Is Sam Bankman-Fried the Zillow of Crypto?

Zillow managed to lose nearly $1 billion buying and flipping houses during the most dramatic real estate inflation in the history of the United States. They could have bought houses at random and made money, at least in nominal dollars, yet they managed to lose.

MIT alum and major Joe Biden donor Sam Bankman-Fried managed to lose his own money and also money that he stole from depositors in the crypto marketplace. But how? His trading operation, Alameda Research, was started in November 2017. Bitcoin was about $7,000 back then. Today, however, Bitcoin is quoted at over 16,000 Bidies. Adjusted for inflation, perhaps this is not a great return but it looks good in nominal dollars at least.

How did a guy celebrated as a genius by Sequoia Capital and the rest of the Silicon Valley smart set manage to lose money while operating in a strong tailwind? Is it like the Florida real estate boom of the mid-1920s in which people who’d been successful kept doubling down and, therefore, the recent dip in crypto prices caused losses far greater than what had been earned on the way up?

Let’s look at what was motivating this rare genius. “How the newest megadonor wants to change Washington” (Politico, August 4, 2022):

… part of life as Sam Bankman-Fried is about embracing paradoxes. The 30-year-old, who has amassed an estimated $20 billion fortune over the last four years through cryptocurrency, drives a hybrid Toyota Corolla.

He was also one of just a handful of donors who spent $10 million-plus backing President Joe Biden in 2020, and in the last year, he’s hired a network of political operatives and spent tens of millions more shaping Democratic House primaries. It was a shocking wave of spending that looked like it could remake the Democratic Party bench in Washington, candidate by candidate. Looking ahead to the 2024 election, he has said he could spend anywhere from $100 million to $1 billion.

… Bankman-Fried has what it takes to be the biggest donor in politics — an eleven-figure bank account he’s committed to giving away before he dies…

Looks like he followed through on that last commitment. What was his main political objective? More and better coronapanic:

In politics, that’s led Sam Bankman-Fried to dual objectives. There’s the one he has talked about most: preventing the next pandemic, which he fears could be more lethal than Covid-19 and would pose a huge threat to humanity, an obsession for effective altruists.

But if he needed only $1 billion to deliver a Democrat-ruled paradise to Americans and that was his main objective, why did he keep placing risky bets? He already passed the $1 billion mark a long time ago, right?

Maybe it was his parents who were motivating him to bet big and steal big? His dad is a Trump-hating Stanford Law professor, Joe Bankman. Mom is Barbara Fried, another Stanford Law professor, who was a leader of a Silicon Valley PAC funneling money to Democrats (Vox). Perhaps the parents said that they needed $10 billion to prevent Republicans from exercising any political power in the U.S. going forward? (plus another $300 million for vacation houses in the Bahamas to be owned by mom and dad that would also be nice enough to host Bill and Hillary Clinton)

Maybe it was about J.K. Rowling and the 2SLGBTQQIA+ community? “Sam Bankman-Fried shifts blame for FTX collapse to ex-girlfriend’s crypto firm” (New York Post, 11/17/2022):

Disgraced crypto mogul Sam Bankman-Fried unleashed a wild, wide-ranging interview in which he appeared to shift blame for the collapse of his company FTX to the trading firm run by his ex-girlfriend, Caroline Ellison.

Bankman-Fried is under intense pressure to address his decision to funnel $10 billion in FTX client funds to prop up Alameda Research, where Ellison — a 28-year-old, professed “Harry Potter” enthusiast who has tweeted about taking amphetamines — served as CEO.

Of that money, at least $1 billion in customer funds is still missing.

The company ran its own cryptocurrency, i.e., Ponzi scheme, in which the bits that they pulled out of their servers’ butts were worth more than $2 billion (CNBC). So we need to try to understand how Sam Bankman-Fried and Caroline Ellison managed to lose at least $2 billion.

How did these two lose so much money? The modern equivalent of CDOs?

