit into the picture?

mym1990 4y ago
They were probably leveraging heavily in some sectors, on top of siphoning those incoming fees to line pockets. Once you leverage, it is extremely easy to lose everything in a span…but also easy to gain!
lordnacho 4y ago
Seems like Alameda was critical to the how of it. What's not clear to me is what they gambled on that lost money. Business model ought to be simple, the exchange earns loads of fees, and Alameda makes markets on it, earning spreads. Just putting a lid on the risk there should be enough to keep people occupied, no need to print your own money for extra leverage.
- grey-area 4y ago
  SBF is a con artist. There is no point looking for a legitimate business because there wasn’t one.
  - HDThoreaun 4y ago
    Running an exchange is a legitimate business that should make tons of money if you're not embezzling customer funds.
    - grey-area 4y ago
      It was not a legitimate business, there were almost zero controls on cashflow.
- emilsedgh 4y ago
  > What's not clear to me is what they gambled on that lost money. My guess would be other crypto ventures. All these crypto companies pumped each other with no products/assets (Stadium names and soccer team sponsorships with no products to sell!) and invested in each other. The economy had so much excess money and they got pumped and they thought this is what "investing" is. Economy's bubble burst and suddenly their valuations goes to 0. When economy goes bad everyone is hurt but these companies had nothing but vaporware and are vaporizing as a result. Just a guess though.
  - lordnacho 4y ago
    But any kind of illiquid venture investment is just money out of your trading capital. Maybe Tom Brady takes tokens in exchange for doing adverts, but I doubt that stadium uses FTT to pay its employees. Likewise with any other venture, you need cold hard cash. Swapping whatever cash you have for FTT in order to invest it elsewhere just seems insane. You've got a business that creates cash, and needs it for deposits and margins. I mean sure, split out some into a venture business, but be sensible and keep some for the cash cow? Also, hire an adult to tell you this. Would have cost barely anything to get any old finance professional to come in and say that.
    - UncleMeat 4y ago
      It does seem like it would be so easy to not fuck this up. Fees are high on the crypto exchanges and you've got so many people day trading or even trading via automation that you should do well. But I can imagine how it happens. It is some massive fucking bull market and you see your peers doing shady things (20% APR! Zero risk!) and making shit loads of money. You've got this trading arm that is making shit loads of money during the bull market. So you do a little double dipping and it work! Hooray you are making everybody richer! So you do a little more. And a little more. And then oops Alameda is losing a lot of money. But don't worry this is just a blip. Those folks are smart. Hmmm... this is taking longer than we thought to come back. They just need some temporary money to get through this. Don't worry, they've still got huge assets. Oh fuck, their assets are tanking and they are still losing money. Kaboom. You need to have somebody in the room who can say "yes I know this strategy is making money right now but we absolutely cannot do this." And it is already hard to have that person in the room normally, let alone when you are a company make up of people in their 20s who are told they can do no wrong and also believe that it is their moral duty to make a shit ton of money so they can funnel it into some weird effective altruism mission. If you believe you are saving the world then that 20th billion is still important, whereas if you just want to be rich as fuck then it really isn't.
- mudrockbestgirl 4y ago
  Exactly. With the perfect order flow information and ability to front-run other MMs and takers Alameda should've been highly profitable just making markets on FTX. How could they lose so much money...
- miked85 4y ago
  Just watching a video of the Alameda CEO explains a lot.
- vgatherps 4y ago
  In addition to earning a spread you lose from toxic trades, i.e. someone trading when your quote is stale. Alameda has a strong incentive to knowingly do bad trades on ftx, i.e. stale quotes + spreads too small, since it increases legitimate volume numbers and generates ftx fees (gains in ftx fees offset trade loss). It's unknown if this happened or to what extent, but it can be very costly to do this in large size.
  - lordnacho 4y ago
    Yes but you can control this, turning it on and off as you like, and indeed market makers do this. It wouldn't explain a catastrophic loss though, it's more like a slow bleed that you balance against whatever income you're making.
    - vgatherps 4y ago
      If you're willingly doing this to boost the exchange, the whole point is that you keep it going even if it's in the red. Certainly won't catastrophically explode the maker but it doesn't help if you're already hurting somewhere else.
- ackbar03 4y ago
  I think it was mentioned that one of the reasons was they tried to bailout voyager but voyager went under anyways. They extended a 500mio loan from alameda, which would explain a good chunk of it. Also, having listened to the FTX podcast a few times just to get some idea of what their magic was, there was one episode where Caroline came on, and the gist of it seemed to be that the host Tristan and a lot of the heavy blockchain cool-aid drinkers managed to convince Caroline to toss out good old risk management principles and Yolo it on defi and nft projects. They referred it in Their podcast as "the summer of defi". I guess that might have been a reason as well
