Is This The End For Sam Bankman-Fried?

When FTX CEO Sam Bankman-Fried bailed out a string of struggling crypto companies earlier this year, the 30-year old billionaire was hailed as the next coming of J.P. Morgan. He cast himself as the shield that would protect crypto even if it hurt him financially, saying to Forbes, “You know, we’re willing to do a somewhat bad deal here, if that’s what it takes to sort of stabilize things and protect customers.” He went on to say that there would be more pain coming. “There are some third-tier exchanges that are already secretly insolvent.”

Ironically, Bankman-Fried, is now the one getting bailed out. He announced Tuesday that FTX, which has raised nearly $2 billion since 2019, most recently in January at a $32 billion valuation, is selling itself to Binance, Bankman-Fried’s very first investor. The transaction will almost certainly wipe out most of Bankman-Fried’s net worth, which Forbes estimated to be $24 billion at its peak, based largely on the value of FTX. This is a shocking turn of events for what appeared to be one of the most sure-footed companies in the industry. It will take time to digest. But once the public moves past the suddenness of the news, people are going to be speculating about what comes next for the former wunderkind.

Bankman-Fried’s initial focus will likely be ensuring that the deal closes. That is far from a given, as Binance CEO Changpeng Zhao clearly noted in his own announcement of the deal that nothing is binding and Binance can walk away whenever it pleases.

There are plenty of potential hangups, as FTX is a complex labyrinth. It has franchises around the world. Most recently it purchased Bithumb, Liquid and BitVo, based in South Korea, Japan and Canada respectively, for undisclosed sums. FTX also committed more than $750 million in bailout deals for struggling lenders Voyager and BlockFi. In addition, the two parties will need to see eye-to-eye on financial terms, no small task given that much of FTX’s worth is tied up in its plummeting exchange token, FTT.

Looking ahead, it is fair to wonder whether Bankman-Fried will stay in crypto for the long run. In an October 2021 profile in Forbes, he made it clear that he never was a true believer, but only saw crypto as an easy way to make a massive fortune. Specifically he subscribes to a discipline of philanthropy known as effective altruism, which is a Silicon Valley–esque spin on philanthropy championed by Princeton philosopher Peter Singer and favored by folks like Facebook cofounder Dustin Moskovitz.

While many givers may dote on causes with personal significance, an effective altruist looks to data to decide where and when to donate, basing the decision on impersonal goals like saving the most lives or creating the most income for each dollar donated. Effective altruism also forces adherents to pick specific roles; Bankman-Fried chose the earn-to-give camp, meaning that he would devote himself to making as much money as possible before handing it over to others to decide where it should go.

This mindset is what got him involved in crypto in 2017. Back then he realized that he could buy bitcoin in the U.S. and sell it in Japan for up to 30% more. “I got involved in crypto without any idea what crypto was,” he says. “It just seemed like there was a lot of good trading to do.” At its peak, his operation was moving $25 million worth of bitcoin per day.

When asked if he would leave the industry if he found a better way to make money, say trading orange juice futures, he did not hesitate. “Yeah, I would.”

This perspective puts him entirely on the other end of the spectrum when compared to most crypto royalty. He would have had no interest in writing bitcoin’s original codebase alongside the possibly pseudonymous Satoshi Nakamoto as did ZcashZEC -15.3%ZEC -15.3% founder Zooko Wilcox. Nor would he have followed in the footsteps of outgoing Kraken CEO Jesse Powell of flying to Japan in a last ditch effort to save the struggling Mt. Gox exchange, which at one time handled 80 percent of bitcoin trading worldwide and was hacked to the tune of 850,000 bitcoin. FTX was not set up as an easy-to-use crypto onramp like Brian Armstrong’s Coinbase.

FTX started as a professional exchange geared towards institutional investors that specialized in crypto derivatives, such as futures and options contracts, which let traders bet on asset prices without direct spot-market exposure. This setup can be extremely efficient since there needs to be no physical asset delivery when a contract expires, like a tanker of crude oil that could be sent around the world to a refiner. For this reason, crypto derivative volume exploded, and exchanges like FTX made gobs of money. Bankman-Fried claimed over the summer that FTX had been profitable over the last 10 quarters and had more than $1 billion to spend.

Derivatives can play an important role in capital markets, as they can help smooth out price discrepancies among exchanges that offer similar assets. In plain English this means that derivatives can help make sure that one bitcoin in Asia costs almost exactly the same in North America. But crypto derivatives, which can be traded using leverage (where traders take out loans to increase the size of their bets), can and do also lead to massive liquidations when markets turn. At one point FTX offered leverage up to 100 times. When asked why, Bankman-Fried replied, “Our users wanted it, and many threatened to not use the platform unless we had it.”

Due to multiple liquidations and public outcries, FTX curtailed the amount of leverage that a user could take on. “I don’t want to try and claim that it was important for efficient markets, because I don’t think it is. Any position that you’re putting on with that level of leverage can’t be absolutely crucial for efficient markets, and this is not something I felt was particularly important or good for crypto-market health.”

Translation: This was good for business, market health be damned, until it wasn’t.

Despite today’s market rout–the FTX token that sparked the commotion has lost about 74% of its value in the past two days–Bankman-Fried remains a billionaire many times over. And now he is going to have to make a choice. He can try to stick it out in crypto and perhaps work for his friend, adversary, or frenemy Changpeng Zhao. He also remains the CEO of FTX.US, the considerably smaller affiliate of FTX. It is also possible that regulators and law-enforcement officials may look at his FTX dealings, which could make some of these questions moot. Right now nobody is alleging that fraud took place, but crypto has been a punching bag for authorities during the best of times. When collapses of this size transpire, one can be sure that governments will investigate.

Just this afternoon the top Republican on the House Financial Services Committee, Patrick McHenryof North Carolina, issued a statement lamenting the collapse and looking forward to “learning more from FTX and Binance in the coming days about these events and the steps they will take to protect customers during the transition.”

Bankman-Fried can also try and cash out what he has left and give it to philanthropic organizations that share his ideals.

But that may not happen given that there were multiple times during the heyday of FTX where he could have donated money and chose not to, betting that he could make his fortune even larger. Ironically, he spent $2.3 billion in July 2021 to buy out Binance’s stake in his exchange. Had he not done so, perhaps he would have been richer today and the war of words between Binance and FTX that led to Bankman-Fried’s downfall would not have happened.

It is entirely possible that Bankman-Fried stays in crypto and tries to rebuild, but unlike true believers it is not a given.

“There’s a wide world out there,” he said to Forbes in September 2021. “We shouldn’t think that crypto is going to be the most fertile ground to work in forever.”

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