How Sam Bankman-Fried Lost $32 Billion Overnight

A worried person in an office resting his chin on his hands.

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This is your guide to one of the biggest crypto crashes.


Key points

  • FTX was one of the largest cryptocurrency exchanges in the world and its founder Sam Bankman-Fried was considered the savior of the cryptocurrency industry.
  • Overnight both Bankman-Fried and FTX suffered one of the most spectacular collapses in history.

Sam Bankman-Fried (known as SBF) is the latest victim of the cryptocurrency markets. Now worth around $850 billion, the global cryptocurrency market cap has dropped more than 70% after hitting its all-time high of $3 trillion in November 2021. Numerous crypto platforms and funds have gone bust along the way. And now, SBF’s $32 billion cryptocurrency exchange FTX has followed suit, filing for bankruptcy on Nov. 11, 2022. Overnight, FTX experienced one of the most dramatic crashes in history. So what happened?

The White Knight of Crypto

Sam Bankman-Fried, now 30, was born and raised in California. After graduating from MIT in 2014, he started working in the investment industry. In 2017, he founded Alameda Research, a cryptocurrency trading company. Then in 2019 he founded FTX, a cryptocurrency exchange. These two entities made up the bulk of SBF’s wealth: $26 billion at its peak.

As the cryptocurrency markets soared in 2021, so did Bankman-Fried’s fortune. It seemed that his success was unstoppable. He gained celebrity status and started getting deeply involved in politics. During the cryptocurrency winter of 2022, SBF was heralded as the savior of the cryptocurrency industry as it bailed out other fledgling cryptocurrency companies, including Robinhood.

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FTX quickly grew to become the third largest exchange in the world. Its valuation has continued to grow, raising over $2 billion in venture financing since its inception. His company has been backed by the world’s top private equity and hedge funds and endorsed by celebrities such as NFL legend Tom Brady, supermodel Gisele Bundchen, Seinfeld co-creator Larry David and NBA stars Steph Curry and Shaquille O’Neal.

The FTX troubles begin

Binance, the largest cryptocurrency exchange by volume and a competitor to FTX, was an early investor in FTX. Binance CEO Changpeng Zhao decided to sell his stake in FTX back to SBF in 2021. Instead of receiving cash, Binance received $2.1 billion in BUSD (a fiat-backed stablecoin issued by Binance and Paxos) and FTT (the native cryptocurrency of FTX).

The first sign of trouble came when CoinDesk released a report on Nov. 2, 2022 with worrying news about the financial health of Alameda and FTX. Several days later, Mr. Zhao said he would sell his FTT tokens worth $580 million. This caused the price of FTT to drop by more than 80%, and within days concerned investors withdrew $5 billion of their funds from the platform. This led to a classic run on the banks, leaving FTX with an $8 billion cash shortfall.

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To start

FTX collapses

In dire need of cash, SBF took out a loan from its main rival, Binance. After initially agreeing to this on Nov. 8, Binance pulled the deal the next day, forcing FTX to file for bankruptcy on Nov. 11. On the same day, SBF stepped down as CEO and FTX stopped all cryptocurrency withdrawals. The damage quickly spread across the cryptocurrency market as many other cryptocurrency companies were exposed to FTX and FTT. After the fallout, Bitcoin hit a two-year low.

The story doesn’t end there. On the day the company filed for bankruptcy, a hacker stole over $400 million worth of cryptocurrencies from the company. The collapse sparked a series of investigations by the SEC and the Justice Department, and within a week the Securities Commission of the Bahamas, from which FTX was based, took control of the FTX bankruptcy.

SBF accused and arrested

On December 12, 2022, SBF was arrested in the Bahamas and charged with multiple felonies, including wire, merchandise and securities fraud. He is accused of illegally using client funds to help Alameda, of lying to investors about the financial condition of FTX and Alameda and of mismanaging his company.

After being extradited to the United States on December 22nd. SBF was released on a $250 million bond, the largest in history. SBF pleaded not guilty. FTX currently has more than 1 million creditors, with the largest 50 owing nearly $3.1 billion. Customers have not yet been able to withdraw their funds.

Protect yourself

So what can we learn from the sudden rise and fall of SBF and FTX bankruptcy? Cryptocurrency fraud is a real problem affecting investors and traders worldwide. It is important to understand that unlike investing in stocks, the cryptocurrency industry is still relatively new and very volatile. It is still relatively unregulated with little oversight. If you want to invest in cryptocurrencies, you should only invest what you can afford to lose.

One of the best tools to protect yourself is a non-custodial wallet. This means that platforms like FTX have no control over your cryptocurrency. Those who have used a custody wallet with FTX may unfortunately never get their money back. There are two types of non-custodial wallets: hot wallets and cold wallets.

Hot wallets are connected to the internet, such as through your phone or computer, while cold wallets are hardware devices where you can store your cryptocurrencies offline. Keeping your cryptocurrency in a cold wallet makes you less vulnerable to hacking and online attacks. Cold wallets, however, are more cumbersome to use, and if you forget your security information, you may never have access to your cryptocurrencies again.

Be sure to keep detailed records and download all of your transactions and holdings. Unfortunately, FTX users are unable to login and gain access to their account statements. You will need it for tax purposes and evidence of your holdings to claim what you can.

While there is no foolproof way to protect yourself from cryptocurrency-related fraudulent activity, there are steps you can take to reduce your risk of becoming a victim. Be vigilant when dealing with unknown parties or when considering investments related to cryptocurrencies. Cryptocurrencies are still a new industry, so you should only invest money you can afford to lose. That way if your platform fails like FTX did, you won’t have lost your life savings.

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