The Rise and Fall of FTX pt2:
Background of a disaster waiting to happen.
The rotten apple of Eden: the darker side of success.
Everything was fine. Bankman-Fried and Caroline Ellison were living in a luxury resort in the Bahamas under the sign of polyamory, taking meth and planning to change the future of humanity with artificial intelligence, biological weapons and space governance. Then FTX, their $32 billion cryptocurrency empire, collapses.
Inside the carnage of bankruptcy is also Caroline Ellison, CEO of Alameda Research, in a nutshell, the money machine that Bankman-Fried used to finance his trading company’s ultra-risky investments. Caroline has always been in the shadows pulling the strings of the game. Her role seems to confirm once again the eternal cliché of ‘behind a great man there is always a great woman’. It seems to work even in failure.
Who is Caroline Ellison and what is her relationship with Bankman Fried?
Caroline Ellison is a controversial figure. At 8 years old she writes an economics article analysing the prices of stuffed animals from Toys ‘R’ Us, at 27 she posts on Tumblr that ‘the sexual revolution was a mistake, women are better suited to raising children than to a career in trading.
It applies to all but her, and indeed Ellison climbs the cryptocurrency hierarchy year after year, ultimately becoming the Lady behind the FTX fiasco.
Before all this, she was the prototypical nerdy, brainy girl. Class of ’94, daughter of economists at the Massachusetts Institute of Technology, captain of the maths team at Newton North High School, and Harry Potter superfan. She studies mathematics at Stanford, and here she joins the elite circuit of longtermism (also called effective altruism), where speculative and futuristic ideas circulate that technology billionaires find intellectually exciting.
It is called the Effective Altruism Club at Stanford and is built on a philosophical movement that uses calculus to understand how people can best use their time, money and resources to help others.
The meeting with Bankman-Fried.
Ellison finishes college and is hired by the commercial company Jane Street. Here she meets Bankman-Fried, they are similar, and they soon kick it off.
He too is a geeky nerd, a maths whiz, wants to change the world, and, like Ellison, is a fervent adherent of longtermism. Driven by the thrill of techno-utopianism that distracts financiers from the pressing problems that already exist on Earth Ellison enters the vortex of crypto, which becomes the speculative means to build a new world.
Bankman-Fried’s proposal arrives in 2018 over coffee. He asks Ellison to join him, to work in his new cryptocurrency trading company, Alameda Research.
Then in 2019 Bankman-Fried founds FTX, Ellison became the queen of Alameda Research and enters the Forbes Under 30 list.
When asked during the interview what she would advise her younger self to do, she replies: ‘I would tell her to be less risk-averse and to believe in herself more.
This now sounds like an ironic epitaph, given that Ellison’s extreme risk aversion was one of the main causes of FTX’s failure.
What role did Ellison play in the collapse of FTX?
The relationship between Alameda and FTX was the original sin. Bankman-Fried admitted that he used billions of dollars of FTX’s clients’ money to finance the ultra-risky investments of the trading company, Alameda Research, headed by Ellison.
Clients simply lent money to Alameda in exchange for an annual return of at least 15 per cent on loan, promising to return the money lent whenever they had even a slightly negative month. This was not true.
The magic of the money machine worked like a Ponzi scheme. Caroline Ellison would take out loans and use the funds to make risky capital investments. In short, she would withdraw billions without her clients’ knowledge, convinced that she would be able to pay it all back, at most she would use the money from new investors.
In the spring, after the crypto collapse, the idyll breaks down. Lenders start asking for their loans back, loans that Alameda had already spent and were therefore not available. The company then uses the funds of FTX customers to satisfy investor demand.
The collapse, however, was triggered on 2 November when the Coinbase portal published a report that cast a shadow over Bankman-Fried’s business, followed by a CZ tweet in the same vein. Worried lenders begin to withdraw their investments, the first withdrawals are successful and then stop. Simply because the money ran out. FTX and Alameda estimated more than 100,000 creditors and liabilities of between USD 10 and 50 billion.
Where did the money go?
