Alameda Research, a small trading firm that Sam Bankman-Fried founded in 2017 at the age of 25, was the start of his crypto empire — and its undoing.
Alameda’s need for funds to run its trading business was a big reason Mr. Bankman-Fried created FTX in 2019. But the way the two entities were set up meant that trouble in one unit shook up the other as cryptocurrency prices began to drop this past spring.
The main way Alameda made money was straightforward: It bought Bitcoin and other cryptocurrencies in one part of the world and sold them in another, pocketing the difference. It used “leverage” — or borrowed money — to fuel its trades and make bigger returns.
Eventually, as more sophisticated investors like hedge funds piled in, such trades became much less lucrative for Alameda. Still, with the price of Bitcoin and other cryptocurrencies soaring — and expected to keep going up — Alameda had no trouble paying back its loans in either dollars or crypto.
But Mr. Bankman-Fried hit upon an idea: Why not build a cryptocurrency exchange that could bring in revenue to help fund Alameda’s activities?
FTX was born. It moved from Hong Kong to the Bahamas, where Mr. Bankman-Fried built his base of operations, and the exchange took off. In financial presentations to investors, the company claimed in 2021 that it was raking in $1 billion in annual revenue by charging fees to customers who wanted to trade cryptocurrencies on its platform.
The relationship between FTX and Alameda centered on a token created by FTX — called FTT — that the exchange’s customers could use to trade their crypto assets. Alameda served as the token’s main market maker, buying and selling a majority of FTT. FTT was popular with the exchange’s investors, who were enticed by the trading discounts it offered, and Alameda began using its holdings as collateral for more loans to facilitate its trading activities.
The problems cascaded this spring when the crypto market began to teeter. Falling crypto prices reduced the value of FTT, and Alameda struggled to pay its lenders.
Now the relationship between Alameda and FTX — and how the two propped each other up — is coming under scrutiny as prosecutors and regulators investigate the exchange’s collapse.