FTX and How to Lose Money | Hacker News Reader

FTX and How to Lose Money

readmargins.com

34 pointsguiambros41 comments

The question that has never been answered is how SBF made money in the first place. The arbitrage story doesn’t check out. Making as much money as claimed with arbitrage requires massive scale.

At any rate, the author is absolutely correct that the ftx collapse was due to Sam and friends cashing out rather than a bank run. However, it’s becoming increasingly clear that the regulatory complex prefers the latter story as it protects the political actors complicit in receiving stolen funds.

Yeah. I'm surprised we haven't seen any more looks at the Japanese arbitrage story. I admit (as a non-crypto person) I had just assumed it was real until last week.

My totally unfounded hypothesis is that Sam made several million betting directionally on crypto and maybe even made a million on this Japanese temporary arbitrage. While most crypto betters are pretty isolated Sam knew with his connections he would be able to get in front of investors and he knew in order to get money he needed to say something that sounded more sophisticated.

It is well documented that he directly stole depositor's funds.

I'm well aware of that. I'm talking about how he initially made money in crypto. The article above links to the piece below but its unclear to me now how much of this is true and how much of this was exaggerated by SBF's own story telling to raise money. This all took place before FTX.

https://vegaxholdings.medium.com/kimchi-premium-crypto-arbit...

While this seem to be the case. How he created his initial assets to create Allameda and FTX? Did he and his colleagues stole funds at the get go?

Maybe it's just a coincidence, but at first I had heard about SBF making $50 million out of that Japanese arbitrage thing, and then, a few days later, of him receiving the same sum of $50 million as an investment from a guy named Tallinn (actually a loan, according to this Times article [1]).

So most probably he didn't make $50 million from the arbitrage alone. He did make some money out of it, but not that exact sum. Which also reminds me that he didn't make the money in his name, he had used a EA person based in Japan who actually opened up an account with a small Japanese agricultural bank or something like that. So the money was in that person's name. There's no way for that Japanese person to have transferred $50 million to SBF without automatically triggering countless money laundering alarms. And "transfer" is the wrong word, that person had to donate those $50 million to SBF (or to FTX?) in order to make them be SBF's (FTX's?) money.

[1] https://www.thetimes.co.uk/article/sam-bankman-fried-the-ner...

Who were the political actors.

Another misdirection is calling this a "bankruptcy". It is a liquidation. The only assets FTX had was other people's money.

"The question that has never been answered is how SBF made money in the first place."

It is the same issue we see with every "tech" company. The so-called "tech" is worthless. How much would anyone pay for the FTX software. That is why "tech" companies must conduct surveillance and sell ad services. They do not produce anything of value.

If the "value" of whatever is being sold by the "tech" company1 can go to zero,2 then it is questionable that it had any value to begin with.

1. If they are are in fact selling anything. Many sell nothing. They just take money from VC and try to grow.

2. For example, so-called "cryto" tokens.

> The only assets FTX had was other people's money.

Not true- which is why this is fraud rather than a “bank run”. FTX claimed to be holding other peoples money in 1:1 custody when in fact it was being funneled to politicians, ngos, private jets, luxury apartments, dogecoin gambling, and likely more that will hopefully be uncovered over time. Whether or not you personally value crypto tokens doesn’t matter here; the fact is that people deposited those tokens into ftx expecting trusted custody when in fact those tokens were sold for a variety of purposes. You can argue whether you feel crypto tokens are worthless but either way trust was violated. Very different from a bank run where you know that the bank is not promising 1:1 custody.

FTX is not a bank. Thus, by definition, what happened cannot be called a "bank run".

While I now understand what was meant by "political actors", I do not understand what were these other assets, besides other peoples' money.

Until someone is convicted, "fraud" should be in quotes.

It is well-documented that SBF literally stole customer deposits and lent them to Alameda. He defrauded his customers, investors and employees. He stole.

I want to believe you but it's a pretty damning accusation and I think here on HN people expect some citation to reliable sources.

https://twitter.com/wclementeiii/status/1592289824542949376

That is hard evidence that Alameda took FTX customers' deposits.

It is easy to find the original FTX Terms of Service which state that deposits are not lent out. Additionally, SBF himself tweeted that deposits are "never invested, not even in bonds" [verbatim].

Is there some wordplay opening there? "It was a loan, not an investment"? "I gifted the money, I didn't invest it", etc...

As if that morally exonerates him...

Vox: you tweeted out some stuff like - we never invest your deposits

Vox: that was bs, right?

SBF: it was factually accurate

Vox: huh!!! but like - their deposits were totally not there? or do you just mean, technically it was Alameda

SBF: FTX

SBF: correct

https://www.vox.com/future-perfect/23462333/sam-bankman-frie...

FTX collapsed due to accounting mistakes and using illiquid tokens as collateral. What sources show that SBF stole customer deposits?

See my reply to the similar comment in this thread and https://www.vox.com/future-perfect/23462333/sam-bankman-frie...

Customers deposited funds for FTX to hold. FTX said "We're holding your funds; they're safe." FTX no longer has the customer funds. Why? They gave them to Alameda and Alameda traded with them and lost them (or maybe stashed some of it somewhere). That's theft, not accounting mistakes.

From the moment they launched, their terms claimed that FTT will be used as collateral to borrow money from their FTX platform.

