Alameda FTX Crisis Started Years Before Bankruptcy: WSJ Report

Alameda FTX Crisis Started Years Before Bankruptcy: WSJ Report

The crypto winter of 2022 turned colder and darker in November when one of the largest and most well-known crypto exchanges, FTX, imploded. The company that rescued several crypto firms during the Terra-caused crash in May 2022 finally filed for bankruptcy.

While FTX founder Sam Bankman-Fried (SBF) and other executives are currently facing severalComplaintsDue to fraud, new reports have emerged claiming that FTX-affiliated crypto trading firm Alameda Research was a walking red flag from the start.

A sinking ship from the start

According to a recent Wall Street Journalreportwhich cited multiple sources familiar with the matter, including former employees, Alameda's collapse had been a long time coming, even before FTX came into the picture.

The report noted that Alameda's first major trade was an arbitrage play in Japan, where Bitcoin was sold at higher prices than in other regions. Alameda took advantage of this opportunity to make between $10 million and $30 million in profits just before the price gap closed in early 2018.

From arbitrage to bankruptcy

According to WSJ, despite claiming to have made massive profits from its trading activities, Alameda suffered heavy losses from its crypto trading algorithm due to incorrectly guessing price movements. By mid-2018, the company had lost over two-thirds of its assets, partly due to a sharp decline in XRP prices.

However, SBF raised funds from multiple lenders and investors to rescue the insolvent company, promising annual returns of up to 20%. In April 2019, the former manager launched the crypto exchange FTX, which was marketed as a safe haven for institutional investors seeking exposure to cryptocurrencies. Bankman-Fried then used Alameda to fuel the exchange's growth as the trading firm became FTX's primary market maker.

Despite claims that FTX and Alameda operated independently, recent lawsuits have revealed that both firms worked together from the start.

FTX used Alameda to attract customers

Jeff Dorman, Chief Investment Officer at Arca, said: “The potential conflicts of interest and embedded risks are great when a digital asset exchange also serves as the largest market maker.”

Alameda occasionally went on the losing side of a trade to lure customers to FTX, according to people familiar with the company's strategy. Recent lawsuits revealed that Bankman-Fried further told his co-founder to create code that would allow Alameda to maintain a negative balance on FTX regardless of how much collateral it deposited with the exchange.

SBF also ensured that Alameda's collateral on FTX would not be automatically sold if its value fell below a certain level. This agreement thus provided Alameda with a line of credit from FTX, allowing the trading firm to borrow tens of billions of dollars in customer funds to continue its poor plays.

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