At its inception in 2017, Alameda Research promised “Madoff-like,” steady, risk-free performance. While conceding that the cryptocurrency market was “exciting and dangerous,” Sam Bankman-Fried assured 15% returns per year and told investors they could withdraw their money at any time. In 2018 during the market plunge, he earned between 4% and 10% per month. Enough to impress investors.
Sam Trabucco, former co-CEO of Alameda Research, delivered some insights into this mysterious cash machine before his departure in August 2021. In 2018 and 2019, it was doing arbitrage without betting on the market going up or down. It was doing “market making,” buying and selling cryptocurrencies to investors by capturing small price differentials.
Like other trading firms, Alameda Research also exploited the price differences that can exist on a cryptocurrency listed on multiple platforms in different countries, including Korea and Japan. This was the reason why Alameda Research had moved from California to Tokyo.
Four years later, Alameda Research is a ruinous field.
At the origin of this disaster, about thirty of its traders took excessive risks in the service of the ambition and megalomania of their boss Sam Bankman-Fried (SBF).
Preferential treatment for Alameda Research at FTX
On Twitter, Alexander Pack, a private equity specialist, says he was once interested in investing in Alameda because SBF made a good impression on him. When he checked in, he found that the trading firm was starting to lose a lot of money. The executive told him that it was in the process of financing the launch of a platform (it will be FTX), assuring him that the two entities would remain separate, Alexander Pack details on Twitter.
SBF will also not see fit to specify that a few months earlier, his company had suffered heavy losses, described as errors, and that half of the traders had left. So all the indicators were in the red for the investor who declined the proposal.
When he launched his FTX platform in 2019, “built by traders for traders,” SBF also forgot to mention that his trading firm, Alameda Research, would get preferential treatment, becoming the leading trading firm on the platform thanks to this crucial - and still secret - advantage over other traders: it had superior trading speed, allowing it to capture opportunities before others.
FTX's trading firm, 90% owned by SBF, provided liquidity to its platform by helping to increase volumes and commissions.
In search of other revenue streams, Alameda Research had also taken positions in illiquid cryptos and unlisted crypto companies. It had revealed in May 2022 that it had acquired a 7.6% stake in Robinhood and knew that it could have privileged access to a private lender of last resort, FTX, thanks to the platform's customer deposits. This liquidity fueled increasing risk-taking across all markets and was reinvested in part in illiquid assets.
An exhilarating success
Fueled by its success, the trading firm made the mistake of taking on Binance. Alameda began to manipulate one of the platform's flagship contracts, provoking the fury of its leader Changpeng Zhao, aka CZ. On September 16, 2019, he did not name the firm on Twitter, announcing, “a market maker from a small platform tried to manipulate our contract but was countered and lost a lot of money.”
It was the first standoff between Alameda Research and Binance, and not the last. Two years later, CZ would precipitate its competitor's downfall.
As increased competition from other high-frequency trading firms gradually erodes Alameda's margins, the company will take on more and more risk. In 2020 and 2021, it will borrow to speculate on the rise or fall of certain cryptos. In 2020, it reportedly came close to disaster during the March 12 crash, according to the head of the trading firm 8BlocksCapital.
Originally quantitative, the trading firm has become over time much less rigorous, trusting more in the intuition of its traders than in its statistical models. SBF would have taken positions contrary to the opinion of its traders and made significant losses. The former traders mention chaotic management. This disorganization accentuated the losses, which accumulated.
The diversification of revenue sources only increased the risks instead of reducing them.
Alameda Research is now suspected of having drawn on the deposits of FTX clients. A drift that would have been known only to a handful of senior executives. Up to half of the assets of FTX clients were transferred to Alameda Research. Alameda Research had provided FTX's crypto, FTT, as collateral. When doubts arose about FTX's financial health, its crypto, which was a barometer of its risks, collapsed, and with it Alameda's collateral.
The trader, the firm Alameda Research, in this case, took its parent company down with it. “Alameda and FTX had a close relationship from day one,” concluded a Nansen report. They won together before both went under in the Sam Bankman-Fried bust.