How to Weather the Crypto Crash with FTX and Sam Bankman-Fried

Sam Bankman-Fried was once hailed as the savior of crypto. In recent weeks, however, his empire has collapsed. Here's what you need to know about the unraveling of FTX, including its founder's rise to fame, how the firm failed, and the collateral damage to customers and the crypto industry at large.

Mr. Bankman-Fried, often referred to as SBF, has become a celebrity in the crypto world with his attempts to make his exchange into a household name.

The 30-year-old billionaire’s eccentric, unkempt appearance created an aura of genius, which attracted venture capitalists. High-profile athletes and musicians, and a wave of FTX ads, encouraged regular people to use the exchange to tap crypto’s moneymaking potential.

Mr. Bankman-Fried and FTX were among the biggest donors in the recent midterm election cycle, boosting their visibility in Washington. And when other crypto firms started collapsing this year, SBF extended loans to prop up ailing competitors.This year has been tough for the crypto industry, with a number of firms collapsing. But Mr. Bankman-Fried and FTX have been among the biggest donors in the recent midterm election cycle, boosting their visibility in Washington. And when other crypto firms started collapsing this year, SBF extended loans to prop up ailing competitors.

Prior to launching FTX, Sam Bankman-Fried founded Alameda Research, which quickly became a leading player in crypto market making and institutional trading. To help run the new company, Bankman-Fried recruited Caroline Ellison, whom he had met while both were traders at Jane Street Capital. Ellison later became FTX's chief executive.

However, even after Mr. Bankman-Fried stepped down as Alameda's CEO, he still owned 90% of the company, according to bankruptcy filings. Alameda's shares were also traded on the FTX exchange.

Mr. Bankman-Fried has repeatedly claimed that Alameda does not have any special privileges on FTX. However, recent revelations have called those claims into question.According to bankruptcy filings, Alameda had a "secret exemption" from the exchange's process for liquidating bad trades. This loophole meant that Alameda could take on more risk than other customers.These revelations raise serious doubts about Mr. Bankman-Fried's claims, and suggest that Alameda may have had an unfair advantage over other traders on the exchange.

Alameda also invested billions in startup companies. It often used FTT, the cryptocurrency of FTX, as collateral for borrowing.

Mr. Bankman-Fried and Ms. Ellison were at times romantically involved. However, their relationship was not always smooth sailing.

When crypto prices plunged earlier this year, Alameda's risky bets soured. Facing potential catastrophe, Mr. Bankman-Fried made a fateful decision: FTX decided to lend billions of dollars worth of customer assets to help Alameda cover its funding gap. By doing so, FTX helped prevent Alameda from collapse, but also put itself at risk should prices not rebound.

FTX's financial problems came to light on Nov. 2, when CoinDesk published a report questioning the financial health of both FTX and Alameda. The report indicated that much of Alameda's balance sheet was made up of FTT.

The report landed with a bang. Changpeng Zhao, the billionaire founder of rival exchange Binance, said he would dump his FTT holdings. Customers panicked and started yanking their money out. Crunched for cash, FTX agreed to sell itself to Binance, but Binance quickly changed its mind. Shortly after, SBF resigned and FTX filed for bankruptcy.

John J. Ray has extensive experience with high-profile bankruptcies, including Enron. He is now the CEO of FTX, which made its first appearance in Delaware bankruptcy court on Nov. 22. According to Ray, FTX is the worst case he has ever seen.

In a court filing, Mr. Ray called the disarray at FTX unprecedented. He said that supervisors approved payment requests with emojis, homes were purchased for employees with corporate funds, and Mr. Bankman-Fried communicated with messages set to auto-delete after a short period. He also said that bank accounts and company financials weren’t tracked, and software was used to conceal the misuse of customer money.

Many employees have quit recently, citing a lack of communication from management as their primary reason for leaving.

People are definitely getting worried. It's hard to say what's causing it, but there's definitely a sense of unease in the air.

Court filings from Mr. Ray and his team show that they are unsure of how much cash or cryptocurrency they will find at FTX. The newly appointed CEO has asked for patience as they continue their search.

The new management of the company has found about $1.2 billion in cash and $740 million in cryptocurrency. However, the majority of the cryptocurrency has not yet been recovered.

FTX owes its 50 largest creditors a combined $3.1 billion. The firm's lawyers believe there could be more than 1 million creditors in total.

Other financial oddities remain. The company's CEO cashed out $300 million of a $420 million funding round. More than $370 million appears to be missing in a possible hack, which occurred after the bankruptcy filing.

The Securities and Exchange Commission and Justice Department are investigating FTX for possible securities law violations.

FTX is a major exchange and trading firm with tentacles that extend wide across the industry. It has loans to and from other players and various tokens with market values once in the billions of dollars.

BlockFi Inc., a crypto lender which got a line of credit from FTX earlier this year, is preparing for a potential bankruptcy filing. Genesis Global Capital, which had loans outstanding to Alameda, is trying to raise a large amount of cash quickly. Both companies have paused withdrawals.

It's hard to say whether or not crypto is doomed. There are a lot of factors to consider. Maybe it is, maybe it isn't. Only time will tell.