What was left in FTX before the crash?

Original title: FTX's Balance Sheet Was Bad

Original author: Matt Levine, Bloomberg Opinion columnist 

Original compilation: Leo, BlockBeats

An "empty box"

There's so much to say, but I'm going to start with Serum.

If a family is in trouble The company went to potential investors in the days leading up to filing for bankruptcy and sent the balance sheet to those investors so they could consider whether to invest, but didn't get the money and the company then filed for bankruptcy, so its balance sheet of course It won't look good, and it's not a state of affairs that matches the original "fortress-like" balance sheet.

Even if it is bankruptcy, It will cause a series of worse chain reactions. When Sam Bankman Fried's FTX balance sheet was sent to potential investors last week (before filing for bankruptcy on Friday), the data was very bad. This Excel sheet on FTX seems to be full of "Ghost Wraith", if you stare at this form for too long, you will go crazy.

The Financial Times' Antoine Gara, Kadhim Shuber and Joshua Oliver reported on Saturday:

The Financial Times According to the obtained investment materials, on the day before SBF went bankrupt, FTX international only held USD 900 million in easily sellable assets, while its liabilities were as high as USD 9 billion.”

The largest portion of the liquid assets listed on FTX international's balance sheet last Thursday was contributed by $470 million in Robinhood stock held by SBF's personal institution, which was not listed in Friday's bankruptcy filing (which includes 134 corporate entities). "

Looks bad , but somehow got worse and worse.

The Financial Times was informed A copy of FTX international's balance sheet listed the problems that led to SBF's bankruptcy. It cited $5 billion in withdrawals last Sunday, and an $8 billion record of negative equity in what it described as a “hidden, poorly labeled fiat@ account.”

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According to the table, the vast majority of FTX's assets of record are either illiquid Venture capital investments, or tokens that are not widely traded, these numbers "are rough and may be slightly different; change."

This form It shows that FTX Trading's assets total $900 million in "liquid" assets, $5.5 billion in "less liquid" assets composed of tokens, and $3.2 billion in illiquid private equity investments. There is also a $7 million holding called "TRUMPLOSE." No bitcoin assets are listed, despite a whopping $1.4 billion in bitcoin liabilities.

Although it is all very Oops, but it doesn't make you accept that this so-called FTX balance sheet published by "FT Alphaville" is not so much a balance sheet as it is a checklist containing hasty apologies. If you easily add the "liquid," "illiquid" and "illiquid" assets to the "deliverable" value (as of last Thursday), minus the liabilities, you do come up with about $700 million Positive net worth (about $9.6 billion in assets, $8.9 billion in liabilities), but also a "hidden, poorly labeled internal fiat account" with a negative $8 billion balance.

I don't think it should Subtract that number from the net worth - although I have no idea how this balance sheet should be calculated! It doesn't matter. If you try to calculate the amount of a balance sheet by "hidden, poorly internally labeled accounts", Microsoft's Clippy will show up in front of you and tell you insanely that you cannot ” to perform common operations on the numbers in the cell. The result of adding and subtracting these numbers with ordinary numbers is not a number, which is a crime!

But the following passage Will drive me crazy:

“As of last Thursday, the company’s largest asset was Serum (tokenized as SRM) worth $2.2 billion. According to data provider CryptoCompare, SRM’s market capitalization on Saturday was $88 million, suggesting that if sold on the market , the value of SRM held by FTX will be greatly reduced, and the data of CryptoCompare considers the liquidity of token.

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Looking at the balance sheet, the largest "deliverable" figure: $2,187,876,172 in SRM, which was worth $5,430,110,335 prior to this ("before this week" refers to the Weeks ago — “before November 8th, everything related to FTX collapsed after the problems with FTX were exposed on November 8th).

As of 11 am on the 14th Around that time, CoinMarketCap showed that the price of the SRM token was $0.25, the "market cap" was about $65 million, and the "fully diluted market cap" was about $2.5 billion. Last Thursday, when the balance sheet came out, this set of figures may have been a bit higher — like $0.35 to $0.40 per token. SRM was trading around $0.80 before Tuesday, when bitcoin prices plummeted during FTX’s death throes. To put it in perspective, FTX is sitting on two-thirds of SRM's fully diluted market cap, which is about 20 times its fundamental market cap.

In the encrypted market, the market value is (as CoinMarketCap puts it) "the total market capitalization of the circulating supply of a cryptocurrency, similar to the free float market capitalization of a stock market," while fully diluted market cap is "the market capitalization calculated when the circulating supply is at its maximum." If for example a company creates a class of tokens with a total supply of 10 billion, keeps them, and then sells 1 million tokens worth $1 to outside investors, then the market cap of the token is $1 million, while the fully diluted market cap It is 10 billion US dollars (1 US dollar multiplied by 10 billion total), the remaining 9.999 billion tokens of the issuing company will actually have a value, which is indeed 9.999 billion US dollars in mathematics. We discuss this later.

