FTX: Sam Bankman-Fried’s Great Investment Bazaar

Posted on December 28, 2022 at 11:22 amUpdated Dec 28th. 2022 at 11:23 am

Alameda Research, the trading firm of Sam Bankman-Fried, had a private equity business booming. A headlong rush has stopped since the bankruptcy. Through a dozen holdings, it has invested in almost 500 companies in all branches of the crypto sector (platforms, mining, metaverse, NFT, decentralized finance, Web3, specialized funds, etc.). Companies established for half of them in the United States and for the rest in many countries (Singapore, Switzerland, Israel, Cyprus), according to the documents revealed by the Financial Times.

These holdings are mostly minority (1 to 10% of the capital). Embarrassed with their heavy shareholder, these companies play down emphasizing that the fall of the FTX in no way affects the continuation of their business and their solvency.

Sam Bankman-Fried’s investments in companies are not limited to cryptocurrencies. They have also been made in start-ups specializing in drones or artificial intelligence, in biotechnology, in online banking and, especially, in the world of video games, one of Sam Bankman-Fried’s passions. He also invested $300 million in two of Elon Musk’s companies, SpaceX (space flight) and The Boring Company (tunnel construction) through the K5 Ventures platform, which connects projects and investors.

In its complaint against Sam Bankman-Fried, the Commodities and Futures Trading Commission (CFTC) finds that “Alameda used funds from FTX clients to make large illiquid investments, such as long-term stakes in various companies and digital assets.” The company held nearly 300 tokens issued by different cryptocurrency companies and used to fund its projects. She could only resell them after a certain period with big profits or big losses.

The trading company struggled to tip the scales in the right direction for it. She is suspected of having manipulated the prices of some tokens on the market. By creating them, she also fictitiously increased the value of her portfolio and therefore the new loans she was likely to obtain by pledging her assets as collateral.

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The trading company took short-term loans and dipped into FTX client accounts to finance all these long-term and risky investments. These equity investments (companies and tokens) were often made at the top of markets and therefore at high prices. Alameda’s private equity portfolio was worth US$5.4 billion, according to documents disclosed by the British daily. Its assets were presented to potential buyers in November as Sam Bankman-Fried tried to save his empire from bankruptcy. But valuations for many of these holdings have investors skeptical.

Investing so much money in illiquid assets – which could not be sold quickly – was a very risky strategy for a trading company. These assets are to be sold to pay off the bankrupt FTX empire’s creditors and customers. Today, the valuation of these investments has certainly dropped after the collapse of markets this year.

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Sam Bankman-Fried also intended to “revolutionize” traditional online brokerage. His arrest interrupted his plan to become one of the leaders of Wall Street 2.0. Along with his stakes in unlisted companies, he revealed in May that he had acquired a 7.6% stake in online mobile brokerage Robinhood. He has since admitted that he bought his shares by borrowing money from his Alameda brokerage. Those 56 million shares ($445 million), now frozen in a brokerage, are held by a company Emergent Fidelity Technologies, owned by Sam Bankman-Fried.

BlockFi, a crypto lending group, also bankrupt, would like to get its hands on this investment for compensation. He is in fact claiming $1 billion from FTX and Alameda, in particular for an unpaid loan. Sam Bankman-Fried brought his Robinhood shares to BlockFi two days before FTX went bankrupt. With that guarantee, he wanted to buy time to raise money and pay off the Alameda loan ($680 million) from BlockFi.

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