Foreign What's up guys and welcome back to Wall Street Millennial On this channel, we cover everything related to stocks and investing. Sam Bankman Freed who we will Hereafter be referring to as SPF was up until recently, one of the richest and most powerful men in the crypto industry. He founded the FTX Crypto Exchange, which became the second largest in the world and gave SPF a net worth in excess of 15 billion dollars. One of the main reasons that FTX was able to grow so big was because of the eight percent yields that they offered on customer Fiat and crypto deposits. They never really explained how they generated these yields. Nevertheless, he was held by the mainstream Financial media as a crypto Messiah as he stepped in to bail out multiple smaller crypto companies over the past year. Under Spf's leadership, FTX was considered to be the safest company in the space, with many even comparing him to the JP Morgan of the crypto industry. SPF was so confident in his position that in June of this year he signed the giving pledge, which billionaires signed to pledge the majority of their net worth to charitable causes by the time they die. Fortunately for SPF, this giving pledge isn't going to cost him a penny because his net worth plummeted to zero over the course of just a few days. The House of Cards showed its first signs of shaking on November 2nd when Coindesk released an article about Alameda research, a crypto trading firm also owned by SPF. As it turns out, Alameda owned billions of dollars worth of Ftx's native Ftt token. Shortly after this news was published, Binance, which is Ftx's largest competitor, announced plans to dump its entire stake in Ftt. This caused the price of Ftt to tank. As of the time of recording this video, it has fallen by almost 90 percent and looks to be on its way towards zero. Unsurprisingly, the collapse of Ftt's price has caused Alameda to go bankrupt. However, it wasn't just Alameda FTX and Ftxus have both also filed for bankruptcy on November 8th. FTX halted all crypto withdrawals, leaving its 1 million users unable to access their own crypto. Thousands if not tens of thousands of people all over the world deposited their life savings into FTX because they trusted SPF to keep their funds safe. Now, it is unclear when or if they will ever see any of this money again. FTX Us is also filing for bankruptcy and they have warned that they may halt withdrawals in a few days. There's a good chance that this will already have happened by the time you're watching this video. So how could this happen? While they are both owned by SPF FTX FTX Us and Alameda research were supposedly separate entities, why are FTX depositors now holding the bag for Alameda's trading losses? As it turns out, SBF allegedly misappropriated FTX depositor money to fund what was essentially his massive gambling operation in Alameda both the U.S Securities and Exchange Commission as well as the Department of Justice are reportedly investigating FTX for mishandling customer funds. While the SEC can only bring civil charges, the Department of Justice has the power to put people behind bars. This is potentially a big problem for SPF as he currently resides in the Bahamas which has an extradition treaty with the U.S In this video, we'll take a deep dive into how SPF tricked the financial media into thinking that he was a JP Morgan of crypto and more importantly, how his 40 billion dollar House of Cards came crumbling down. Sand Bankman free! Graduated from the Massachusetts Institute of Technology with a Physics degree in 2014. after graduating, he worked for a few years at a high frequency trading firm called Jane Street where he traded ETFs. In 2017, he quit his job at Jane Street to start his own trading firm called Alameda Research. Around this time, Bitcoin was becoming a big thing. SBF started trading Bitcoin and he noticed that there were significant price discrepancies in different exchanges around the world. Specifically, he saw that there are differences of as much as 10 between the price of Bitcoin on U.S exchanges as compared to Japanese exchanges. He could buy Bitcoin for ten thousand dollars in the US, transfer them over to the Japanese exchange and sell them for 11 000 each, making a ten percent almost risk-free profit overnight. By doing these Arbitrage trades, he was able to make 20 million dollars in just a few weeks. The price discrepancies eventually disappeared as more Traders started doing the exact same thing that Alameda was doing. But these quick profits were enough to convince SPF that crypto had huge potential. So in 2019, he launched FTX a crypto exchange based out of Hong Kong. Their main selling point was that FTX was created by Traders for Traders They differentiated themselves by offering a huge number of crypto derivatives and leveraged tokens that experienced Traders could use to take high risk High reward bets On their platform, you can buy three times leveraged Bitcoin tokens meant to amplify the daily returns of Bitcoin by three. They also had inverse tokens that you could buy to bet on the price of a coin going down. This isn't too different from the three times leveraged ETFs that you can buy on stock exchanges, but FTX went even more extreme on The Leverage Allowing users to take on as