‘I F—ed Up’

“I f—ed up.”

So said Sam Bankman-Fried, on a call with FTX investors, many of whom likely thought (and maybe said), “No sh–t.”

As many readers are no doubt apprised, FTX is headed for bankruptcy absent a $4 billion cash infusion, which would only cover half the projected $8 billion shortfall that prompted Binance to back out of a tentative rescue deal for its embattled rival. The associated chaos across the cryptoverse stabilized Thursday, but “stable” is an even more relative term now than it always is when crypto’s involved.

Although the outlook for “regular” markets depends on the balance of US data over the next several weeks, and the implications of that data for Fed policy, the potential for spillover from the latest and “greatest” crypto fiasco is real. “Bitcoin below the 2019 high at $13,850 [would] elevate stress, ending the current equity bear-market rally,” Evercore ISI suggested.

The list of people and entities who gave Bankman-Fried’s FTX money is a who’s who.

Sequoia Capital wrote its $214 million stake down to zero, telling investors that “We are in the business of taking risk. Some investments will surprise to the upside, and some will surprise to the downside.” That’s true. And who could’ve known the private money business was likely to be among the “downside” surprises, right? The following list of FTX backers isn’t exhaustive, but it’s a testament to how pervasive the crypto mythology has become.

• BlackRock
• Third Point
• Ontario Teachers’ Pension Plan Board
• Tiger Global
• SoftBank
• Paul Tudor Jones’s family office
• Galaxy Digital
• Brevan Howard
• And, of course, Tom Brady

As Bloomberg wrote, “these investors, among others, are set to lose all or most of their invested cash.”

It’s possible that Zhao “CZ” Changpeng’s somewhat Machiavellian tactics employed around FTX’s demise could backfire to the extent the industry’s infamous overlap and associated self-referential dynamics create a cascade of forced selling that undermines the entire space.

But even if that doesn’t happen, the risks are myriad. “What makes this new phase of crypto deleveraging induced by the apparent collapse of Alameda Research and FTX more problematic is that the number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking within the crypto ecosystem,” JPMorgan’s Nikolaos Panigirtzoglou wrote. “Investor and regulatory pressure on crypto entities to disclose more information about their balance sheets, to safeguard client assets and to limit asset concentration is likely to increase and crypto market participants are likely to adopt more diligent risk management including management of counterparty risk.”

Panigirtzoglou went on to say that “given the size and interlinkages of both FTX and Alameda Research with other entities of the crypto ecosystem including DeFi platforms, it looks likely that a new cascade of margin calls, deleveraging and crypto company/platform failures is starting similar to what we saw last May/June following the collapse of Terra.”

The Terra episode, documented in these pages at some length across multiple articles, shook crypto and Web3 to its very core. “The $8 billion of Alameda Research liabilities reported in the press is big enough to create a similar wave of deleveraging to that seen following the $20 billion Terra USD collapse last May,” Panigirtzoglou said, in a note published Wednesday afternoon. “And similar to what we saw after the collapse of Terra USD, this deleveraging is likely to last for at least a few weeks unless a rescue for Alameda Research and FTX is agreed quickly.”

During congressional testimony in December of last year, Bankman-Fried said that,

If you look at some of what precipitated the 2008 financial crisis, you saw a number of bilateral bespoke non-reported financial transactions happening between financial counterparties which then got repackaged, again and again and again such that no one knew how much risk was in that system until it all fell apart. If you compare that to what happens on FTX or on other major cryptocurrency venues today, there is complete transparency.

Some would argue that what was allegedly happening between FTX and Alameda wasn’t exactly consistent with “complete transparency,” and while I don’t want to speak definitively about “major” venues, what I can say is that rehypothecation (or something that looks a lot like it) is a fixture of decentralized finance.

The “basics,” so to speak, of Bankman-Fried’s backstory are well-known to most, but those interested in a painstakingly rendered biography can avail themselves of a novella-length “spotlight” penned by a private historian and proudly featured on Sequoia’s website. At the top is an uncomfortably close profile of Bankman-Fried sporting a flashing red, animated halo.

While gushing obsequious, the author called Bankman-Fried a billionaire who “achieved the status of legend” and wrote, of his now teetering exchange, “the success of FTX seems like a foregone conclusion.”

“Nothing is a sure bet in crypto, but just the possibility that FTX could join — or even eclipse — JPMorgan Chase, Bank of America, Wells Fargo and Citibank means it’s already valued at $32 billion,” the piece, published in September, said, noting that “SBF himself has amassed more wealth in a shorter period of time than anyone else, ever. But we get ahead of ourselves.”

Yes, indeed we did “get ahead of ourselves.” Just two months later, FTX was insolvent and Bankman-Fried was worth a lot less. In fact, he might be worthless for most financial intents and purposes. “The Bloomberg wealth index assumes existing FTX investors, including Bankman-Fried, will be completely wiped out… and that the root of the exchange’s problems stemmed from Alameda. As a result, both FTX and Alameda are given a $1 value,” read a Bloomberg article published earlier this week, before Binance’s Zhao said he wouldn’t, in fact, be rescuing FTX.

Bankman-Fried might’ve, as Sequoia’s private historian suggested, “amassed more wealth in a shorter period of time than anyone else, ever.” But that feat was nothing compared to how quickly he lost it. Bloomberg’s calculations implied that Bankman-Fried lost $14.6 billion in a single day.

Now that’s legendary.

Read more: Dear Crypto — You Have No Lender Of Last Resort