What Happened to FTX?

One of the world’s largest cryptocurrency exchanges has declared bankruptcy: A Dispatch Explainer.

By
58
(Photo Illustration by Michael M. Santiago/Getty Images)

FTX, one of the world’s largest cryptocurrency exchanges, declared bankruptcy on Friday after last week’s revelations that it used billions of dollars in customer assets to bankroll the risky investments of an associated trading firm. That firm, Alameda Research, was founded by Sam Bankman-Fried, the 30-year-old founder and CEO of FTX who resigned Friday.

Just months ago, Bankman-Fried was a billionaire, major political donor, aspiring philanthropist, and media darling. This week, his net worth crumbled to zero, a stunning drop that has drawn comparisons to the fall of Theranos CEO Elizabeth Holmes in 2016. How did it all come apart?

Who is Sam Bankman-Fried and what is FTX?

The son of two Stanford Law professors, Bankman-Fried—often referred to as “SBF”—is a proponent of “effective altruism,” a utilitarian approach to philanthropy: He claimed to want to earn as much money as possible and then give almost all of it all away to effective causes.

Keep reading with a free account
Create a free Dispatch account to keep reading Get Started ALREADY HAVE AN ACCOUNT? SIGN IN
58
By
Comments (58)
Join The Dispatch to participate in the comments.
 
  1. Avatar photo
    David Eggleston

    If the latest Vox article is true, Bankman-Fried is neither effective nor altruistic.

    Collapse
  2. Avatar photo
    Tomjedrz

    Does anyone know where the $10B that FTX lent to Alameda Research went?

    Collapse
  3. Avatar photo
    Richard Maxton

    Excellent reporting.

    Collapse
  4. Patrick.Ferrini

    Thank you, Price, for the great explainer. I have seen a lot of headlines in the WSJ about FTX but I have not had the chance to educate myself on the matter. Life, after all, can be busy and you can't know everything.

    This is what I subscribe to The Dispatch for. Keep up the great work!

    Collapse
  5. Bdecicco2001

    For the past 20 years, people have been inventing the pre-New Deal, unregulated bank, and people keep finding out what happens.

    Collapse
  6. Avatar photo
    Show Jay Janney the 🚪!

    I dunno: naming a new asset class in reference to a graveyard just seems kinda prophetic to me

    Maybe SBF can write a new book called 'Tales from the crypt; how I lost billions faster than Zuck"...

    Collapse
    1. Avatar photo
      William Miller

      Sorry, that podcast is taken:

      https://talesfromthecrypt.libsyn.com/

      Collapse
  7. Avatar photo
    Ethan Cordray

    In fairness to SBF: destroying the cryptocurrency market is probably one of the most effectively altruistic things a person could do right now.

    Collapse
  8. Martinbtatuch

    Great explanation. Now I understand.

    Collapse
  9. Avatar photo
    Mjturosz

    Nice explainer.👌 Where does this leave a company like MicroStrategy, which bet the farm on crypto?

    Collapse
    1. Avatar photo
      Bonzai30

      MicroStrategy is basically a legacy software company with around $30 million in annual profits pre-bitcoin investment. The company subsequently used its extra cash of roughly $500 million and $2+ billion of new debt (which requires interest and principle payments) to buy 130,000 bitcoin at an average price of $30,623, making it a relatively small legacy software business with a giant bet on bitcoin…a bet the farm type bet. With today’s bitcoin price of $16,560, MicroStrategy has lost $1.83 billion on its investment in bitcoin. MicroStrategy now has a negative net worth, ie its liabilities exceed the value of its assets, and its legacy software business could never cover the cost of typical debt service for that much debt.

      However, MicroStrategy’s debt is not typical; it bears little interest, and the company can choose to give debt holders a set amount of stock as debt repayment, regardless of the share price. One of MicroStrategy’s big debt offerings says the company can pay debt holders .6981 shares of stock for each $1,000 of debt principal. At today’s trading price, .6981 shares of stock are worth $123…a fraction of $1,000. Basically, the debt deal was heads MicroStrategy wins, and tails the debt holders lose. Currently the debt holders are losing big time. I feel sorry for them, but I’m shocked they would agree to such a deal.

      Collapse
      1. Avatar photo
        Mjturosz

        Thank you, sir. Nice summary.

        Collapse
        1. Avatar photo
          Bonzai30

          Note that I made a material edit after my first message, so I wanted to make sure you saw the update. I was wondering how the company could be trading for $2 billion with such a steep loss on its bitcoin holdings, and then I looked at the terms of its debt. MicroStrategy really stuck it to the bond holders. I guess in retrospect it was really smart. If the price of bitcoin continued to rise, MicroStrategy would win, big time, but the bond holders mainly would be left holding the bag if the bitcoin price tanked…as it has lately. There will be some stock dilution when bond holders convert, but that pales in comparison to the bond holder losses.

          Collapse
  10. Austin.Oconnor

    Well done. Thanks

    Collapse
Load More