FTX Tapped Into Customer Accounts to Fund Risky Bets, Setting Up Its Downfall
FTX’s chief executive told investors this week that an affiliated trading firm owes the crypto exchange about $10 billion
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Crypto exchange FTX lent billions of dollars worth of customer assets to fund risky bets by its affiliated trading firm, Alameda Research, setting the stage for the exchange’s implosion, a person familiar with the matter said.
FTX Chief Executive Sam Bankman-Fried said in investor meetings this week that Alameda owes FTX about $10 billion, people familiar with the matter said. FTX extended loans to Alameda using money that customers had deposited on the exchange for trading purposes, a decision that Mr. Bankman-Fried described as a poor judgment call, one of the people said.
All in all, FTX had $16 billion in customer assets, the people said, so FTX lent more than half of its customer funds to its sister company Alameda.
Alameda took out additional loans from other financial firms, according to people familiar with the matter. As of Monday, Alameda owed $1.5 billion in loans to counterparties outside of FTX, the people said.
An FTX spokesman declined to comment.
FTX paused customer withdrawals earlier this week after it was hit with roughly $5 billion worth of withdrawal requests on Sunday, according to a Thursday morning tweet from Mr. Bankman-Fried. The crisis forced FTX to scramble for an emergency investment.
FTX struck a deal to sell itself to its giant rival Binance on Tuesday, but Binance walked away from the deal the next day, saying FTX’s problems were “beyond our control or ability to help.”
The failure of FTX to fill withdrawal requests shocked crypto investors and badly tarnished the reputation of Mr. Bankman-Fried, who had embraced regulation of digital currencies and branded himself as a crypto entrepreneur driven by ethics and philanthropy.
“An exchange really shouldn’t have problems getting its customers their deposits,” said Frances Coppola, a U.K.-based economist. “It shouldn’t be doing anything with those assets. They should literally be sitting there so people can use them.”
As questions were brewing about FTX’s health on Monday, Mr. Bankman-Fried tweeted: “FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries).” He later deleted the tweet.
On Thursday morning Mr. Bankman-Fried said in a tweet that Alameda Research was winding down trading.
In traditional markets, brokers must keep client funds segregated from other company assets and regulators can punish violations. In 2013, for instance, the Commodity Futures Trading Commission fined brokerage MF Global $100 million for misuse of customer funds during its messy collapse two years earlier—a downfall also driven by risky bets gone wrong.
But MF Global customers were ultimately made whole after a years long bankruptcy process. With FTX, operating in the Wild West of crypto, it is unclear whether customers will ever get their money back.
The revelation of the loans suggests that the root of FTX’s downfall lay in its relationship with Alameda, a firm known for aggressive trading strategies funded by borrowed money. Some crypto traders have voiced wariness of the affiliation, worrying that it posed a conflict of interest for an exchange to be attached to a trading business.
Mr. Bankman-Fried founded and is the majority owner of both firms. He was CEO of Alameda until last year, when he stepped back from the role to focus on FTX.
Alameda’s CEO is Caroline Ellison, a Stanford University graduate who like Mr. Bankman-Fried previously worked for quantitative trading firm Jane Street Capital. Alameda is based in Hong Kong, where FTX was headquartered before relocating to the Bahamas last year.
In theory, exchanges like FTX make money by allowing customers to trade cryptocurrencies and collecting fees for transactions. Alameda pursued a variety of trading strategies to make money from volatility, a riskier business model.
Among the strategies that Alameda engaged in after Mr. Bankman-Fried founded the firm in 2017 was arbitrage—buying a coin in one location and selling it elsewhere for more. One early winning trade involved buying bitcoin on U.S. exchanges and selling in Japan, where it commanded a premium over its U.S. price.
Another business at Alameda is market-making—offering to buy and sell assets on crypto exchanges throughout the day, and collecting a spread between the buying and selling price.
More recently Alameda has become one of the biggest players in “yield farming,” or investing in tokens that pay interest-rate-like rewards, according to analysts who used public blockchain data to track the firm’s activities. One crypto wallet controlled by Alameda has generated more than $550 million in trading profit since 2020, according to blockchain analytics firm Nansen.
Yield farming can be risky because the tokens often have an initial run-up in price as investors pile in, seeking the rewards, then a crash as they get out.
