How Billionaire Bankman-Fried Survived the Crisis and Thrived Again

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FTX CEO Sam Bankman-Fried shopped amid the recent industry carnage and said he still had cash to spend if the opportunity presented itself.

It may seem strange. Other multi-billion dollar crypto giants have gone bankrupt this year. FTX’s main competitor, Coinbase, saw its shares plunge 70% and laid off a fifth of its workforce as crypto prices crashed.

Still, FTX is emerging as something of a lifeline for the industry.

The 30-year-old billionaire says it was the result of hoarding lots of money, limiting overhead, avoiding loans and being able to scale quickly as a private company.

“It was important for the industry to come out of this in one piece,” Bankman-Fried told CNBC in an interview at FTX headquarters in Nassau, Bahamas. “It won’t be good for anyone in the long run if we have real pain and real breakouts – it’s not fair for customers and it won’t be good for regulations.”

The crypto industry has seen billions of dollars wiped out in the weeks surrounding the implosion of the Terra USD cryptocurrency and the failure of crypto hedge fund Three Arrows Capital. Lenders exposed to Three Arrows were the next domino to fall. In July, FTX signed a deal that gives it the option to buy lender BlockFi after providing a $250 million line of credit. FTX also awarded $500 million to struggling Voyager Digital, which later filed for bankruptcy, and was in talks to acquire South Korea’s Bithumb.

Bitcoin, the largest cryptocurrency in the world, has lost more than half of its value this year.

“Not Immune”

While Bankman-Fried cryptocurrency exchange FTX is suffering from the decline in digital assets, he said market share growth has helped offset the pain.

“I don’t think we’re immune to that,” Bankman-Fried said. “But we’ve put a lot of effort into growing our footprint over the last year…and we have a less heavy platform for retail – retail tends to be more driven by market sentiment.”

Most of FTX’s volume comes from customers trading “at least” $100,000 a day, he said. Bankman-Fried described the group as “highly engaged, high-volume” users who are “quite sophisticated.” These range from small quantitative trading firms to family offices and day traders. According to the company, FTX demographics have been less price-sensitive and held up relatively well in the crypto bear market.

In addition to its success with professional traders, it is a costly land grab for the American retail public. FTX has purchased the naming rights to Miami Heat’s NBA arena, formerly American Airlines Center. He courted high-profile investors and brand ambassadors, including Tom Brady and Giselle Bündchen, and ran a Super Bowl ad featuring Larry David.

Cryptocurrency exchange brought in around $1 billion in revenue last year, CNBC reported in August. Bankman-Fried confirmed that the numbers were in the “good range” and that this year would see a “similar” number, depending on the severity of the market downturn. He also said the business was profitable.

He pointed to the low number of employees as one of the factors of profitability. FTX has about 350 employees, about a tenth of Coinbase’s workforce.

“We’ve always tried to grow sustainably – I’ve always been deeply suspicious of negative unitary economics, of any economy without any sort of real, clear path to profitability,” he said. declared. “We hired a lot less than most places, but we also kind of controlled our costs.”

Bankman-Fried earned a degree in physics from the Massachusetts Institute of Technology and began his career as a quantitative trader at Jane Street Capital. He bought his first bitcoin five years ago and said he was drawn to the industry by vast arbitrage opportunities that seemed “too good to be true”. In 2017, Bankman-Fried launched proprietary trading firm Alameda Research to begin trading the asset full-time. According to the CEO, the company was earning a million dollars a day in some cases by buying on one exchange in one market and reselling on other global exchanges.

Alameda Research still accounts for about 6% of FTX’s trading volumes, according to documents seen by CNBC. While Bankman-Fried is still a major shareholder in Alameda, it has pulled out of day-to-day operations.

Bankman-Fried said he has worked in recent years to eliminate conflicts of interest at Alameda. “I no longer run Alameda – none of FTX does. We consider it a neutral part of the market infrastructure.”

FTX has seen epic growth since Bankman-Fried launched it alongside co-founder Gary Wang in 2019. It last raised $400 million in January at a valuation of $32 billion, taking its total venture capital funding over the past three years to approximately $2 billion.

FTX Trading Ltd. is headquartered in Antigua, while FTX Derivatives Markets is based in the Bahamas, where Bankman-Fried lives. FTX Trading has acquired companies in Switzerland, Australia, Cyprus, Germany, Gibraltar, Singapore, Turkey and the United Arab Emirates, among other countries.