djbebs 4y ago
They stole clients assets and used them to: 1- Gamble with them 2- pay themselves 3- lobby the government 4- bailout other failing crypto companies. Everything here could have been done with any non-crypto exchange.
- 331c8c71 4y ago
  How would a regulated exchange gamble with clients money? It's even technically impossible for all they do is managing a place where participants trade.
  - kayamon 4y ago
    Most banks loan their customer assets out. You money isn't sitting in a big Scrooge-McDuck money pit at Citibank -- it gets loaned back out to other people.
    - 331c8c71 4y ago
      My point was specifically about an exchange since the claim was "Everything here could have been done with any non-crypto exchange". I fully agree with your point about bank deposits. Unlike ftx, however, the banks are tightly regulated and monitored.
- smileysteve 4y ago
  Kind of sounds like Chase / Washington mutual when you put it like that
blue_light_man 4y ago
My vague guess is they need money to spend on advertising and investments made by Alameda and FTX. For that, they can't use FTX. They need USD or a stable coin like USDC. They can't convert hundreds of millions of dollars of FTT to USDC since demand for FTT is relatively small. And a transaction like that might cause a huge decline in the price of FTT. So they must have used ETH, BTC etc deposited by customers for swapping to USD or USDC. I guess their theory must have been the surbowl ads, celebrity endorsemens and all would result in demand of FTT going up after some time. And they can later swap them back to customer funds when required. But then crypto crashed. Now customers want to withdraw the funds and they don't have it to give back. And nobody wants FTT.
deleted 4y ago
[deleted]
seanhunter 4y ago
Well firstly they were offering perps[1] which are a margined product. If you want to trade with margin on a regular exchange (like say you want to trade commod futures on CBOE or ICE or whatever) you contact a broker/dealer and put up collateral[2] to get margin. FTX was seemingly both acting as an exchange and as a broker/dealer so they were providing the margin and standing risk on the other side of certain trades either as FTX themselves or as Alameda (I'm not sure about this). Margin has the effect of magnifying the effect of volatility in the value of a product on profit and loss. And of course crypto is extremely volatile to begin with (by comparison to other assets). Since they were acting as a dealer they could lose a lot if their book of business was imbalanced (ie on net a lot of their customers have the same position) and the market moved against them. Secondly they seem to have had very little equity as a reserve against losses and what equity they had seems to have been in this FTT token which was only backed by the exchange itself. So if the FTT token lost value they would lose all their equity and have no reserves to protect against losses. This happened when Binance tweeted that they were selling their (very substantial) FTT holdings. In normal finance your equity reserves are there for if you have a bad day and lose some money - you can dust yourself off and try again the next day. If you have no equity then your business is insolvent. Trading when insolvent is no bueno and if there are rumours that you are insolvent of course people pull funds, won't trade with you so you have effectively a "run on the bank" and all the problems you had before get worse because now you can't find anyone to trade with as you try to wind down positions to refund customers etc. Thirdly there seems to have been shenanigans afoot regarding Alameda (the affiliated hedge fund) which seems also to have primarily been long FTT and a bunch of other similar tokens backed by not very much. It may be exchange funds were being used by Alameda for trading - certainly they don't seem to have been kept at arm's length as they should have. Fourthly there have been allegations that customer funds from the exchange were somehow inappropriately used to cover losses either at alameda or at FTX itself. If this is not true, it's hard to understand why refunds are taking any time at all so make of that what you will. [1] Essentially a leveraged swap on the price of a particular crypto. So one party will pay say 10x the difference between some reference price and the current price of the crypto and the other side will receive it. [2] Assets with a certain value as security against losses. Generally you will be required to have collateral which is liquid (ie can be easily sold if need be without affecting the value of the collateral) and relatively risk-free (like treasury bonds). For collateral that is risky, the dealer will take a "haircut" off the face value of the collateral to account for the fact that they may not be able to sell the things for the market value. The market itself (and Alameda) had collateral (FTT and similar) that was on the whole neither liquid nor risk-free.
dbancajas 4y ago
> usiness model ought to be simple, the exchang They were greedy and counted on a bull market. Basically used money that's not theirs to speculate on shitty coins. Shitty coins went down in value along with their customer's deposit. Think about borrowing money at the bank to buy BTC at 60K. You'd be on the same spot.