9 thoughts on “Is Sam Bankman-Fried the Zillow of Crypto?

  1. I do not understand why everybody is surprised, the American dream can be summarized by a Mr Gekko “Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.” Making money by designing and manufacturing a useful product is a very difficult process, investors do not like to wait and want immediate results, a proposal for pulling valuable bits from server’s butts looks like genius. Its much easier making money in rent seeking and not actually producing anything of value.

    Sam Bankman-Fried and Caroline Ellison are today’s Gekkos. Although it looks like they were not smart enough to open a Swiss Bank Account before their respective companies got flushed down the toilet.

    • Thanks, David. The chart shows volatility, but volatility is supposed to be good for sophisticated traders such as Sam Bankman-Fried. And the overall trend is up compared to when he started. So he had a tailwind plus volatility, which should have been a recipe for profits simply on the bid/ask spread.

      (For comparison, the stock market has gone up and down, but the Wall Street banks are nearly always wildly profitable.)

  2. It’s actually worse than that. Alameda was front running listings of new tokens on the FTX exchange, buying them up right before they were listed and then making profit from the big jump in value that came with being listed:

    That they went bankrupt with this level of insider trading shows shocking incompetence.

    In your Zillow analogy, it’s as if Oprah had a “house of the week” program, and they were leaked it in advance and were able to buy that house before it was pushed by Oprah and flip it right after. And yet they still ran out of other people’s money to spend.

  3. I don’t know, but I like it when the world coughs up a good example of a “jolie laide” girl in the flesh. Cute ugly! Take your glasses off, put down that math book, and turn around!

    Will they go to prison? Will they pick cauliflower at 0.06/hour in their prison agricultural camp?
    Will they be suicided? Who knows? Jolie laide!

  4. The amount of leveraging in housing & crypto currency must be a lot more than reported. The media says all houses are now bought with cash & crypto is all bought with cash. Maybe the reality is Zillow borrowed 2 bill to make 1 bill. Maybe crypto was all bought on margin. We’ll never know. The fed announced today the economy can’t afford 3% interest & will soon end tightening without making any meaningful dent in inflation.

  5. The details of this case are scarce and do not appear to be clarified much with the passage of time.

    I am not entirely sure how it was even possible for the FTX guys to “steal” customer assets. My understanding of a crypto transaction is that a certain amount is transferred between two “digital wallets” directly, after the seller and the buyer have been matched via an exchange. So, theoretically no tap into the “money” flow is possible.

    If what was stolen is fiat sitting on cash accounts, then it raises a question of why the accounts, at least in the FTX-US, were not SIPC insured ? FTX-US surely could not operate without such insurance. I am not sure about the Bahamian regulations.

  6. Dear @philg

    I respectfully claim you’re overthinking this.

    Please allow me to describe this in Floridian.

    Mr. Bankman-Fried operated a theme park in the Bahamas.

    At the entrance to the park, where the monorails and ferry boats disgorge the guests, you have to convert your US Dollars to Bankman Bucks (a/k/a FTT tokens)

    Very much like:

    When it became manifestly clear that Bankman had embezzled the US dollars that would be needed either to pay soi-disant “cast-members” for their services or redeem the Disney Bucks at the exits, the new guests stopped converting US dollars into Disney Bucks, and existing guests rushed the exits to get their US dollars back.

    Predictable hilarity ensued.

    Bankman World required an ever increasing number of guests and US dollars to operate. There was no economic activity going on in the park. It was a pure ponzi scheme.

    The poor guy ran out of gullible marks.

    • Warming to the topic:

      You walk down Main Street and convert your Disney Bucks into “Hakuna Matata” tokens in a colorful “Lion King” themed store.

      Then you walk over to Tomorrowland and convert the “Hakuna Matata” tokens into “Buzz Lightyear” tokens in a colorful “Toy Story” themed store.

      Then you go convert your “Buzz Lightyear” tokens into “Galactic Credits” over at the Star Wars area.

      That’s all FTX was.

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