How Billionaires Survived the Bankman-Fried Recession and Still Expanded

FTX CEO Sam Bankman-Fried has been shopping for bargains amid the industry’s recent carnage, saying he still has cash to spend if the opportunity knocks.

This may sound strange. Other multibillion-dollar crypto giants fell into bankruptcy this year. FTX’s main competitor, Coinbase, has seen its shares drop 70% and laid off a fifth of its workforce as crypto prices plummet.

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Pro exclusive: FTX's Sam Bankman-Fried and his investment strategy on becoming a billionaire

Pro exclusive: FTX’s Sam Bankman-Fried and his investment strategy on becoming a billionaire

Nevertheless, FTX is somehow emerging as the lifeline of the industry.

The 30-year-old billionaire says this was a result of being able to stash enough cash, keep overhead low, avoid lending and grow rapidly as a private company.

“It was important that the industry get through this in one piece,” Bankman-Fried told CNBC in an interview at FTX Headquarters in Nassau, Bahamas. “It won’t be good for anyone in the long run if we have real pain and real setback – it’s not fair to customers and it won’t be good for regulation.”

The crypto industry wiped out billions of dollars during the weeks surrounding the explosion of the cryptocurrency Terra USD and the failure of crypto hedge fund Three Arrows Capital. Lenders exposed to Three Arrows were the next dominoes to fall. In July, FTX signed a deal that gives it the option to buy lender BlockFi after providing it with a $250 million line of credit. FTX also extended $500 million to struggling Voyager Digital, which later declared bankruptcy, and was in discussions to acquire South Korean crypto exchange Bithumb.

Bitcoin, the world’s largest cryptocurrency, has lost more than half of its value this year.

‘Not immune’

While Bankman-Fried’s cryptocurrency exchange FTX has been suffering from a downturn in digital assets, he said the increase in market share helped to relieve the pain.

“I don’t think we’re immune to that,” Bankman-Fried said. “But we did a lot of work in the last year to grow our footprint… and we have a less retail-heavy platform – retail is more dependent on market sentiment.”

He added that the majority of FTX volume trades from clients “at least” $100,000 per day. Bankman-Fried described the group as “highly engaged, high-volume” users who are “quite sophisticated”. This ranges from small volume trading firms to family offices and day traders. According to the company, the demographic of FTX is price sensitive and has held up relatively well in the bear market of crypto.

In addition to its success with professional traders, it is an expensive land grab for the US retail trading audience. FTX purchased the naming rights to the Miami Heat’s NBA arena, formerly American Airlines Center. It has attracted high-profile investors and brand ambassadors, including Tom Brady and Gisele Bundchen, and has run a Super Bowl ad featuring Larry David.

The cryptocurrency exchange generated nearly a billion dollars in revenue last year, CNBC reported in August. Bankman-Fried confirmed the numbers were in the “right ballpark” and would see a “similar” figure depending on how severe the market downturn is this year. He also said that the company is profitable.

He pointed to a low employee head count as a factor for profits. FTX has about 350 employees – about one-tenth of Coinbase’s employees.

“We have always tried to grow in a sustainable way – I have always been deeply skeptical of negative unit economics, any economics without any sort of real, clear path to profitability,” he said. “We rent much less than most places but we’ve also kept our costs under control.”

Bankman-Fried earned a degree in physics from the Massachusetts Institute of Technology and began his career as a quantitative trader at Jane Street Capital. He bought his first bitcoin five years ago, and says he was attracted to the industry by the wide arbitrage opportunities that seemed “too good to be true”. In 2017, Bankman-Fried launched proprietary trading firm Alameda Research to begin trading the asset full-time. According to the CEO, the firm was making over a million dollars a day in some cases, buying on one exchange in one market and selling back on other global exchanges.

Alameda Research still accounts for about 6% of FTX’s exchange volume, according to documents seen by CNBC. While Bankman-Fried is still a major shareholder in Alameda, he stepped down from day-to-day operations.

Banksman-Fried said he has worked to eliminate conflicts of interest in Alameda over the years. “I no longer run Alameda – none of FTX does. We see it as a neutral piece of market infrastructure.”

FTX has seen epic growth since Bankman-Fried launched it with co-founder Gary Wang in 2019. It raised $400 million in January at a valuation of $32 billion, bringing its total venture capital funding over the past three years to nearly $2 billion.

FTX Trading Limited is headquartered in Antigua, with FTX Derivatives Markets based in the Bahamas, where Bankman-Fried resides. FTX Trading has acquired companies in countries including Switzerland, Australia, Cyprus, Germany, Gibraltar, Singapore, Turkey and the United Arab Emirates, among other countries.