mym1990 4y ago

They were probably leveraging heavily in some sectors, on top of siphoning those incoming fees to line pockets. Once you leverage, it is extremely easy to lose everything in a span…but also easy to gain!

lordnacho 4y ago

Seems like Alameda was critical to the how of it. What's not clear to me is what they gambled on that lost money. Business model ought to be simple, the exchange earns loads of fees, and Alameda makes markets on it, earning spreads. Just putting a lid on the risk there should be enough to keep people occupied, no need to print your own money for extra leverage.

grey-area 4y ago
SBF is a con artist. There is no point looking for a legitimate business because there wasn’t one.
- HDThoreaun 4y ago
  Running an exchange is a legitimate business that should make tons of money if you're not embezzling customer funds.
  - grey-area 4y ago
    It was not a legitimate business, there were almost zero controls on cashflow.
emilsedgh 4y ago
> What's not clear to me is what they gambled on that lost money. My guess would be other crypto ventures. All these crypto companies pumped each other with no products/assets (Stadium names and soccer team sponsorships with no products to sell!) and invested in each other. The economy had so much excess money and they got pumped and they thought this is what "investing" is. Economy's bubble burst and suddenly their valuations goes to 0. When economy goes bad everyone is hurt but these companies had nothing but vaporware and are vaporizing as a result. Just a guess though.
- lordnacho 4y ago
  But any kind of illiquid venture investment is just money out of your trading capital. Maybe Tom Brady takes tokens in exchange for doing adverts, but I doubt that stadium uses FTT to pay its employees. Likewise with any other venture, you need cold hard cash. Swapping whatever cash you have for FTT in order to invest it elsewhere just seems insane. You've got a business that creates cash, and needs it for deposits and margins. I mean sure, split out some into a venture business, but be sensible and keep some for the cash cow? Also, hire an adult to tell you this. Would have cost barely anything to get any old finance professional to come in and say that.
  - UncleMeat 4y ago
    It does seem like it would be so easy to not fuck this up. Fees are high on the crypto exchanges and you've got so many people day trading or even trading via automation that you should do well. But I can imagine how it happens. It is some massive fucking bull market and you see your peers doing shady things (20% APR! Zero risk!) and making shit loads of money. You've got this trading arm that is making shit loads of money during the bull market. So you do a little double dipping and it work! Hooray you are making everybody richer! So you do a little more. And a little more. And then oops Alameda is losing a lot of money. But don't worry this is just a blip. Those folks are smart. Hmmm... this is taking longer than we thought to come back. They just need some temporary money to get through this. Don't worry, they've still got huge assets. Oh fuck, their assets are tanking and they are still losing money. Kaboom. You need to have somebody in the room who can say "yes I know this strategy is making money right now but we absolutely cannot do this." And it is already hard to have that person in the room normally, let alone when you are a company make up of people in their 20s who are told they can do no wrong and also believe that it is their moral duty to make a shit ton of money so they can funnel it into some weird effective altruism mission. If you believe you are saving the world then that 20th billion is still important, whereas if you just want to be rich as fuck then it really isn't.
mudrockbestgirl 4y ago
Exactly. With the perfect order flow information and ability to front-run other MMs and takers Alameda should've been highly profitable just making markets on FTX. How could they lose so much money...
miked85 4y ago
Just watching a video of the Alameda CEO explains a lot.
vgatherps 4y ago
In addition to earning a spread you lose from toxic trades, i.e. someone trading when your quote is stale. Alameda has a strong incentive to knowingly do bad trades on ftx, i.e. stale quotes + spreads too small, since it increases legitimate volume numbers and generates ftx fees (gains in ftx fees offset trade loss). It's unknown if this happened or to what extent, but it can be very costly to do this in large size.
- lordnacho 4y ago
  Yes but you can control this, turning it on and off as you like, and indeed market makers do this. It wouldn't explain a catastrophic loss though, it's more like a slow bleed that you balance against whatever income you're making.
  - vgatherps 4y ago
    If you're willingly doing this to boost the exchange, the whole point is that you keep it going even if it's in the red. Certainly won't catastrophically explode the maker but it doesn't help if you're already hurting somewhere else.
ackbar03 4y ago
I think it was mentioned that one of the reasons was they tried to bailout voyager but voyager went under anyways. They extended a 500mio loan from alameda, which would explain a good chunk of it. Also, having listened to the FTX podcast a few times just to get some idea of what their magic was, there was one episode where Caroline came on, and the gist of it seemed to be that the host Tristan and a lot of the heavy blockchain cool-aid drinkers managed to convince Caroline to toss out good old risk management principles and Yolo it on defi and nft projects. They referred it in Their podcast as "the summer of defi". I guess that might have been a reason as well

djbebs 4y ago

They stole clients assets and used them to: 1- Gamble with them 2- pay themselves 3- lobby the government 4- bailout other failing crypto companies. Everything here could have been done with any non-crypto exchange.