What is Serum, Serum It is a "decentralized transaction protocol that brings high speed and low transaction costs to decentralized transactions", running on the Solana chain. Additionally, SRM is Serum’s utility and governance token. If you keep SRM in your wallet, you can get a discount on the fees for trading the Serum protocol. Additionally, when the protocol charges a transaction fee, it uses a portion of the fee to buy and burn SRM. The result is that SRM functions a lot like a stock in Serum: if the Serum project does well, and a lot of decentralized transactions happen on its exchange, then it will collect a lot of fees, and use those fees to buy SRM, which will push the SRM up value, making SRM investors rich. (SRM investors can also vote on how Serum is run.) If you like Serum as a business, as a decentralized crypto trading platform, then you should buy SRM because SRM is roughly a cash flow requirement for the business .

About the Serum protocol, there are Crucially, it was created and promoted by FTX and Alameda Research. Alameda Research is a crypto hedge fund affiliated with FTX, also created by SBF. FTX is a centralized crypto exchange, but many people in the crypto space do not believe in centralized exchanges (for some reason!), they prefer to trade on decentralized exchanges. Serum, in a loose but meaningful manner, became "FTX's decentralized exchange."

Back to the above topic, a company creates a type of token, a large number of tokens Keep it to yourself and sell a small amount of tokens to the open market. About 3% of the value of SRM is held by the public, or traded on exchanges. Roughly two-thirds of the other 97% are held by FTX and Alameda.

How did they get SRM of? You can look at the SRM token distribution chart, but the main point is that they are not bought for cash on the open market. FTX's balance sheet says that "prior to this week" it held $5.4 billion in SRM, which doesn't mean Alameda or FTX spent $5.4 billion in cash (their own, their investors', their customers’ or anyone’s), and purchased a large number of SRM tokens on the open market. As the original backers of the Serum protocol, they got all the SRM tokens for free (presumably they paid some start-up costs).

Ignore this nightmare balance sheet for a moment and think about what FTX's balance sheet should look like. Conceptually, clients give you money - apparently about $16 billion in cash, unrelated tokens, etc. - and you keep that money for them. In the simplest logic, you keep your customers' money exactly in the form of value they give you: someone deposits $100, you keep $100 for him; someone deposits 1 bitcoin, you keep 1 bitcoin for him . For reasons we've already discussed, operate legally! But that’s not how FTX works, and you can also think of some more complicated balance sheets, where some customers have a lot of funds and tokens loaned to other customers. But overall, your balance sheet will still look something like this:

Liabilities: You owe money to your customers;

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Assets: Things you buy with the money.

The basic question is , how severe this mismatch is. For example:

16 billion USD liabilities and 16 billion USD liquid assets;

$16 billion in liabilities and $16 billion in BTC assets - not ideal, very risky, but understandable on a macro level;

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$16 billion in liabilities and the "magic beans" you bought in the market for $16 billion? Very bad;

$16 billion in liabilities and assets mostly of your own invention, Magic beans obtained at zero cost? Ignoring the value of the magic beans, where did the money go? Where did that $16 billion go? It would suck to spend $5 billion of user funds on Serum, but FTX didn't and couldn't because there wasn't $5 billion of SRM to buy at the time. FTX puts customers’ money into some unidentified “black hole” and says, “We’re really worth $5 billion in SRM tokens, isn’t that amazing?” Not so!

Very simple, FTX holdings of SRM ($2.2B last week, $5.4B previously) are unlikely to sell for $2.2B. FTX's SRM reserve far exceeds the circulating supply of SRM in the entire market. If FTX tried to sell them on the market for a week, a month or a year, it would flood the market and cause the price to plummet. Maybe make a few hundred million dollars for them. But I think the realistic value of huge SRM should be close to zero. This isn't a review of Serum: it's a review of the size of the stash.

But I do want to comment A word on Serum, because SRM is not a token that FTX got into trouble for some reason; SRM is a token that FTX made. A loose but reasonable analogy — Serum (protocol) is FTX’s decentralized exchange subsidiary, and SRM (token) is the subsidiary’s stock. There is a small portion of shares that are publicly traded, but largely held by its parent company, FTX. The open market price of the few outstanding shares can probably be judged by the value of the subsidiary. But in the real world, the value of the subsidiary is closely tied to the value of FTX's overall business. If everyone thinks "yes, FTX is a good trading platform, the leader in secure crypto trading platforms", then Serum has a good chance of becoming popular and profitable. Serum will have a hard time if everyone thinks "FTX is a scam".

