Ins and Outs of FTX/Alameda Debacle
Welcome to all our free subscribers. What will be shared today are free alpha from our Economics Design's researchers.
Brief Context
The behemoth FTX, one of the largest Centralized Exchanges in the world, with $9.5 billion of trading volume per day and roughly 10% of the global perpetuals market share was featured in every news headline in the past two weeks - and not for the best reasons. On November 2nd, Coindesk reported the potentially fragile financial situation of Alameda Research (FTX’s sister company) through accessing private information. In short, Alameda’s balance sheet had $14.6 billion in assets, but 40% of it in F 0.00%↑ token, issued by its related party company FTX. As a result, the crypto community started to raise concerns about the ongoing strength of Alameda's balance sheet. In this piece, I look at the timeline of events, while bringing light to unusual asset exchanges starting in October until mid-November, post FTX collapse.
Key Topics this Article will Cover:
Alameda Research Balance Sheet – First Alarm
Uptrend in withdrawals started before CZ’s tweet - Second Alarm
M&A attempt & Chapter 11 - Final Alarm
Key wallet addresses to keep track
Future outlook and next steps
Alameda Research Balance Sheet – First Alarm
$FTT is the native token issued by FTX, and is the main utility token used in the ecosystem. The key utility of $FTT was to acquire benefits such as fee discounts, early access to NFTs and token launches.
So what exactly was shown by Alameda’s balance sheet? The company reported $14.6 billion in total assets, with 40% of it in $FTT exposure - $3.6 billion in $FTT holdings plus $2.16 billion in $FTT collateral. The remaining 60% were composed of other crypto assets, cash, and equity investments. Liabilities, on the other hand, amounted around $8 billion, with $7.4 billion of that in outstanding loans.
Alameda Research's Assets - Breakdown (in %)
Source: Economics Design
By only looking at assets and liabilities, it seems that its financials were under control. However, when we analyze the origin and quality of the assets held, the story is a lot different. Starting with $FTT, it had around $3.3 billion in total market cap, but $8.8 billion in fully diluted market cap. In other words, there were over $5 billion in $FTT mints that were not yet released to the market (locked tokens) but held in Alameda’s balance sheet as collateral or outstanding assets. This picture tells us that almost half of Alameda’s assets were in reality created out of thin air by FTX, and later on transferred to Alameda through loans and private deals. Investment rounds in developing projects were financed by newly minted tokens and loans backed by $FTT as collateral, using FTX’s reputation as a backup for closing deals in such terms.
This was just the tip of the iceberg.
Uptrend in withdrawals started before CZ’s tweet - Second Alarm
With the news hitting the headlines, crypto investors started speculating about potential impacts of the situation, with some defending that the claims were overstated, while others believing it was a real issue. There was no consensus between industry analysts, until November 6th, when Binance CEO, Changpeng Zhao (”CZ”), tweeted the following: “As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash ($BUSD and $FTT). Due to recent revelations that have come to light, we have decided to liquidate any remaining $FTT on our books.”
His statement set the crypto industry on fire, and the community went on to rethink their exposure to FTX and $FTT holdings. The immediate impact, however, was not as exacerbated as one would’ve thought and the $FTT price went from around $25 to $21 in a 12-hour timeframe, almost a 20% drop. Minutes later, Caroline Ellison, Alameda’s ex-CEO, replied to CZ stating that Alameda Research would “happily buy it all for $22”, suggesting a potential OTC deal with Binance to minimize $FTT price impact from large sales by Binance, which was publicly ignored. A potential reason for holding a specific $FTT price around $22 could be to avoid liquidation of Alameda/FTX/SBF loans collateralized with $FTT. Price resilience was supported by SBF’s tweet stating that “a competitor was trying to go after them with false rumors”. In hindsight, this controlled drop confirmed that investors were still not aware of the size of the problem, and temporarily decided to trust in SBF until formal communications were published.
What else did you miss?
M&A attempt & Chapter 11 - Final Alarm
Key wallet addresses to keep track
Future outlook and next steps
Get premium access to unlock more content. If you already have a premium subscription with us, click here to view the full article.
If you found this article useful, share it with someone who's interested in innovative designs of Metaverse ecosystems and the underlying strategies behind them.
Got a question for our author regarding this article? Contact him at:
Giovanni Populo | Associate Consultant
E: Giovanni.P@economicsdesign.com | W: EconomicsDesign.com