The FTX Ponzi: Uncovering The Largest Fraud In Crypto History

Modern day alchemy, unsurprisingly, failed. A deep dive into FTX and the events leading to the collapse of the now notorious crypto exchange.

The below is an excerpt from the Bitcoin Magazine Pro report on the rise and fall of FTX. To read and download the entire 30-page report, follow this link.

The Beginnings

Where did it all start for Sam Bankman-Fried? As the story goes, Bankman-Fried, a former international ETF trader at Jane Street Capital, stumbled upon the nascent bitcoin/cryptocurrency markets in 2017 and was shocked at the amount of “risk-free” arbitrage opportunity that existed.

In particular, Bankman-Fried said the infamous Kimchi Premium, which is the large difference between the price of bitcoin in South Korea versus other global markets (due to capital controls), was a particular opportunity that he took advantage of to first start making his millions, and eventually billions …

At least that’s how the story goes.

The real story, while possibly similar to what SBF liked to tell to explain the meteoric rise of Alameda and subsequently FTX, looks to have been one riddled with deception and fraud, as the “smartest guy in the room” narrative, one that saw Bankman-Fried on the cover of Forbes and touted as the “modern day JP Morgan,” quickly changed to one of massive scandal in what looks to be the largest financial fraud in modern history.

The Start Of The Alameda Ponzi

As the story goes, Alameda Research was a high-flying proprietary trading fund that used quantitative strategies to achieve outsized returns in the cryptocurrency market. While the story was believable on the surface, due to the seemingly inefficient nature of the cryptocurrency market/industry, the red flags for Alameda were glaring from the start.

As the fallout of FTX unfolded, previous Alameda Research pitch decks from 2019 began to circulate, and for many the content was quite shocking. We will include the full deck below before diving into our analysis. 

The deck contains many glaring red flags, including multiple grammatical errors, including the offering of only one investment product of “15% annualized fixed rate loans” that promise to have “no downside.”

All glaring red flags.

Similarly, the shape of the advertised Alameda equity curve (visualized in red), which seemingly was up and to the right with minimal volatility, while the broader cryptocurrency markets were in the midst of a violent bear market with vicious bear market rallies. While it is 100% possible for a firm to perform well in a bear market on the short side, the ability to generate consistent returns with near infinitesimal portfolio drawdowns is not a naturally occurring reality in financial markets. Actually, it is a tell-tale sign of a Ponzi scheme, of which we have seen before, throughout history.

The performance of Bernie Madoff’s Fairfield Sentry Ltd for nearly two decades operated quite similarly to what Alameda was promoting via their pitch deck in 2019:

• Up-only returns regardless of broader market regime
• Minimal volatility/drawdowns
• Guaranteeing the payout of returns while fraudulently paying out early investors with the capital of new investors 

It appears that Alameda’s scheme began to run out of steam in 2019, which is when the firm pivoted to creating an exchange with an ICO (initial coin offering) in the form of FTT to continue to source capital. Zhu Su, the co-founder of now-defunct hedge fund Three Arrows Capital, seemed skeptical.

Approximately three months later, Zhu took to Twitter again to express his skepticism about Alameda’s next venture, the launch of an ICO and a new crypto derivatives exchange.

“These same guys are now trying to launch a “bitmex competitor” and do an ICO for it.