Built for Traders by Traders
There is so much (mind blowing insights & bullshit) to write about this topic that I might actually end up doing a Series on it. In the meanwhile, I will keep you guessing for a few paragraphs on what the headline means.
Last Tuesday, I wrote a post “The Billionaire’s Special”, wherein I covered Credit Suisse. This week it’s even bigger. In fact, the cake of this decade certainly goes to this firm and its founder.
Can you guess who this is?
The firm was all over the place in the T-20 World Cup too.
The fastest firm in the history of business to achieve a $32 billion valuation in 3+ years. The fastest to even go down from $32 billion to Zero. I can’t help myself but digress for a line as I have to make one important point – Many such firms achieve such valuations based on fund raising and not on the strength of the business they have built. It’s financial alchemy at its best but that’s a topic for another day.
You would have guessed it by now. The firm in question is FTX (a cryptocurrency exchange) and the founder is a gentleman Samuel Bankman Fried (aka SBF).
Are you wondering how this company that was worth billions of dollars a few months ago, and had raised billions from investors suddenly went insolvent?
The answer lies in the headline. Not clear. It will be soon.
Do you remember a company named Enron?
I am sure all of us do.
Let’s take a quick flashback for those who don’t remember it. In the eighties and nineties, Enron was an American energy, commodities and services company based in Houston, Texas. Before it went bankrupt in 2001, it claimed revenues of $101 billion. Fortune named Enron America’s Most Innovative Company for six consecutive years. Not One. But Six.
The Enron scandal not only took Enron down but also took down the revered Arthur Andersen – then one of the largest audit and accountancy partnerships in the world. According to Wikipedia -in addition to being the largest bankruptcy reorganization in U.S. history at that time, Enron was cited as the biggest audit failure. There were several reasons for the failure of Enron, but the main ones were – Toxic People, Toxic Culture and Greed.
Many of you might even recollect Enron and its journey in India with the Dabhol Power Plant.
In case you do (or even if you don’t), park this Enron thought for a moment.
Let’s fast forward to FTX.
Prior to founding FTX, Samuel was a trader. Not any trader. A trader who could go to any lengths to make money. You will realize what I mean by this.
His first big trade was the bitcoin arbitrage strategy. Let me explain this in very few and simple words.
Let’s say the Price of Bitcoin in the US was $10,000. Samuel noticed that the price of Bitcoin in Japan was 10% higher.
So, here’s the trade.
Buy Bitcoin in the US. Sell Bitcoin in Japan.
The only conditions (and risks to the trade):
1. The currency peg between USD and the JPY(Yen) needed to hold – not too much fluctuation
2. The Bitcoin premium in Japan needs to hold.
Leverage this Trade – Borrow money and do this trade with $10 million. Sell Bitcoin in Japan for $11 million. Even after paying interest, you will have close to a million.
This is a long story in itself, but he flew to Japan to open his trading account (this is what Alameda Research, his first company was famous for) and his banking account. Banks in Japan were reluctant to open accounts for crypto trading, but he managed to get a regional bank to oblige.
He did this trade every day and made shit loads of money.
When you manage to do this and make quick money (with your trading intelligence or whatever), you start believing you are God. Everything you touch will become gold.
He kept gloating about it and speaking about it on every available forum and media outlet. He knew how to play the media well. And he built a Persona around this. He was going to change the world. While all of this is great, I am often reminded of this Leo Tolstoy quote – Everyone thinks of changing the world, but no one thinks of changing himself.
He then went on to form FTX in 2019. Raised boat loads of Capital (billions of dollars) from all the known names – Sequoia, Softbank and so on. By the way Sequoia Capital marked down its $ 210 million investment in FTX to ZERO.
Once he was armed with seemingly unlimited capital (any amount of money can be spent) he gave an equity stake (plus Crypto) and got NFL Star Tom Brady and his wife Giselle Bundchen to co-star in a $20 million ad campaign for FTX. Managed to get NBA legend Steph Curry to become a global ambassador for the country. Got NBA team Miami Heat’s Arena (stadium) to be named after FTX by paying huge sums of money not to mention striking a deal with ICC for cricket. Samuel was everywhere.
There was nothing that could go wrong.
Except that it did.
So, what went wrong?
There is certainly a Part 2 coming (to explain what happened) and maybe a Part 3 if I believe there is something more that needs to be written.
But for now, let me get back to the headline, Enron, FTX and connect the dots.
Look at the image below and how similarly have Enron and FTX described themselves on their website.
There is no need to guess that Samuel Bankman-Fried is out as CEO. But guess what? Who has been brought in as the new CEO?
John J Ray III.
Turns out, John is the same lawyer that was called in to clean up the Enron Mess.
How’s that for an ending?