331c8c71 4y ago
How would a regulated exchange gamble with clients money? It's even technically impossible for all they do is managing a place where participants trade.
- kayamon 4y ago
  Most banks loan their customer assets out. You money isn't sitting in a big Scrooge-McDuck money pit at Citibank -- it gets loaned back out to other people.
  - 331c8c71 4y ago
    My point was specifically about an exchange since the claim was "Everything here could have been done with any non-crypto exchange". I fully agree with your point about bank deposits. Unlike ftx, however, the banks are tightly regulated and monitored.
smileysteve 4y ago
Kind of sounds like Chase / Washington mutual when you put it like that

blue_light_man 4y ago

My vague guess is they need money to spend on advertising and investments made by Alameda and FTX. For that, they can't use FTX. They need USD or a stable coin like USDC. They can't convert hundreds of millions of dollars of FTT to USDC since demand for FTT is relatively small. And a transaction like that might cause a huge decline in the price of FTT. So they must have used ETH, BTC etc deposited by customers for swapping to USD or USDC. I guess their theory must have been the surbowl ads, celebrity endorsemens and all would result in demand of FTT going up after some time. And they can later swap them back to customer funds when required. But then crypto crashed. Now customers want to withdraw the funds and they don't have it to give back. And nobody wants FTT.

deleted 4y ago

[deleted]

seanhunter 4y ago

Well firstly they were offering perps[1] which are a margined product. If you want to trade with margin on a regular exchange (like say you want to trade commod futures on CBOE or ICE or whatever) you contact a broker/dealer and put up collateral[2] to get margin. FTX was seemingly both acting as an exchange and as a broker/dealer so they were providing the margin and standing risk on the other side of certain trades either as FTX themselves or as Alameda (I'm not sure about this). Margin has the effect of magnifying the effect of volatility in the value of a product on profit and loss. And of course crypto is extremely volatile to begin with (by comparison to other assets). Since they were acting as a dealer they could lose a lot if their book of business was imbalanced (ie on net a lot of their customers have the same position) and the market moved against them. Secondly they seem to have had very little equity as a reserve against losses and what equity they had seems to have been in this FTT token which was only backed by the exchange itself. So if the FTT token lost value they would lose all their equity and have no reserves to protect against losses. This happened when Binance tweeted that they were selling their (very substantial) FTT holdings. In normal finance your equity reserves are there for if you have a bad day and lose some money - you can dust yourself off and try again the next day. If you have no equity then your business is insolvent. Trading when insolvent is no bueno and if there are rumours that you are insolvent of course people pull funds, won't trade with you so you have effectively a "run on the bank" and all the problems you had before get worse because now you can't find anyone to trade with as you try to wind down positions to refund customers etc. Thirdly there seems to have been shenanigans afoot regarding Alameda (the affiliated hedge fund) which seems also to have primarily been long FTT and a bunch of other similar tokens backed by not very much. It may be exchange funds were being used by Alameda for trading - certainly they don't seem to have been kept at arm's length as they should have. Fourthly there have been allegations that customer funds from the exchange were somehow inappropriately used to cover losses either at alameda or at FTX itself. If this is not true, it's hard to understand why refunds are taking any time at all so make of that what you will. [1] Essentially a leveraged swap on the price of a particular crypto. So one party will pay say 10x the difference between some reference price and the current price of the crypto and the other side will receive it. [2] Assets with a certain value as security against losses. Generally you will be required to have collateral which is liquid (ie can be easily sold if need be without affecting the value of the collateral) and relatively risk-free (like treasury bonds). For collateral that is risky, the dealer will take a "haircut" off the face value of the collateral to account for the fact that they may not be able to sell the things for the market value. The market itself (and Alameda) had collateral (FTT and similar) that was on the whole neither liquid nor risk-free.

dbancajas 4y ago

> usiness model ought to be simple, the exchang They were greedy and counted on a bull market. Basically used money that's not theirs to speculate on shitty coins. Shitty coins went down in value along with their customer's deposit. Think about borrowing money at the bank to buy BTC at 60K. You'd be on the same spot.