Also, where does Alameda fit into the picture?
What's not clear to me is what they gambled on that lost money.
Business model ought to be simple, the exchange earns loads of fees, and Alameda makes markets on it, earning spreads.
Just putting a lid on the risk there should be enough to keep people occupied, no need to print your own money for extra leverage.
My guess would be other crypto ventures. All these crypto companies pumped each other with no products/assets (Stadium names and soccer team sponsorships with no products to sell!) and invested in each other. The economy had so much excess money and they got pumped and they thought this is what "investing" is. Economy's bubble burst and suddenly their valuations goes to 0.
When economy goes bad everyone is hurt but these companies had nothing but vaporware and are vaporizing as a result.
Just a guess though.
Swapping whatever cash you have for FTT in order to invest it elsewhere just seems insane. You've got a business that creates cash, and needs it for deposits and margins. I mean sure, split out some into a venture business, but be sensible and keep some for the cash cow?
Also, hire an adult to tell you this. Would have cost barely anything to get any old finance professional to come in and say that.
But I can imagine how it happens. It is some massive fucking bull market and you see your peers doing shady things (20% APR! Zero risk!) and making shit loads of money. You've got this trading arm that is making shit loads of money during the bull market. So you do a little double dipping and it work! Hooray you are making everybody richer! So you do a little more. And a little more. And then oops Alameda is losing a lot of money. But don't worry this is just a blip. Those folks are smart. Hmmm... this is taking longer than we thought to come back. They just need some temporary money to get through this. Don't worry, they've still got huge assets. Oh fuck, their assets are tanking and they are still losing money. Kaboom.
You need to have somebody in the room who can say "yes I know this strategy is making money right now but we absolutely cannot do this." And it is already hard to have that person in the room normally, let alone when you are a company make up of people in their 20s who are told they can do no wrong and also believe that it is their moral duty to make a shit ton of money so they can funnel it into some weird effective altruism mission. If you believe you are saving the world then that 20th billion is still important, whereas if you just want to be rich as fuck then it really isn't.
Alameda has a strong incentive to knowingly do bad trades on ftx, i.e. stale quotes + spreads too small, since it increases legitimate volume numbers and generates ftx fees (gains in ftx fees offset trade loss). It's unknown if this happened or to what extent, but it can be very costly to do this in large size.
Certainly won't catastrophically explode the maker but it doesn't help if you're already hurting somewhere else.
Also, having listened to the FTX podcast a few times just to get some idea of what their magic was, there was one episode where Caroline came on, and the gist of it seemed to be that the host Tristan and a lot of the heavy blockchain cool-aid drinkers managed to convince Caroline to toss out good old risk management principles and Yolo it on defi and nft projects. They referred it in Their podcast as "the summer of defi". I guess that might have been a reason as well
For that, they can't use FTX. They need USD or a stable coin like USDC.
They can't convert hundreds of millions of dollars of FTT to USDC since demand for FTT is relatively small. And a transaction like that might cause a huge decline in the price of FTT.
So they must have used ETH, BTC etc deposited by customers for swapping to USD or USDC.
I guess their theory must have been the surbowl ads, celebrity endorsemens and all would result in demand of FTT going up after some time. And they can later swap them back to customer funds when required.
But then crypto crashed.
Now customers want to withdraw the funds and they don't have it to give back. And nobody wants FTT.
1- Gamble with them
2- pay themselves
3- lobby the government
4- bailout other failing crypto companies.
Everything here could have been done with any non-crypto exchange.
I fully agree with your point about bank deposits. Unlike ftx, however, the banks are tightly regulated and monitored.
They were greedy and counted on a bull market. Basically used money that's not theirs to speculate on shitty coins. Shitty coins went down in value along with their customer's deposit. Think about borrowing money at the bank to buy BTC at 60K. You'd be on the same spot.
Margin has the effect of magnifying the effect of volatility in the value of a product on profit and loss. And of course crypto is extremely volatile to begin with (by comparison to other assets).
Since they were acting as a dealer they could lose a lot if their book of business was imbalanced (ie on net a lot of their customers have the same position) and the market moved against them.
Secondly they seem to have had very little equity as a reserve against losses and what equity they had seems to have been in this FTT token which was only backed by the exchange itself. So if the FTT token lost value they would lose all their equity and have no reserves to protect against losses. This happened when Binance tweeted that they were selling their (very substantial) FTT holdings. In normal finance your equity reserves are there for if you have a bad day and lose some money - you can dust yourself off and try again the next day. If you have no equity then your business is insolvent. Trading when insolvent is no bueno and if there are rumours that you are insolvent of course people pull funds, won't trade with you so you have effectively a "run on the bank" and all the problems you had before get worse because now you can't find anyone to trade with as you try to wind down positions to refund customers etc.
Thirdly there seems to have been shenanigans afoot regarding Alameda (the affiliated hedge fund) which seems also to have primarily been long FTT and a bunch of other similar tokens backed by not very much. It may be exchange funds were being used by Alameda for trading - certainly they don't seem to have been kept at arm's length as they should have.
Fourthly there have been allegations that customer funds from the exchange were somehow inappropriately used to cover losses either at alameda or at FTX itself. If this is not true, it's hard to understand why refunds are taking any time at all so make of that what you will.
[1] Essentially a leveraged swap on the price of a particular crypto. So one party will pay say 10x the difference between some reference price and the current price of the crypto and the other side will receive it.
[2] Assets with a certain value as security against losses. Generally you will be required to have collateral which is liquid (ie can be easily sold if need be without affecting the value of the collateral) and relatively risk-free (like treasury bonds). For collateral that is risky, the dealer will take a "haircut" off the face value of the collateral to account for the fact that they may not be able to sell the things for the market value. The market itself (and Alameda) had collateral (FTT and similar) that was on the whole neither liquid nor risk-free.
It's incredible that 1) crypto "finance" is full of products whose name screams scam, and 3) a perp(etuity) is like a fixed-term annuity except it's supposed to lay out forever, but no crypto perpetuity has been existence (and most have already failed) for longer than any annuity term.
It could equally be short for “perpetrator” in this case in particular.