FTX wasn't and isn't the only protocol CEX that does this.

When Facebook sells our data to advertisers, their not stealing it. It's in their terms. It doesn't make it a fair or great thing though.

Would it be stealing if $1 of crypto was “borrowed” for $0.02 of FTT?

Digital copying is not theft, but since crypto cannot be copied I am fine with calling FTX’s actions stealing.

I would be very interested to see a citation and also to know what other large exchanges do this.

Source?

Why would SBF delete his tweet claiming funds are "never invested, not even in bonds"?

Lending money and buying bonds are functionally the same thing, albeit there is legal nuance.

What is a "protocol CEX"? I'm assuming that's a typo.

I believe CEX is Centralised EXchange as opposed to DEX the Decentralised equivalent. This is just my best guess based on what I’ve learned from following this scandal so could be wrong. TLDR: FTX is not the only centralised exchange behaving in the manner being discussed (according to parent)

Edited for clarity

I know what a CEX is and what a DEX is.

The phrase "protocol CEX" is an oxymoron.

"protocol" implies a set smart contracts, i.e., some semblance of decentralization.

A CEX could be fully off-chain.

All of them.

What source do you have that it was accounting mistakes? The only source that says that is Sam Bankman-Fried. There's a reason for that, and it's because it's lie. For one, there was no accounting, and Sam Bankman-Fried effectively had control of all the funds across both companies. First-party sources have already mentioned that funds were transferred from FTX to Alameda.

> how did they manage to lose so much money?

What the article says about market making on FTX is true, but that doesn't bring in billions. The uninformed retail order flow for the crypto market is not large enough for that. It probably would've been a ~$10M/year business, or something on that order. Great, but who wants a few million? Can't even do political stuff with that. They wanted billions! And the only obvious way to get there is by making huge risky directional bets on shitcoins and other crypto ventures, which is what happened. Instead of building a sound (okay, still shady because you're front-running) business with Alameda, SBF decided to gamble away the money on VC-style bets trying to become a trillionaire.

Yes, but he gambled depositors' money.

He defrauded his customers.

He stole their deposits.

He stated he would not take their deposits, yet he did.

He committed fraud. He committed wire fraud.

He stole.

And that's horrible, but I always miss the initial part of the story.

My understanding of crypto and the economics of scale around it is poor, but was FTX was one of the largest exchanges. Doesn't such a thing need huge initial capital investments, sales, etc?

Yes. It did have huge initial capital investments. In fact, in one of the rounds, $420m was raised and SBF personally took $300m for himself. He just funneled it to his own entities. I'm sure investors wouldn't be happy. I would not be surprised if he defrauded them in that situation, too.

I think the point is they didn't even bother with those shitcoin bets. They didn't lose the money due to poor risk management, they just....took it

SBF didn't act alone. Sequoia was heavily involved in this massive fraud and must be investigated along with a16z and the whole nexus.

Mango as well and others.. the hacks before all this went down appeared to be inside jobs to those tied to the Alameda. It goes deep.

Kevin O'Leary's statements that he would invest in SBF again are very suspicious. He doesn't sound like someone who lost a lot of money to a crook. https://twitter.com/unusual_whales/status/159282329011176243...

I don't really find this suspicious. It would probably be better for him legally if they found a way to raise the funds to keep FTX solvent. He has also already stated the SEC killed his attempts to save FTX. [1]

[1] https://www.coindesk.com/business/2022/11/14/kevin-oleary-sa...

Why would a16z be involved? They didn't invest in FTX and turned them down for reasons likely related to their investment in Coinbase.

I agree that investors should be held more accountable. They throw out these millions to fraudsters and get to claim "oh, it was just a bad investment" and move on.

Is there anyone in this forum actually facing a potential loss due to this FTX episode?

I have a couple honest questions:

Were you already familiar with Mt. Gox?

Do you see the irony of losing your so-called decentralized cryptographic currency because you trusted it to a centralized third-party?

I haven’t heard of anyone on this forum or any other personally exposed to FTX. And yet everyone in crypto seemed to have money in LUNA. Seems weird, as though retail wasn’t heavily exposed.

I personally know one guy who was just using them to deposit money in his bank account (it seems they have good banking connections with Singapore). The timing was just very bad.

Yes-ish. Not FTX, but Celsius (very similar situation on a smaller scale).

I was aware of Mt. Gox, and I do see the irony.

I invested 25% of my crypto portfolio with Celsius. The rest was, and is, in an offline wallet (though after Celsius I felt burned by the crypto space so I sold all but one Bitcoin - basically I’ve broken even on my crypto investments in total, and have a single BTC left over).

Crypto investing amounted to never more than 3% of my investing portfolio entirely.

Basically - I view crypto with a lot of doubt, but still wanted my hand in it. In total, I have lost .75% of my portfolio from this fiasco - I’m willing to say that it was a greedy play on my part knowing it was unsustainable, and it was effectively gambling. I’m very happy I kept the amount I gambled low, but it still sucks, and I still feel like an idiot.

I do hope the lawsuit brings something back, but I’m not holding my breath.

Thanks for answering. It seems like everyone who lost money knew that they were acting against the raison d’etre of cryptocurrency and should have known better based on industry history.

Sounds like you are properly diversified and just having fun with it and I wouldn’t have the same schaudenfreude if you lost your life savings.

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