This article comes fromsubstack, Author: SBF

Odaily Translator |

Odaily Translator |

In mid-November 2022, FTX International faced insolvency. In the final analysis, this matter was triggered by Voyager and Celsius.

It was three things that combined to cause FTX to implode:

a) During 2021, Alameda's balance sheet grows to approximately $100 billion in net assets, $8 billion in net borrowing (leverage), and $7 billion in cash.

b) Alameda failed to adequately hedge its market exposure. During 2022, there will be a series of wide-ranging market crashes in the stock and cryptocurrency space, causing the asset's market value to drop by about 80%.

c) In November 2022, the Binance CEO facilitated this extreme, rapid, targeted crash that left Alameda insolvent.

Then Alameda's problems spread to FTX and elsewhere, similar to how Three Arrows funds affected crypto companies like Voyager, Genesis, Celsius, BlockFi, Gemini, etc.

Nonetheless, there is still a chance that FTX will recover, and FTX US remains fully solvent and should be able to refund all client funds. FTX International has billions of dollars in assets, and I dedicate almost all of my personal assets to clients.

This article is about the bankruptcy of FTX International and has nothing to do with FTX US because FTX US is fully solvent and always has been.

When I handed over FTX US to new CEO Ray and filed for bankruptcy, the company had net cash on hand in excess of client balances by approximately $350 million, and FTX US' funds and clients were segregated from FTX International. It is ridiculous that FTX US users have not fully recovered and got their funds back, the following table is the record of FTX US balance sheet at the time of my handover:

FTX International is a non-U.S. exchange that operates outside the United States, is regulated outside the United States, is incorporated outside the United States, and accepts non-U.S. clients. (In fact, FTX International is based in, operates from, and is incorporated in the Bahamas under the name FTX Digital Markets LTD.)

US clients trade on the (still solvent) FTX US exchange.

Senators have raised concerns about potential conflicts of interest at law firm Sullivan & Crowell (S&C). Contrary to the statements of S&C, one of the two primary law firms of FTX International prior to bankruptcy and the primary law firm of FTX US, their relationship with FTX is limited and primarily transactional. FTX US's GCs are from Sullivan & Crowell, and they work with FTX US on its most important regulatory filings, they work with FTX International on some of its most important regulatory issues, and they work with FTX US on its most important transactions. When I visit New York, I sometimes work out of S&C's offices.

Despite FTX's insolvency, having processed approximately $5 billion in withdrawals over the past few days of operations, FTX International still retains substantial assets - approximately $8 billion in liquid assets as of the time Ray took over.

Beyond that, there are many potential funding proposals -- including a LOI signed after the bankruptcy filing -- totaling more than $4 billion. I believe that given a few weeks, FTX International could potentially raise enough capital using its illiquid assets and equity to keep client assets intact.

However, with the S&C pressuring FTX into bankruptcy filing, I fear the above resolution may no longer be enforceable. Even now, I believe that if FTX International were to restart, it would indeed be possible to leave client assets largely intact.

Although FTX's liquidity has mainly relied on Alameda from 2019, it has been greatly diversified by 2022, and Alameda's trading volume has also dropped to about 2% of FTX's total trading volume (as shown in the figure below):

I didn't steal money, and I certainly didn't hide billions of dollars. Almost all of my holdings were and are used to support FTX clients. Both FTX International and Alameda are legitimate and independently profitable businesses in 2021, with each making billions.

Then, due to a series of market crashes, Alameda lost around 80% of its asset value over the course of 2022 — as did 3Arrows Capital (3AC) and other crypto firms last year. FTX was also affected by Alameda's decline, as Voyager and others were earlier affected by Three Arrows Capital and others.

A lot of it is post hoc, from models and approximations, often based on data before I stepped down as CEO, and modeling and estimates based on that data.

secondary title

2021 Events Overview

Over the course of 2021, Alameda's net worth soars, reaching about $100 billion by the end of the year, according to my models, when it goes public. Even if you ignore fully diluted assets like SRM that are much larger than circulating supply, I think it's still about $50 billion.

Over the course of 2021, Alameda's position has also increased.

In particular, I believe that Alameda has about $8 billion in net borrowing that is used to:

a) About $1 billion in interest payments to lenders

b) About $3 billion to buy out Binance (shareholding) from FTX's market cap table

c) about $4 billion in venture capital

(By "net borrowing" I mean basically borrowing minus liquid assets on hand that can be used to repay the loan. Net borrowing in 2021 will mostly come from 3rd party lending platforms - Genesis, Celsius, Voyager, not from FTX margin trading.)

So by early 2022, I think Alameda's balance sheet will look roughly like this:

a) Approximately $100 billion in net worth

b) Approximately $12 billion in liquidity from 3rd party desks (Genesis etc.)

c) An increase of $10 billion in liquidity that may be obtained from third parties

d) about 1.06 times leverage

In this case, ~$8 billion in illiquid positions (with tens of billions of dollars in available credit/margin from 3rd party lenders) seems reasonable and not very risky. I believe that Alameda's SOL alone is sufficient to cover net borrowings, which are assets from third-party lending desks.

In my opinion, Alameda's position on FTX International at the time was reasonable - about $1.3 billion according to my model, backed by tens of billions of dollars in assets - and that FTX successfully passed the GAAP audit.

