Below is an excerpt of the Bitcoin Magazine Pro report about the rise and fall FTX. The Beginnings How did Sam Bankman-Fried get started? As the story goes, Bankman-Fried, a former international ETF trader at Jane Street Capital, stumbled upon the nascent bitcoin/cryptocurrency markets in 2017 and was shocked at the amount of “risk-free” arbitrage opportunity that existed. Bankman-Fried claimed that the Kimchi Premium, the difference in the price of bitcoin in South Korea versus other international markets (due capital controls), was a unique opportunity that he took advantage to start making his millions and eventually billions. The Alameda Ponzi: The Beginning Although the story seemed plausible on the surface due to the inefficiency of the cryptocurrency market/industry the red flags for Alameda were obvious right from the beginning. Alameda Research’s pitch decks for 2019 circulated as the fallout from FTX. Many found the content quite shocking. Before we get into our analysis, we will provide a complete deck. There are many red flags in the deck, including numerous grammatical errors and only one investment product, “15% annualized fixed-rate loans”, that promise “no downside.” These are all red flags. It is possible for a firm with a strong portfolio to perform well in a bearish market. However, it is not common for them to be able to generate consistent returns with a small portfolio drawdown. It is a sign of a Ponzi scheme. We have seen it before. Zhu Su, the co-founder of now-defunct hedge fund Three Arrows Capital, seemed skeptical.SourceApproximately three months later, Zhu took to Twitter again to express his skepticism about Alameda’s next venture, the launch of an ICO and a new crypto derivatives exchange. “These same guys are now trying launch a “bitmex rival” and do an ICO. ?” Tweet, 4/13/19 Zhu posted the following tweet while tweeting a screenshot from the FTT whitepaper: “Last Time they pressured my business partner to get me delete the tweet. After they couldn’t find any better fools to borrow money from, even at 20%+, they started this ICO. I understand why scams are not exposed early enough. Exclusion risk is higher than the return on exposing. Tweet, 4/13/19 FTT could also be used as collateral in FTX cross-collateralized liquidity engine. FTT received a collateralweighting of 0.95, while USDT & BTC received 0.975, and USD & USDC a weighting 1.00. This was true up until the collapse. Source: TokenThe FTT token was described as the “backbone” of the FTX exchange and was issued on Ethereum as a ERC20 token. It was primarily a rewards-based marketing scheme to increase FTX platform users and support balance sheets. Alameda Research held the majority of FTT supply. Alameda even participated in the initial seed round that funded the token. FTX controlled 280 million of the total supply of FTT. 27.5 million went to an Alameda account. FTT holders were able to take advantage of additional FTX perks like lower trading fees, discounts and rebates, as well as the ability to use FTT to collateralize derivative trades. FTT tokens were purchased by FTX using a percentage from trading fees revenue. To continue increasing FTT’s value, tokens were bought and then burned every week. FTX repurchased burned FTT tokens based on 33% fees generated on FTX market, 10% net additions made to a backstop liquidity funds and 5% fees earned from other uses. The FTT token doesn’t give its holders FTX revenue, shares or governance decisions over FTX. The idea was to increase the perceived market value for FTT and then borrow against it using the token as collateral. Alameda’s balance sheets grew with FTT’s value. The game could go on as long as the market didn’t rush to sell FTT and then collapse its price, FTT rode the FTX marketing push to a peak market cap at $9.6 billion in September 2021. This was not including locked allocations. Alameda leveraged against FTT behind the scenes. The Alameda assets of $3.66b FTT & $2.16b “FTT collateral” in June of this year, along with its OXY, MAPs, and SRM allocations, were combined worth tens of billions of dollars at the top of the market in 2021.The price of FTT with a side profile showing FTT trading volume on FTX (logarithmic scale)FTT Market Cap (logarithmic scale) – Source:CoinMarketCapCZ Chooses BloodIn one decision and tweet, CEO of Binance, CZ, kicked off the toppling of a house of cards that in hindsight, seems inevitable. The company wanted to sell $580 million worth of FTT in order to avoid Binance being left with a useless FTT token. This was a shocking development as Binance’s FTT holdings made up over 17% of market cap. This is the double-edged sword of having most FTT supply in the hands a few and an unliquid FTT market that was used for manipulating the price higher. Value collapses when someone sells something large. Caroline of Alameda Research made a mistake in announcing their plans to purchase all of Binance’s FTT for $22. Publicly announcing their plans to buy all of Binance’s FTT at the current market price of $22 caused a lot of market open interest to speculate on the future direction FTT would take. Short sellers joined the fray to drive the token price down to zero, claiming that something was wrong and that there was a risk of insolvency. This scenario was brewing since the collapse of Three Arrows Capital, Luna, and Luna this summer. Alameda likely suffered significant losses and exposure, but they were able to survive on FTT token loans and leveraging FTX customer money. It makes sense that FTX was interested in bailing out Voyager and BlockFi during the initial fallout. These firms may have large FTT holdings, so it was necessary for them to stay afloat in order to maintain the FTT market value. BlockFi was loaned $250 million worth of FTT in the bankruptcy documents. We now know why Sam was buying every FTT token he could find each week with hindsight. The FTT token was a ticking bomb that was ready to explode. There were no marginal buyers, no use cases and high-risk loans with the FTT token. The End of It All It is likely that the company owes more than a million creditors. The bankruptcy document contains numerous flaws, balance sheet holes, and financial controls that are worse than Enron. It took just one tweet about selling a large number of FTT tokens, and a rush for customers withdraw their funds overnight to expose FTX’s asset and liability mismatch. Despite the fact that customer deposits were estimated to be $8.9 million now, they weren’t listed as liabilities in the bankruptcy court filing. We can now see that FTX never properly accounted or backed the bitcoins and other crypto assets customers held on their platform. It was all a web made up of misallocated capital and leverage, and the movement of customer funds around to keep the confidence game alive …. This concludes an excerpt of “The FTX Ponzi”: Uncovering the Largest Fraud in Crypto History. Follow this link to download the entire 30-page report.


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