“It’s essentially like picking up pennies before a steamroller,” said independent blockchain analyst Andrew Van Aken. “You use dollars, or stablecoins, to get these very speculative coins.”
—Peter Rudegeair and Caitlin Ostroff contributed to this article.
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There’s more to building substantial savings than putting away what you can after paying your bills
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Whether you’re starting your wealth creation journey in your 20s, 30s, 40s, 50s or beyond, the core principles remain consistent. Create more income, manage your savings, and invest intelligently.
We look at the best wealth creation strategies depending on which decade you’re in right now.
In your 20s
The key to wealth creation is to start early. So if you’re reading this and you’re in your 20s, you’re well ahead of the game.
Accept that the greatest investment you can make is in yourself and your ability to earn an income.
“If you want to build wealth in Australia, you need to have a plan to be earning more than $100,000 per annum either now or within the next five years,” financial planner Chris Carlin says. “Most finance experts focus on ways to reduce your expenses, which is important, but for sustainable long-term wealth creation, we believe that you should be focusing on ways to increase your income rather than just focus on reducing your expenses.
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“If you need to change careers, study, start a business or ask for a pay rise, do whatever it takes to get your income above that level while you’ve got time on your side. Next step is to buy a house, because the sooner you get your foot in the door of the property market, the easier it will be for you to build wealth over the long term.”
Bear in mind that your first home doesn’t need to be your forever home. Think of it as your foot in the door to build wealth.
“If you’re accessing a first home buyers grant, you only need to live in it for 12 months and then you can consider converting it into an investment property or selling it,” Carlin says.
In your 30s
This is the time in life to establish a regular investment strategy. Consider long-term investments that you can lock up for five to 10 years. You can take on more risk at this time of your life, which can generate higher returns.
Set your priorities for life, and don’t take on more debt than you can afford to pay back.
Also, keep track of expenses and income with budget planners — a great habit to get into now.
There are many other things you should be considering too, such as topping up your super above the Super Guarantee and reviewing your personal insurance and investments.
In your 40s
This can be an expensive time of life, particularly if you’re supporting a family. But you’re probably in a more stable financial position by now, giving you a good springboard into investments such as a diversified portfolio of shares.
Investing in property is the best option at this age, whether it’s the family home or an additional property that can be utilised for an Airbnb. Also, make sure you rein in your debt. A bank loan for a mortgage is one thing, but debt on credit cards is hard to justify by this stage of your life.
Invest in your retirement by topping up your superannuation. Even an additional $50 a month will benefit from the wonders of compound interest.
Generally speaking, shares outperform other investments over the longer term. And if you invest in companies that pay dividends, you’ll benefit from being paid part of the company’s profits, generally twice a year. While dividends are less common in a downturn like we’re having now, they are likely to increase once company profits recover.
In your 50s (and beyond)
If you’re in your 50s or older, traditional financial planning tends to encourage less aggressive asset classes as people near retirement.
If you’re in a low asset position due to divorce and having to start again or you’ve missed the real estate boom and are still renting, the main focus should be on controlling spending and pumping money into super and savings and then investing aggressively, advises financial adviser and money coach Max Phelps.
“Property investing is either an option through super, or outside of super if the deposit can be raised,” he says. “Outside of super, properties with scope to improve, extend or subdivide will help build capital faster than normal market growth, to help catch up.”
Share investing could also be an option, with particular focus on high growth funds, such as international securities.
“Controlling spending at a level just above the aged pension should be a key focus, otherwise it’ll be a big step down when you finally stop work. Use a good budgeting and planning app,” Phelps says.
However, if you own your own home, and have a standard super balance, focus on the home and perhaps look at downsizing opportunities in the future.
“Maximising super contributions is likely to be beneficial to get the tax savings, potentially using a transition to retirement strategy,” he says. “For those looking for a sea or tree change, we would always recommend keeping the family home until a year or two after moving to a new area to make sure it really suits.
“For those wanting to stay in the same home forever, releasing equity to buy a couple of high yielding investment properties could be a good option, with the time to pay down the mortgages and keep them for additional income for retirement,” Phelps says.
If your own home is paid off and you have a high super balance and a strong asset position, the focus will likely be on asset protection and less risky asset allocation for investments, he says.
Whatever age you are, consider getting help now. The right financial advice early can set you on the right track.
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