The crypto winter of 2022 turned colder and darker in November when one of the biggest and biggest crypto exchanges, FTX, imploded. The company, which had bailed out several crypto firms during the Terra-induced crash in May 2022, ended up filing for bankruptcy.
While FTX founder Sam Bankman-Fried (SBF) and other executives currently face several court case for fraud, new reports have surfaced alleging that FTX-linked crypto trading firm Alameda Research has been a walking red flag since its inception.
A sinking ship from the start
According to a recent Wall Street Journal reportwhich cited multiple sources familiar with the matter, including former employees, Alameda’s collapse had been a long time coming, even before FTX entered the scene.
The report noted that Alameda’s first major trade was an arbitrage play in Japan, where Bitcoin was sold at higher prices than in other regions. Alameda took advantage of this opportunity to make profits between $10 million and $30 million shortly before the price gap closed in early 2018.
From arbitration to bankruptcy
According to the WSJ, despite claiming to have made huge profits from its trading activities, Alameda was incurring heavy losses from its crypto trading algorithm due to misjudging price movements. By mid-2018, the company had lost more than two-thirds of its assets, partly due to a major drop in XRP prices.
However, SBF raised funds from several lenders and investors to rescue the failing company, promising annual returns of up to 20%. In April 2019, the former executive launched crypto exchange FTX, which was marketed as a haven for institutional investors seeking exposure to cryptocurrencies. Bankman-Fried then used Alameda to fuel the growth of the exchange, with the trading company becoming FTX’s primary market maker.
Although they claimed that FTX and Alameda operated independently, recent lawsuits revealed that the two companies worked together from the start.
FTX used Alameda to attract customers
Speaking on this, Jeff Dorman, Chief Investment Officer at Arca, said: “The potential conflicts of interest and inherent risks are significant when a digital asset exchange also acts as the largest market maker. .”
According to people familiar with the company’s strategy, Alameda has sometimes taken the losing side of a transaction to attract customers to FTX. Recent lawsuits revealed that Bankman-Fried further instructed his co-founder to create a piece of code that would allow Alameda to maintain a negative balance on FTX regardless of the amount of collateral he had deposited with the exchange.
SBF too insured that Alameda’s collateral on FTX would not automatically be sold if its value fell below a certain level. This arrangement therefore gave Alameda a line of credit from FTX, allowing the trading company to borrow tens of billions in customer funds to continue its bad bets.