much as 10 times leveraged for some coins 10 times Leverage is only appealing to a small section of Hardcore crypto. Traders If they want to grow FTX into a mainstream exchange, they need to attract mainstream users. They had two ways of doing this. Firstly, they launched an earned feature where users can earn eight percent yield on both their crypto and USD Holdings by depositing it within the app. The idea was that this money could be lent to other users on the platform as margin loans. FTX would liquidate these margin loans before they defaulted. So this was supposed to be almost risk-free However, the high yields they offered were highly suspect. When they first launched the service in 2021, the Federal funds rate was close to zero percent. If this was truly almost risk-free they could have easily borrowed money from money market funds for two or three percent. Why would they be paying eight percent of their depositors instead? FTX Also paid millions of dollars to celebrities, including Tom Brady and Steph Curry to endorse the platform. In 2021, they shot a commercial that was, in hindsight, incredibly cringy where Tom Brady calls all of his friends convincing them to start using FTX Anybody who took his advice would end up in a world of hurt. One year later, With so many celebrity endorsements and a legit looking app, hundreds of thousands of people assumed that the 8 yield was nearly risk-free and many of them deposited their life savings into the app. Eight percent looked extremely attractive in a zero interest rate environment. Another factor which gave people trust in FTX was Sam Binkman Freed's impressive resume. He was an MIT graduate and former quantitative. Trader At Jane Street people assumed that he was some sort of a genius. If you couldn't understand how FTX generated these insane yields, that just means you're a boomer who doesn't understand the magical abilities of crypto and the fact that he signed the giving pledge to give away the majority of his net worth by the time he dies further bolstered his Public Image Not only is he a genius, he's also a benevolent one. And it wasn't just retail investors who were fooled FTX raised billions of dollars from prestigious Venture Capital funds including Sequoia Capital which was an early investor in Google during the 2022 crypto crash FTX stepped in to bail out multiple crypto lending firms including Voyager Digital in blockfy saving their customers deposits. This is when the media perception of SPF peaked. He was viewed as the one financially responsible CEO in the crypto space, helping to bail out the smaller players in this time of Crisis Some commentators even started comparing him to JP Morgan founder John Pierpont Morgan as he built his financial Empire 100 Years Ago by bailing out and buying up distressed companies. but behind the facade, SPF was not a genius. In fact, he was incredibly lazy and undisciplined. By his own admission, he is Infamous for playing League of Legends during business calls. He moved Ftx's corporate headquarters to the Bahamas where he lived in a luxury compound along with nine members of his inner circle, all of whom reportedly had romantic relationships with each other. One of the members of the Inner Circle was the 28 year old Harry Potter fan Caroline Ellison who SPF appointed as CEO of Alameda research according to Coindesk, SPF had a romantic relationship with Caroline at least for a Time None of this information by itself is incriminating, but the fact that SPF plays League of Legends on the job and appoints his girlfriend to be CEO of Alameda research which had over 10 billion dollars of assets certainly isn't a good look from the corporate governance perspective, and corporate governance is a big concern. SPF is the founder of FTX FTX Us and Alameda research, but he was ostensibly only the CEO of FTX and FTX Us. He appointed his alleged romantic partner Caroline Ellison to be CEO of Alameda research. Supposedly Alameda research was independent of FTX Alameda's business model was to make money trading crypto FTX was supposed to make money by charging fees on customers crypto transactions. There's no reason that these two companies should have any interaction, but as it turns out, they appear to have been joined by the Hip. According to private documents obtained by Coindesk, Alameda had 14.6 billion dollars of assets as of June 30th. Its single largest holding was 3.66 billion dollars of Ftt tokens. It also had 2.16 billion dollars of Ftt collateral. That means that 40 of its assets were related to FTX Ftt token offers users discounts on trading fees when they use the exchange. The idea is that as Ftx's user base grows, more people will want to buy the coin and the value will increase. As it turned out, Binance, the world's largest crypto exchange, and former investor in FTX, was also a major holder of Ftt token. Shortly after, the coindesk article was released, Binance dumped all of its Ftt tokens, citing recent relevations. This caused the price of Ftt to tank and as of the time of recording this video is Fallen by almost 90 percent and looks to be on its way towards zero. This caused massive losses for Alameda Research, and the trading firm went bankrupt a few days later. FTX halted withdrawals meaning that FTX customers, many