WTF happened, according to SBF

What Happened

This reconstruction of events concerns FTX International, a non-US crypto exchange for non-Americans, run out of The Bahamas and not regulated in the US. To my knowledge, FTX US–a separate, US-based exchange that does accept Americans–is fully solvent, and thus all US customers could and should be made whole immediately.

I wish that I could give a fuller account of what happened. Unfortunately I don’t have access to much of the relevant data right now. Here is a reconstruction of events to the best of my recollection.

1. I started Alameda Research, a private crypto trading firm, in 2017.

   
   

2. I started FTX International, a non-US crypto exchange for non-Americans, in 2019. I began transitioning away from an active role in Alameda Research then.

   
   

3. I started FTX US, a US crypto exchange that does accept Americans, in 2020.

   
   

4. In reconstructing the events of 2021-2022, I am relying on memory and extrapolations, as I was not fully aware of many of the critical events at the time they happened and don’t have access to the relevant data right now that would allow me to confirm or disconfirm my best guess at this point. In particular, I was not running Alameda Research this past year.

   
   

   1. FTX is a derivatives exchange. As is true for most financial exchanges, users are permitted to put on margined or leveraged positions. This means that users are allowed to put down less than the full cost of their positions, with their obligation to repay backed by posted collateral. A significant percentage of customers on FTX engaged in margin trading. Alameda Research was one such user.

   2. FTX was licensed and regulated to operate by regulators globally, including in The Bahamas, Switzerland, Japan, Australia, Cyprus, and Dubai.

   3. Over the past year, as markets crashed, Alameda’s assets fell substantially

      1. In late 2021, I believe that Alameda Research likely had a Net Asset Value (NAV) of substantially over $50b, marked to market.

         (1) I believe that Alameda was likely leveraged long: perhaps about 1.1x leveraged.  That is, it had corresponding assets for roughly 90% percent of its position, borrowing the remaining 10%. That was roughly 1/20 of the maximum leverage FTX allowed, and roughly 1/3 of the leverage assumed by the average FTX margin trader.
         

      2. In early November, 2022, over a three-day period, the market value of assets that Alameda Research held declined dramatically–I believe by more than 50%.

      3. After that crash, Alameda had, to my knowledge, roughly $11b of assets and roughly $11b of liabilities, marked to market, including its position on FTX. However, many of the assets were not very liquid, and could not be quickly sold. I believe that roughly $3b of the assets were highly liquid, leaving a liquidity shortfall of roughly $8b.

      4. This is a very rough approximation of Alameda Research’s net assets and liabilities over time, in billions. I do not have access to all of this data now, and did not know much of this at the time; thus these numbers may well be incorrect or incomplete.

4. At the same time, there was a ‘run on the bank’ on FTX. There were, I believe, roughly $4b of client withdrawals per day, starting shortly after Changpeng Zhao (CZ), Binance’s CEO, tweeted on November 6th that he would sell all of his company’s holdings in FTT, a token that Alameda Research had substantial holdings in.
5. This put extreme pressure on FTX, and forced the exchange to margin call substantial customer positions. Alameda Research was not able to deliver sufficient liquid assets for its margin call, and defaulted against FTX International. Thus, FTX International was unable to meet customer withdrawal requirements.