During their paper-mâché rise, Caroline Ellison and Bankman-Fried spent 121 million on houses in the Bahamas, spent long nights on drugs, video games and vegetarian food, and weaved polyamorous relationships in the style of ‘imperial Chinese harems’, as per Ellison’s words.
But it is still unclear what happened to all the money from FTX and Alameda as Bankman-Fried’s lawyers paint a complex picture, it is not easy to trace the lost loot, a substantial amount of assets have been stolen or are missing’, they explained.
The platform was run by Bankman-Fried as a ‘personal fiefdom’. Bankman-Fried, with Lady Crypto at his side, had in fact chosen a small circle of followers with whom to share everything, work, financial plans, home, bed and drugs. “Nothing like regular amphetamine use to make you appreciate how stupid a normal, unmedicated human experience is,” Ellison tweeted in 2021. And in the midst of an orgiastic existence of extreme risks and disproportionate dreams, FTX’s fortune dissipated like that, leaving no trace.
The true dream of Bankman-Fried and Ellison
And then there is actual altruism. In March 2021 Bankman-Fried and Ellison set up Future Fund, the philanthropic collective of the FTX Foundation, the long termism machine. This could be the missing piece to explain the financial hole created by Bankman-Fried and Caroline Ellison. Both of them in fact did not churn out money to get rich, Ellison did not even believe much in cryptocurrencies, “I just use them to make a lot of money for actual altruism”. Bankman-Fried, in the presentation of Future Fund, writes “When Sam was 20 years old, he decided to make as much money as he could in order to donate everything he earned to charity”.
The charity in question does not want to solve world hunger, but to invest in ultra-utopian super technologies. In February, the Future Fund announced the possibility of funding projects capable of ‘improving humanity’s long-term prospects’ with a billion dollars. Among other things, biosecurity, artificial intelligence capable of governing the world safely, and sums of money to support Democrats during elections.
What we can extrapolate from this example of debauchery?
To start off with a bit of levity, we have clear examples of how you don’t need to be a genius to become rich, that you don’t need to be inherently bad to really mess up the lives of many many people, and that you don’t need to be a rockstar to munch on hard drugs as if they were candy.
All in all, the Bankman Fried story teaches us nothing worth perusing, it’s an interesting dissection of the dynamics behind the rise and fall of a giant of a generation, but everything is so messed up, so demoralizingly stupid that all we can say is to do your own research, and don’t invest money you need to live.
We know that FTX seemed very solid, but we think that they had as many flaws as they had advantages and that ultimately, while the world of crypto is full of risks, minimizing those risks or maximising your returns on the risks you take is a skill that you can either develop painstakingly in multiple years of hard work, or you can simply choose the more risk averse methods that will yield you results in the span of years, not months.
This won’t be the first nor the last giant coming down, as we can all remember My Space, Messenger, Tumblr and other widely successful entities in the digital market. And as always the effects of this fall will be felt for a long time, but, just like many times in the past, panicking is not the right choice.
Prepare yourself, store up knowledge and skills, maintain a calm mind and wait for the many opportunities that are still coming up every day in the DeFi ecosystem. We are focusing on core development, building utility and passing this crypto winter with flying colours to rise up during the next green wave.
You can do the same or try to profit from the red, but never forget the basics, don’t throw away your money, and wait for the right moment to make your movements.
We will be publishing another article on the FTX fiasco in which we want to point out the winners in the situation, and how entities like Binance and Coinbase have actually solidified their positions in the market while implementing new features that are a step forward for the general public.
We also want to give you a bit more perspective on how to move in the current market, so check out our series on How to Survive in the Crypto Jungle to learn some basics and advanced skills about navigating this wonderful digital space.
About Synapse Network
Synapse Network is developing a cross-chain investment and start-up acceleration ecosystem based on blockchain technology to give everybody an equal chance to contribute to great upcoming projects and to do so early on. We are bridging the gap between the traditional & crypto market. The idea of the Synapse Network technology goes beyond the standard offer of launchpads available on the market, becoming a true technological brand providing tech solutions.
Website
Twitter
Telegram Announcement Channel
Telegram Global Group
Github
Youtube
Linkedin
