SBF, or Sam Bankman-Fried, is recognized for being the sharpest person in the room. The crypto millionaire owns Alameda Research, one of the largest crypto hedge funds, as well as FTX, one of the major crypto exchanges. He has surfaced in the midst of many cryptocurrency firm disasters, bailing out crypto lender Blockfi and acquiring the majority of Voyager Digital's assets following their successive failures. Some have even compared his participation in the current crypto meltdown to that of J.P. Morgan during the 1907 catastrophe. However, a new leak reveals that SBF's crypto empire is built on shaky ground.

The background

On November 2nd, Coindesk published an article that revealed some important financial facts from Alameda Research, the crypto hedge fund run by crypto entrepreneur Sam Bankman-Fried (SBF). According to Coindesk, they received a copy of the hedge fund's Quarter 2 balance sheet. The balance sheet of the corporation, according to its reporting, consists of:

$14.6 billion in total assets. This includes $5.8 billion in FTT tokens, $1.2 billion in Solana tokens (SOL), $3.37 billion in unidentifiable "crypto holdings," and $2 billion in "equity securities assets." This leaves an estimated $2.2 billion in assets. Alameda's assets of the Serum (SRM), Oxygen (OXY), MAPS, and FIDA tokens, all from various SBF projects, account for hundreds of millions of dollars of the remaining assets. Alameda has only $134 million in cash on hand in June 2022, according to the leaked balance sheet.
Total liabilities are $8 billion, with $7.4 billion in "loans" and another $292 million in FTT tokens outstanding. The Coindesk article does not identify the remaining.

This alleged leak of Alameda's financials shows that the company's most valuable asset is its ownership of "FTX Token (FTT)," which was issued by SBF's FTX Exchange. The FTT token on Alameda's balance sheet represents nearly one-third of the company's total assets and 88% of its net equity. Simply put, the firm's greatest asset is a crypto token created by SBF's other company, with a sizable chunk of its assets held by tokens issued by other associated parties. It's almost as if SBF discovered a method to hack the monetary system, producing dollars out of thin air to borrow vast sums from anonymous counterparties. It's almost as if he stumbled across a financial perpetual motion machine. Perhaps, a flywheel?

The flywheel scheme

When we talk about the flywheel plan, you may recollect that the Celsius Network, a multi-billion dollar crypto lending enterprise with deep links to SBF, was partially destroyed by its token, CEL. Celsius Network was founded on the great notion that the CEL token may be utilized to generate billions of dollars in free assets. A flywheel scheme has a straightforward structure:

Build a token: Tokens are nothing more than pieces of code on a blockchain. Set that sucker up and get it going. To maximize flywheel, keep the bulk of those tokens on your balance sheet.
Pump your tokens: Keep a market maker on hand to buy tokens using your customer's assets. Wash trade it continuously. Do everything it takes to raise that price! And because you keep the majority of the tokens for yourself, there are fewer tokens available to pump.
Show everyone your success: You've reaped your gains, at least on paper. On your balance sheet, you may now show billions of dollars in assets. Now is the moment to cash in on your achievement. Hook some astute investors, like pension funds, into substantially overpaying for your shares or providing you large loans secured by your token.
Keep that flywheel turning: If the flywheel stops spinning, you're in trouble. Of course, nothing is that easy. For a variety of reasons, the flywheel idea turns out to be another example of unsustainable financial engineering. To begin, as you push the price of your token higher, it becomes more expensive to maintain the price; the individuals who possess the token are increasingly inclined to sell out, compelling you to acquire more tokens at greater costs. You will eventually run out of money, possess all of the tokens in the circulating supply, or cease buying.

Here is the worse thing: it turns out that marking enormous amounts of completely illiquid assets to market just produces value on paper. Despite having hundreds of millions of CEL over liabilities, Celsius is unable to dispose of any substantial fraction of those tokens without plummeting the token's price to zero. Such is the risk of holding more than 90% of all tokens in circulation when no one wants to possess them in the first place.

FTT token

According to a Coindesk analysis, in June 2022, Alameda controlled $5.8 billion worth of FTT tokens. This is comparable to 193% of the entire market cap of the circulating quantity of the tokens according to CoinMarketCap (data as of November 7th).

FTT market cap

Source: CoinMarketCap

A look at the on-chain addresses reveals that FTT ownership is very concentrated, with only 10 addresses holding 93% of all tokens.

