The FTX scandal shook crypto and even the TradFi world, but how did we not see this coming? Here are the signs we missed, divided into “red flags,” that show SBF has been engaging in fraud since Alameda discovered it.
1- Red Flag raised 3AC Founder
Sam Bankman Fried was known for betting big and often promised: “HIGH RETURNS, NO RISK” perhaps that should’ve been the first red flag we paid attention to from November 2018 to January 2019, a small hedge fund called Alameda Research promised investors “HIGH RETURNS WITH NO RISK” to get money from them.
— 朱溯 🐂 (@zhusu) January 22, 2019
Even 3AC founder Zhu Su was shocked to see the investment product deck of Alameda, which promised 15% annualized and zero downside risk.
2- Red Flags comes from Sam Trabucco
When Trabucco, Alameda’s former co-CEO, posted a thread about superpowers, that should have been a warning sign. This thread was on April 22, 2021, and he resigned on august 25,2022.
Found this thread, which shows where and when things started to go wrong for Alameda.
The tweet from 2021 above shows that Alameda’s first strategy was to be “delta neutral” and make money from spreads and arbs. It sounds good.
Trabucco says that Alameda chose crypto over sports betting and other markets because it gives them the most advantage.
Okay makes sense. But what do they get out of it? At first, delta-neutral MM strategies were used. Since they were quants, this makes sense again.
Trab then says that they switched to yield farming (30% of their time!). From delta-neutral strategies, this is a huge, huge change in risk. The risk of yield farming is very high, and it is definitely not delta neutral. I know a lot about farming.
They weren’t happy with their delta-neutral gains, so they tried out some yield farming. The tests worked because it was definitely summer and everyone was winning. So they started to bet on it, and they started to bet more. They really believed that winning in Defi Summer gave them superpowers.
We can see that they were getting better at market making at the same time they were getting better at defi summer. So they turned their attention to trades that are based on news, like the ones you and I might make.
They became so desperate that when Elon tweeted, they were buying doge. A billion-dollar firm full of quants who have access to FTX data, and this is the best edge they could find?
He says it wasn’t likely that they were winning by chance. IT WAS A GOOD TIME TO BUY!
In a bull market, they won with directional bets and made more money than with their delta-neutral bear market strategy. Who would have guessed? They tell themselves that this is a “superpower.” This is CRAZY AS HELL. They then decide to bet “BIG” on this plan.
Wrapping up Sam Trabucco Thread
What happens if you use leverage to bet BIG on directional strategies and the market goes from bullish to bearish while you are betting?
Your Alameda goes bankrupt, and that’s the end of it. Trabs, you didn’t have a superpower. It was a bull market, and you had borrowed money to buy stocks.
I think that even regular traders can learn from the mistakes that Sam Trabucco made.
ALWAYS know what’s going on in the market. In a bear market, the direction-based strategies you use in a bull market WON’T always work.
3- Red Flag Chamath Palihapitiya
Chamath Palihapitiya, a billionaire, said that SBF asked him to take part in a $17 billion funding round. When he made some practical suggestions, he was told to “go F**K himself.”
CHAMATH WASN’T FOOLED BY FTXpic.twitter.com/QY6ESL5MxJ
— The_Real_Fly (@The_Real_Fly) November 13, 2022
4- Read Flag Marc Cohedes
One month before FTX Saga, Marc Cohedes warned us about FTX and SBF, saying, “It reads like a complete scam.”
"Nothing here fits. Everything reads like it's a complete scam. This thing is dirty and rotten to the core."
— Hedgeye (@Hedgeye) November 12, 2022
5- Red Flag Caroline
Caroline, the CEO of Alameda, has been in the news because of a controversial tape, so it’s not surprising that she doesn’t use stop losses.
6- Read Flag Alameda Ventures
They “invested” $8 billion in 448 early-stage companies, most of which have between one and ten employees and no written plans.
Average date of founding for the $8 billion worth of companies in the basket? May 8th, 2019
7- Red Flag FTX INSIDER
An insider at FTX said that the company wasted $12 million on an ad campaign that was later scrapped.They said they had never seen a business waste money as much as FTX.
INSIDER: "We’ve never seen a company waste money like FTX. This ad campaign with Shohei Ohtani cost $12
Million. Sam killed it the first day it ran because he thought it was dumb. There was also a whole second campaign that never aired. He didn't care."https://t.co/GAmhZjq7fI
— Autism Capital 🧩 (@AutismCapital) November 14, 2022
When Alameda first starts, they commit fraud because they promised a high return with no risk, which is completely unacceptable and raises a red flag; they also don’t do any documentation or risk management. The failure of FTX is not due to crypto, but rather to mismanagement of centralised exchanges.