Well, dragging the Alameda underwater would require a 94% market drop by the end of 2021! Not just SRM and similar assets - if you ignore that, Alameda is still massively overcollateralized, and I think its SOL position alone is greater than its leverage.

So Alameda is theoretically facing an extreme market crash.

secondary title

Market Crash in 2022

• Entering 2022, the general situation of Alameda is:

• $100 billion net worth

• $8 billion net borrowing

• 1.06 times leverage

tens of billions of dollars in liquidity

Then, over the course of the year, the market crashed again and again. Alameda failed to adequately hedge its position until midsummer.

– BTC plummeted by 30%

–BTC plummeted another 30%

–BTC plummeted another 30%

– Rising interest rates limit global financial liquidity

–Luna reset to zero

–3AC Bankruptcy

–Alameda co-CEO resigns

–Voyager implosion

–BlockFi almost went bankrupt

–Celsius Bankruptcy

–Genesis start shutdown

– Almaeda's borrowing/loan liquidity lowered from about $20 billion at end-2021 to about $2 billion at end-2022

As a result, Almaeda's assets have been hit again and again. But this part is not specific to Alameda's assets. Bitcoin, Ethereum, Tesla, and Facebook are all down more than 60% annually, and Coinbase and Robinhood are down about 85% from their peaks last year.

Keep in mind that Almaeda has roughly $8 billion in net borrowing by the end of 2021:

a) About $1 billion in interest payments to lenders

b) About $3 billion to buy out FTX holdings from Binance

c) about 40 US dollars for venture capital

Net borrowing of $8 billion, minus the several billion dollars of hedges it has, results in an excess leverage/net position of about $6 billion, backed by about $10 billion in assets.

As the market crashes, so do those assets. Alameda's assets -- a mix of altcoins, crypto companies, listed stocks and venture capital -- are down about 80% over the year, and its leverage has increased a little.

During the same period, liquidity dried up in lending markets, public markets, credit, private equity, venture capital, and pretty much everything else. During the year, nearly all sources of liquidity for cryptocurrencies — including nearly all lending platforms — were exhausted.

In the summer of 2022, Alameda is heavily hedged in some combination of BTC, ETH, and QQQ (Nasdaq ETF). But even after all the market crashes in 2022, shortly before November, Alameda still has about $1 billion in NAV; even if you exclude SRM and similar tokens, Alameda is positive, but ultimately hedged .

secondary title

margin trading

During 2022, many crypto platforms will become insolvent due to overflowing margin positions, which may include Voyager, Celsius, BlockFi, Genesis, Gemini, and FTX.

This is fairly common on margin platforms, but it can happen elsewhere, such as:

• Traditional finance:

• London Metal Exchange

• LTCM

• MF Global

Lehman

• CoinFlex

• EMX

• Voyager, Celsius, BlockFi, Genesis, Gemini, etc.

secondary title

november crash

CZ's decisive tweet follows an extremely effective months-long PR campaign against FTX and the crash.

Before the last crash in November, QQQ was about half as volatile as Alameda's portfolio, and BTC/ETH was about 80% as volatile - meaning Alameda's hedge (QQQ/BTC/ETH) Strategies are already working. Unfortunately, the hedge wasn't big enough until after the Three Arrows collapse, and finally in October 2022, it was unbelievably big.

At that time, the collapse of the encryption market had a great impact on the assets held by Alameda. In a few days in November, Alameda's assets fell by about 50%; BTC fell by about 15% (BTC fell only 30% of Alameda's assets).

Over the course of November 7-8, things went from stressful but mostly under control to clearly insolvent.

As of November 10, 2022, Alameda's balance sheet will only have about $8 billion in assets, while its current liabilities will be roughly the same, also only about $8 billion, as shown in the following diagram:

Credit Suisse shares fell nearly 50% this fall due to the threat of a run, which required liquidity -- and Alameda had none at the time.

So as Alameda became illiquid, FTX International also became illiquid because Alameda had an open margin position on FTX; the bank run turned illiquidity into insolvency. That means FTX joins Voyager, Celsius, BlockFi, Genesis, Gemini and others suffering collateral damage as borrowers' liquidity crunches.All this is to say:Indeed, Alameda is not sufficiently hedged — as Three Arrows and others have been this year. FTX was affected, but so were Voyager and others earlier.

secondary title

end

I still think FTX could benefit all clients if there is a concerted effort to improve liquidity.

When the new CEO took over, FTX had billions of dollars in funding offers, even exceeding $4 billion at one point.

Given FTX a few weeks to raise the necessary liquidity, I believe it would be possible to keep client assets largely intact. I didn't realize at the time that Sullivan & Cromwell - pressured Ray to be CEO and file for bankruptcy, including FTX US. I still think that if FTX International were to restart today, it would indeed be possible to keep client assets largely intact. Even without these, there are plenty of assets available to clients.

Regrettably, I have been slow to respond to public misunderstandings and material misstatements. It took me a while to piece together what I could - I didn't have access to a lot of relevant data, most of it about a company I wasn't running at the time (Alameda).

I have been planning to give my first substantive account of what happened when I testify before the US House Financial Services Committee on December 13th. Unfortunately, I was arrested the night before the hearing.