of whom deposited their life savings with the company, were not able to access their funds. This was weird. Why would the collapse of Alameda research have any impact on the FTX exchange? They were supposed to be two separate companies. Perhaps the more basic question is, how did Alameda research have 14 billion dollars of assets to begin with? According to a Wall Street Journal report, SPF siphoned off billions of dollars worth of customer assets from FTX and funneled them to Alameda research. They used these funds to build a massive position in Ftt token as well as other cryptocurrencies and this ended up being a massive disaster. Everybody is entitled to the presumption of innocence, and SBF has not yet been criminally charged, but there is significant circumstantial evidence that FTX and Alameda were running a multi-billion dollar scam on November 10th. shortly after FDX halted withdrawals. SPF tweeted an explanation. He blamed poor internal labeling of Ftx's assets, which led SPF to underestimate how much margin users were taking on. He thought that the exchange had zero leverage when it actually had 1.7 leverage. After the Coindesk article was released, people started pulling their money out of FTX, basically like a bank run. He further said that Ftx's assets were greater than client deposits. However, the assets were illiquid, meaning that it would take time to sell them. Eventually, they'll be able to sell them and all the depositors will be paid in full. He also said that the liquidity crunch only affected FTX International The US exchange FTX Us was 100 liquid and all users could fully withdraw if they wanted to. He contradicted everything he said the very next day when he announced that Alameda research, FTX and FTX Us were all filing for bankruptcy. If they were truly solvent, they could have just waited to slowly liquidate their assets. So what actually happened to the customer deposits at FTX and Fdxus: When you buy stocks on a regulated stock brokerage such as Robin Hood or Charles Schwab for example, There is almost zero risk of losing your stocks. If you buy a share of Apple, the Brokers will go onto the NASDAQ and buy one share of Apple that has your name on it. Whenever the market is open, you can sell your Apple share because your broker owns it. even if every single customer sold all their stocks at once. The Brokerage would be able to honor these withdrawals because they have in their custody every single share that their customers own. FTX clearly did not act in a similar manner. they allegedly took their customer deposits and loaned them to Alameda Research that would explain how Alameda research managed to amass 14 billion dollars of assets Alameda Research would use these funds to make risky bets in the crypto. Market If the bets worked out, they'd be able to pay back their depositors and keep the rest as profit if the bets went. South their customers would end up holding the bag. They apparently went all in on the Ftt token and now that it's crashed, they have no way of making their customers whole. hence the withdrawal freeze. When the liquidity crunch first started, Binance, the world's largest crypto exchange, offered to acquire FTX and protect user deposits. Remember that Binance triggered Ftx's liquidity crunch when it dumped its entire Ftt stake a few days earlier. So it looked like a predatory move whereby Binance dumps its Fct tokens, thus allowing them to buy the Rival exchange on the cheap. But it looks like Binance didn't even know the extent of Ftx's problems. After just one day of due diligence, Binance abandoned the deal citing allegations of FTX mishandling customer funds. Binances pull out all but confirms Ftx's insolvent. If the assets were really greater than its liabilities, they would have been willing to pay something for it. With FTX headed towards collapse, the Ftt tokens Alameda owns are likely worthless. Remember that Ftt allows users to get discounted commission rates on FTX. With FTX now bankrupt, Ftt tokens will be about as valuable as a Sears loyalty card. If the allegations about FTX misappropriating funds are true, things are not looking good for depositors. Much of their money has been squandered by Alameda It remains unclear how much of their money they will get back if they get anything at all. So how did all this happen? It was partly because SBF ran all of his companies from his compound in the Bahamas There is almost no regulatory oversight. Nobody knew how FTX was making the 8 yield that it offered to its customers and nobody knew what Alameda was doing SPF was able to fool the financial media Venture capitalists and celebrities into thinking that he could create money out of thin air with the power of crypto. Everybody deserves the presumption of innocence and SPF will have his day in court if it comes to that. But as it stands now, it looks like FTX was a multi-billion dollar fraud where SBF misappropriated customer funds in an attempt to enrich himself in the history books. He will be remembered not as a JP Morgan of Crypto, but instead as the Bernie Madoff. All right guys, that wraps it up for this video. What do you think about Fgx and Sam Bankman Freed? Let us know in the comment section below. As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.