FTT holding addresses

Source: Etherscan

What's more alarming is that there are barely 180–200 addresses regularly transacting in FTT tokens, according to data from blockchain analytics company Messari. On August 5th, 2022, unexpectedly, around 10,000 addresses momentarily became active. This was the lone exception. This serves as proof of the token's extremely low demand as well as the relatively few individual FTT holders.

ftt active addresses

Source: Messari

Let's examine Chainlink, a cryptocurrency token with a comparable market valuation, for comparison. LINK wallets are active 10 times more frequently than FTT wallets.

link active adresses

Source: Messari

The trading volume of FTT indicates how unpopular it is. FTT's daily trading volume has varied during the past month from $6 million to $42 million, or 0.1% to 0.8% of Alameda's total FTT holdings. When compared to FTT, Messari reveals that genuine trade volumes for LINK have been around four times higher, ranging from $25 million to $173 million.

FTX has acknowledged that it actively acquires FTT tokens, saying that it buys FTT on a weekly basis using 33% of fees made on FTX marketplaces. Then, in order to reduce the quantity overall, FTX burns these tokens. The amount that FTX has been paying for FTT each week over the last few months has varied from $2.5 million to $5 million.

Let's examine the blockchain flows of FTT through FTX exchange during the last month since it hosts the majority of FTT trade volume:

ftt txn flow

Source: Twitter

The tokens are placed in a massive circle. That certainly points to an organic market need. Rarely have we seen this before. By the way, Alameda is cycling millions of FTT tokens through the exchange based on the number of tokens passing through the biggest wallets. What is the purpose?

All of this is to indicate that Alameda will never be able to cash in a substantial chunk of FTT to pay off its debts. There are few purchasers, and the major buyer seems to be the corporation with which Alameda is most closely associated. The fact is that the great majority of the value Alameda accrues to their FTT token is unrealizable, and the fair market value of their FTT in the case of massive sales would quickly approach $0.

Other projects by Alameda/FTX

Alameda's financial sheet also includes coins from numerous other SBF-related crypto projects. Serum (SRM) is a decentralized exchange on SBF's Solana blockchain. MAPS is a token for a map application with a DeFi plugin (lol, hahaha). Oxygen (OXY) is a brokerage on the blockchain and Bonfida (FIDA) is another Solana-linked project that hosts the "Solana Name Service." Surprisingly, the majority of these projects were flops.

SRM, OXY, MAPS, and FIDA have a combined circulating market cap of $321 million. In other words, Alameda's holdings of these tokens once again considerably outnumber the total number of tokens in circulation. This is feasible since the bulk of these projects' tokens is still "frozen" and not yet in circulation. SRM token, for example, will gradually have a total circulating supply of 10 billion tokens by 2027.

Again, it would be very hard for Alameda to sell any meaningful amount of these "assets" in order to repay debts without pushing the price of these tokens down to near zero. Nobody wants them since no one is interested in these failing projects. Let's take a brief look at the data associated with these tokens:

SRM: The cryptocurrency for SBF's Solana blockchain network's decentralized exchange. Over the previous 30 days, SRM's true daily volume has ranged from $1.6 to $8 million. SRM's entire circulating market cap is only $189 million; this is a minuscule fraction of SRM's overall market cap, which would be around $7 billion at today's pricing.
MAPS: Maps.me is a mapping application with DeFi functionality and a token stuffed into it. Of course, hardly anyone uses it. MAPS has only 28,000 Twitter followers. The project has been so idle that they wrote a tweet on Twitter in August 2022 apologizing for "not being in contact for a time" and announcing "new features" for their project. MAPS has a low level of engagement. Their daily volume has fluctuated from $3,000 to $350,000 in the last month, despite a circulating market valuation of barely $10 million. Nonetheless, Alameda chose to separate this asset on its balance sheet... Like SRM, there are 10 billion of these tokens in circulation, the vast majority of which is currently locked. This is another example of Alameda having tokens worth more than ten times the circulating market valuation. MAPS has dropped 93% since its all-time high.
OXY has a current market cap of only $8 million, with a fully diluted value of $440 million after unlocking. Its daily trading volume has fluctuated from $800 to $31,000. It has fallen 98% from its all-time high. Alameda seems to have far more tokens than its current circulating market cap.
FIDA: FIDA has $280,000 to $4 million in daily volume versus a $25 million market cap. It is 96% lower than its all-time high. Alameda seems to have less than the total circulating market cap in FIDA. Nonetheless, their holdings comprise the bulk of tokens in circulation.

How things heated up

After the FUDs against FTX and Alameda, Caroline (CEO of Alameda) raised her voice in a tweet.