The exchange has spent nearly half its cash on bailouts and acquisitions, most recently buying Anthony Scaramucci’s 30% stake in Skybridge Capital.

“We still have a lot left to deploy, if it’s useful or important,” Bankman-Fried said.

three day deals

FTX had the advantage of being a private company this year. FTX hasn’t had the daily volatility of publicly traded stocks, especially namesakes of growth, which have been battered by higher interest rates this year. Banksman-Fried also said that thousands of shareholders did not enable FTX to move quickly when trying to close deals in just a few days.

“I think it makes it very difficult, practically speaking, to do this as a public company,” he said. When “you have three days from start to finish to wire the money, you can’t do a public engagement process around the potential terms of a messy situation.”

Banksman-Fried said many of the deals were done within days, when the team “didn’t sleep much that week.” Often came in a truncated Excel spreadsheet instead of long hours of due diligence. Finance was not audited. The team had at least some hope of losing money.

“It was not clear whether this would be a net positive or a negative – there was potential upside in a case where things were going well,” he said. “We got to the point of realizing that we could do something that would be an unofficial chance to help make up for the amount we were prepared to lose if we went wrong.”

It is too early to tell whether Bankman-Fried’s distressed crypto bet will pay off. Some companies have refused the rescue package outright.

After giving Voyager a line of credit, FTX and Alameda considered buying and restructuring the company. It outlined Voyager’s plans to buy digital assets and loans at market value. The company responded to the bid, calling it “a low ball bid designed as a white knight defense”.

“It surprised me. It didn’t surprise our legal team,” he said. “I honestly assumed they’d see our offer and just say… Of course, we’ll take it.”

Banksman-Fried said further discussions took place and the answers were “disappointing”. He said the problem was that no fee was charged in the proposal.

“If you’re in the business of taking fees, maybe our offer isn’t what you like,” he said. “I believe it was a low offer for consultants willing to charge on the matter. It was not what I had in mind. I had clients on my mind. But my current best view of what happened.” Good sense.”

Next… Warren Buffett?

Bankman-Fried’s latest forays into crypto have drawn comparisons with Warren Buffett’s strategy in 2008. The chairman and CEO of the famed Berkshire Hathaway stopped the bleeding during the financial crisis with a $5 billion investment in Goldman Sachs. This ultimately resulted in a $3 billion profit for the Omaha, Nebraska-based group.

“There are some similarities,” Bankman-Fried said. “There are probably more differences. First, I don’t think Warren Buffett would call me the next Warren Buffett. There’s a recent parallel, looking at which assets are in a place where they badly need capital.”

Banksman-Fried said it is looking for places where it can “make good investments together, and help them and their customers and the ecosystem stop them.” Although sometimes only one is on offer, not both.

He also praised Buffett’s skill in long-term value investing. Investor has shown that “you don’t need a brilliant innovation or insight, you can do it by putting together good decision after good decision over the course of decades and combining it.”

Like Buffett, Bankman-Fried signed the Giving Pledge: a promise by the world’s richest men to donate the majority of their wealth to charity. Banksman-Fried said they have given about $100 million this year with a focus on future pandemic prevention. Like Buffett, he lives decently. Banksman-Fried shares a home with 10 roommates and a Goldendoodle named Gopher. He drives a Toyota Corolla, and said he is not interested in the excesses of yachts or Lamborghinis.

But the two humble investors are sharply separated when it comes to their positions on cryptocurrencies.

Buffett and his business partner Charlie Munger have been critical of cryptocurrencies for years. For example, in 2018, Buffett called bitcoin “probably squared off rat poison.” Earlier this year, Buffett said he wouldn’t buy all the bitcoin in the world for $25 because it “produces nothing.”

Buffett called the underlying blockchain technology “crucial” — but hasn’t shied away from the idea that “Bitcoin has no unique value.” Blockchains are digital databases that store cryptocurrency transactions and, in some cases, other data. Its main use has been to power cryptocurrencies like bitcoin. But fans of the technology say it could be used in other areas of healthcare, supply chain logistics and finance.

“I certainly disagree with that,” said Bankman-Fried. “I should expect [Buffett] Disagree with that too. I don’t think you should run a company if he thinks so, but I don’t think he really thinks so. I think it’s likely to be exaggerated,” he said. “They’ve missed some of the power of blockchain — they’ve also missed some of the incentives for it in the first place, and people want a new tool.”

Correction: Gisele Bundchen is the brand ambassador of FTX. An earlier version misspelled his name.

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