How to Lose $32 Billion in 10 Days

January 31, 2023

   In mid-November of 2022, the nascent cryptocurrency exchange platform FTX saw its value plummet precipitously in one of the most dramatic crashes in industry history. Within 10 days, the firm, valued at an estimated $32 billion, was forced to declare bankruptcy. Nearly a month later, FTX founder and disgraced crypto mogul, former billionaire Samuel Bankman-Fried, was arrested in the Bahamas and eventually extradited to the United States after American prosecutors filed criminal charges. Among those charges were alleged wire fraud, money laundering, and conspiracy to defraud investors.

   Just as FTX saw its firm collapse and its money evaporate in front of its very eyes, so did Bankman-Fried, who lost upwards of 94% of his wealth overnight. Bankman-Fried, who reportedly has $100,000, has pleaded not guilty to the myriad of charges levied on him. This comes as two of Bankman-Fried’s top associates agreed to plead guilty and cooperate with investigators. 

   The stunning developments within the past two months not only spell uncertainty for Bankman-Fried — who awaits trial in early October — but also call into question how the former crypto tycoon made his billions.

   Born in the tech hub of Silicon Valley to two Stanford Law School professors, Bankman-Fried interned at trading firm Jane Street Capital while enrolled at MIT before working there full-time upon graduation.

   In 2017, the 25-year-old left the trading firm to found Alameda Research, Bankman-Fried’s first cryptocurrency exchange. Two years later, FTX was born.

   Both Alameda Research and FTX experienced extraordinary success during the COVID-19 pandemic. Bankman-Fried, with his burgeoning wealth, became a major donor to the Democratic Party and partnered with various celebrities to promote the crypto exchange, from NBA star Stephen Curry, to tennis icon Naomi Osaka, to comedian Larry David

   Then things took a turn for the worse. In early November of 2022, CoinDesk released a report questioning the stability of FTX and its funds management. The report elicited concern from major investors, precipitating a liquidity crisis as more investors trickled out. FTX sought to resolve the crisis via a bailout from rival exchange Binance. Despite agreeing to acquire a branch of FTX, Binance pulled out of the deal, citing concerns over the former’s alleged mishandling of customer funds. By Nov. 11, nearly 10 days after the initial CoinDesk report, Bankman-Fried resigned as CEO at both of his exchanges.

   But the FTX debacle was not the only problem for Bankman-Fried: the U.S. Securities and Exchanges Commission charged that he illegally transferred investors’ finances to make private investments into real estate and a personal hedge fund.

   For West High economics student Rithul Rengarajan (12), who has been following the situation closely, the FTX collapse and Bankman-Fried’s ignominious fall from grace come as no surprise: “every two, three days I’ll read like an article or something that comes up on my feed.” Funnily enough, Rengarajan expressed that “in some ways…it’s a good thing,” elaborating that these mistakes have inspired other crypto firms to “[advocate] for transparency.”

   Rengarajan also believed that Bankman-Fried’s actions were reprehensible: “It seemed to me . . .  like it was [for] personal gains,” affirming that Bankman-Fried “should face the consequences of whatever [prosecution will] put on him.”

   But for others, the FTX fiasco cannot be viewed facetiously. Speaking under the condition of anonymity, a former intern at one of the firm’s divisions was unable to comment on the topic, citing an ongoing investigation. The individual warned that disclosing any information about their involvement with FTX could put them in legal jeopardy. The sheer gravity of this situation demonstrates the far-reaching implications of the collapse, not just for top executives and celebrity investors, but for ordinary employees.

   Despite this substantial blowback to the crypto sector, West High student Benjamin Choi (12), also familiar with the matter, communicated that he is “personally optimistic,” claiming that cryptocurrency “has recovered from downfalls like this before.” 

   While both Rengarajan and Choi agree that the downfall of FTX epitomizes the volatile nature of cryptocurrency, they contend that the future of crypto looks bright. Unlike physical currency printed by the U.S. government and deposited in a bank, “cryptocurrency is a digital medium of exchange,” explained Rengarajan . There are several benefits: whereas a bank would solely track an individual’s transactions, crypto transactions are placed in a public ledger on the internet. An accurate record of these aggregate purchases, known as a blockchain, is kept on multiple decentralized servers. Similar to how investors might deposit physical currency into multiple banks, lest one location is robbed or burned down, decentralization mitigates the risk of losing all of one’s investments if the site is hacked, Choi pointed out. “I think that [the] technologies itself is really something innovative,” he concluded. 

   As the aphorism goes, ‘don’t put your eggs in one basket’: an astute axiom that ironically could have saved Bankman-Fried from economic and legal calamity.

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