The exchange has spent about half of its cash on bailouts and acquisitions, most recently buying a 30% stake in Skybridge Capital from Anthony Scaramucci.

“We still have quite a bit to deploy, if and when it’s useful or important,” Bankman-Fried said.

Three Day Deals

FTX has benefited from being a private company this year. FTX doesn’t have the daily ups and downs of a publicly traded stock, especially growth stocks, which this year have been battered by higher interest rates. Bankman-Fried also said that not having thousands of shareholders allows FTX to move quickly when trying to close deals within days.

“I think that makes it much more difficult, in practice, to do this as a public company,” he said. When “you have three days from start to finish to wire the money, you can’t do a public engagement process around the potential terms of a messy situation.”

Bankman-Fried said many deals closed within days, while the team “didn’t get much sleep that week.” What is often a lengthy due diligence came instead in a truncated Excel spreadsheet. The finances have not been audited. The team expected to at least lose money.

“It wasn’t clear if it would be a net positive or negative – there was a potential upside if things went well,” he said. “We got to the point of feeling that we could do something that would have a fair chance of helping for an amount of money that we were willing to lose if things went wrong.”

It’s too early to tell if Bankman-Fried’s distressed crypto bets will pay off. Some companies have outright said no to a rescue program.

After extending a line of credit to Voyager, FTX and Alameda sought to buy and restructure the business. He outlined a plan to buy Voyager’s digital assets and loans at market value. The company responded to the offer by calling it a “low ball offer disguised as a white knight rescue.”

“It surprised me. It didn’t surprise our legal team,” he said. “Honestly, I had just assumed they would see our offer and just say…sure, we’ll take that.”

Bankman-Fried said there had been further discussions and the responses were “disappointing”. The problem, he said, was that the proposal did not include any fees.

“If you’re in the fee business, then maybe our proposal isn’t what you like,” he said. “I believe it was a lowball offer for consultants looking to make a fee on this deal. That’s not what I had in mind. I had the clients in mind. But that’s my best understanding. actuality of what happened.”

The next… Warren Buffett?

Bankman-Fried’s latest crypto moves have drawn comparisons to Warren Buffett’s strategy in 2008. The legendary CEO of Berkshire Hathaway stopped the bleeding during the financial crisis with a $5 billion investment in Goldman Sachs. This ultimately netted the Omaha-based conglomerate a $3 billion gain.

“There are parallels,” Bankman-Fried said. “There are probably more differences. First of all, I don’t think Warren Buffett would call me the next Warren Buffett. where they really need Capital.”

Bankman-Fried said he finds places where he can “simultaneously make good investments and help them, their customers and their ecosystem.” Although sometimes only one is offered, not both.

He also applauded Buffett’s skills in long-term value investing. The investor showed that “you don’t have to have an innovation or a brilliant idea, you can do that by just putting together good decision after good decision over decades and making it worse.”

Like Buffett, Bankman-Fried signed the Giving Pledge: a pledge made by the world’s wealthiest people to donate the majority of their wealth to charity. Bankman-Fried said he gave about $100 million this year, with a focus on future pandemic prevention. Similar to Buffett, he lives modestly. Bankman-Fried shares a house with ten housemates and a Goldendoodle named Gopher. He drives a Toyota Corolla, and says he has no interest in the excesses of a yacht or a Lamborghini.

But the two humble investors differ sharply when it comes to their positions on cryptocurrencies.

Buffett and his business partner Charlie Munger have criticized cryptocurrencies over the years. In 2018, for example, Buffett called bitcoin “probably a rat’s death squared.” Earlier this year, Buffett said he wouldn’t buy all the bitcoin in the world for $25 because it “isn’t producing anything.”

Buffett called the underlying blockchain technology “important,” but didn’t shy away from the idea that “bitcoin has no unique value.” Blockchains are digital databases that store cryptocurrency transactions and, in some cases, other data. Its primary use has been to power cryptocurrencies like bitcoin. But fans of the technology say it could be used in healthcare, supply chain logistics and other areas of finance.

“I definitely disagree with that,” Bankman-Fried said. “I have to hope [Buffett] doesn’t agree with that too. I don’t think you should be running a business if he thinks that, but I don’t think he actually thinks that. I think that was most likely hyperbole,” he said. “It missed some of the power of blockchain – it also missed some of the momentum in the first place, and what drives people to want a new tool.”

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