In brief, she explained that the asset reflected in the Coindesk report is just a subset of their entities. Since Alameda and FTX are technically two separate entities. This may imply that the mentioned asset just belongs to one entity, which means the total assets of the two companies are a lot more.

Shortly after, CZ (CEO of Binance) shocked the crypto Twitter space when he tweeted that he would sell all of his FTT holdings. According to CZ, Binance invested in FTX in the private round and received equity worth $2.1 billion now (after being converted to BUSD and FTT).

Moreover, he also compared the risk of holding FTT to that of the LUNA crash. This appears to be a straight knife to SBF when his competitor publicly spread FUD against him. Many people believe that SBF’s effort to bring more regulation to crypto (i.e KYC on AAVE) is the source of everything as CZ stated that he won’t support individuals who “lobby against industry players behind their back”

Caroline showed no fear when she replied to CZ's tweet stating that she would buy all of his FTT tokens at the price of $22 if he wishes to minimize the market price impact so badly.

Many crypto twitters also wonder why Caroline does not wait for CZ’s dump to buy FTT at a much better price. Well, in our opinion, since FTT doesn’t have much of a use case, CZ’s dumping on this token can cause a massive sell-off which is super hard to control. On the other hand, one may wonder why CZ does not sell his FTT holding via OTC since he wants to minimize the market price impact. There are a lot of confusing things behind these two rivals that we have not yet come up with satisfactory explanations for.

The final chapter of FTX

FTT plummeted

On November 8, FTT had fallen significantly below the $22 barrier provided by Alameda CEO Caroline to acquire FTT, falling below $15. If Alameda's balance sheets were correct, as claimed by CoinDesk, the fund would be bankrupt by now owing to its enormous FTT holdings.

At that time, there was a deafening quiet from FTX. If your money was still in FTX, you'd be sweating profusely by then. SBF reappeared after more than 30 hours of silence, presumably giving up.

According to The Information, SBF sent a message he never dreamed he'd send." He requested help from CZ. Sure enough, SBF announced the next day that Binance had agreed to buy them, assuring clients that their investments would be secured. 1:1

CZ announced the bailout

CZ stated that FTX had requested aid on November 9th. CZ, also known as Binance CEO, tweeted just after 11 a.m. New York time. An LOI is a Letter of Intent to acquire a company. The deal's details have not been published. According to TechCrunch, FTX was valued at $32 billion following a funding round in January.

Following the news, FTT and Binance's BNB tokens rose 26% and 12%, respectively. Ether and Bitcoin both increased by 7% and 3%, respectively. FTX founder Sam Bankman-Fried stated in his own announcement that things had come “full circle."

According to CZ, Binance has the option to withdraw from the contract at any time. The announcement of the purchase sparked outrage and incredulity on Twitter. "Liquidity crunch. "I thought your deposits were backed 1:1," UTXO Management senior analyst Dylan LeClair tweeted. "Or was your 'proprietary trading desk' trading in a direction utilizing user funds?"

BlockTower Capital's CIO, Ari Paul, questioned why an FTX bailout was required for liquidity because client deposits cannot be lawfully leased out. He added: "At this point, I'd like to pose a question to the industry: if the same thing happens with Binance, who will backstop it?"

The deal fell through

In the latest actions, Binance, the world's largest cryptocurrency exchange, has backed out of its tentative deal to acquire competitor FTX, sending cryptocurrencies into a spiral late November 9th afternoon.

Binance stated in a tweet that while it wants to support FTX and offer liquidity, the Bahamas-based exchange is dealing with "problems" that are "beyond (its) control or capacity to assist."

As a consequence of corporate due diligence, as well as recent press stories alleging mismanaged client funds and suspected US government investigations, Binance has chosen not to pursue the prospective acquisition of FTX.com.

Conclusion

Given that the market has just recently begun to recover, the insolvency of one of the largest industry players is a tremendous loss that has resulted in a deeper bear phase. There are rumors about a bailout made by Justin Sun from TRON. If this is true, it will be a piece of good news for users who still have their funds stuck on FTX. Otherwise, we should not be surprised if Justin Sun can’t acquire FTX since their balance sheet looks really bad now with 8-10 billion in the capital hole.

The collapse of FTX comes with no amusement to anyone, especially in the context that the macroeconomics starts to get better and the stock market is seeing a lot of green. Uncomfort as we may feel, this collapse is necessary to wipe the bad actors out of this industry before they grow even bigger and things start to get out of hand.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

FTX's Insolvency Breakdown