At this node, FTX is selling its Serum stake for rescue financing, its huge reserve Serum is just "toast" due to hidden internal poorly labeled accounts!

Does this sound familiar? ? This is similar to last week when I talked about FTT, FTT is the application token of FTX Cex, I wrote:

FTX issues a type of token called FTT. The attribute of this token is to give you the right to enjoy some discounts, but its main attribute is that FTX Regularly using a portion of its profits to buy back FTT tokens makes FTT a bit like FTX stock: the more profitable FTX is, the higher the price of FTT will be. But it's not FTX stock -- actually FTX is a company, owns stock, and venture capitalists buy it, but it's a lot like FTX stock, and FTT is a bet on FTX's future profits.

I have written about FTX Possibly large amounts of client funds being lent to Alameda with Alameda's FTT token as collateral:

If you think that tokens are "similar to stocks", and you think that encrypted trading platforms are securities broker-dealers, then your idea is too outrageous. If you go to an investment bank and say, "Lend me $1 billion, and I'll mortgage $2 billion of your stock," they'll say no and think you're making trouble. The problem is that this is a mismanagement of risk, and (at least some of the time, illegally too) if people start worrying about the financial health of an investment bank, its stock will fall, which means its collateral will Devaluation, which means its financial situation will deteriorate, which means its stock will fall, and so on into a death spiral.

Last week, I The shock is that one of FTX's main assets -- one of its main assets that enable it to pay its customers' balances -- is the token it just minted. But I was wrong! In fact, it makes two kinds of tokens! (Before this week) FTX's two largest asset balances were the $5.9 billion FTT token ($553 million after last Thursday's crash) and the $5.4 billion SRM token ($2.2 billion after the crash). Roughly two-thirds of the money FTX owes clients is backed by tokens it made up itself.

Third The big asset is SOL, the token of the Solana chain. Solana is not something made by FTX, it exists independently of FTX. But it definitely has something to do with Alameda, FTX, and SBF, who are the main supporters of the Solana ecosystem. Not to say that Solana is "FTX's blockchain", but in fact it is a bit like it, and there is also a risk of misoperation here.

another A large asset was MAPS tokens worth $616 million  ($865 million "before last week"). MAPS is the token of Maps.me 2.0 (which is a derivative of Serum and is also issued by FTX); according to data from CoinMarketCap around 11 am on the 14th, its market value is about 3 million US dollars. Likewise, the MAPS held by FTX is 200 times the total value of the actual tradable MAPS in the market. This is roughly the same as Serum, albeit on a smaller scale (lots of similar stuff on the balance sheet: Bloomberg's Annie Massa reports on the projects, Click to learn).

According to integer, FTX Last Thursday's balance sheet showed client liabilities of about $8.9 billion, compared to assets worth about $19.6 billion before the crash last week and $9.6 billion after the crash (as of last week, according to FTX Four). Of the alleged $19.6 billion in assets, around $14.4 billion is in FTX-related tokens (FTT, SRM, SOL, MAPS). Only $5.2 billion in assets ($8.9 billion in customer liabilities) are presumably normal financial assets. (Even so, this is mostly illiquid venture capital; only about $1 billion is liquid cash, stocks, and crypto tokens — half of which is Robinhood stock). After what happened to FTX, predictably, everything related to FTX fell apart. The balance sheet released last Thursday valued the combined assets of FTT, SRM, SOL and MAPS at $4.3 billion, which is still too high.

I don't mean FTX All assets of are fictitious and fabricated. This shitty balance sheet lists USD and JPY accounts, stablecoins, uncorrelated tokens, stocks, VCs, etc., all of which were not created or controlled by FTX. This balance sheet reflects the state of FTX after the $5 billion customer exodus last weekend; presumably FTX ran out of more liquid normal assets (Bitcoin, USD, etc.) It is "a cat and a dog". Surprisingly, however, much of the balance sheet that FTX distributed to potential rescuers consisted of stuff it made up itself. Its balance sheet is mostly made up of stuff it made up itself! This (made up) is not the normal composition of a balance sheet! no!

Fine, this is encryption How money works. This may sound familiar, not only to the FTT we talked about last week, but also to Terra and Luna earlier this year. Terra, a blockchain system run by Do Kwon, has raised billions of dollars by selling a dollar-pegged token — TerraUSD — that are considered a store of value because they are another token created by Kwon LUNA support. For a while, people thought the Terra ecosystem was promising, so LUNA was worth so much, so Terra could go around saying its TerraUSD token was pretty safe because billions of dollars of TerraUSD "debt" was secured by billions of dollars of LUNA. Then one day people changed their minds and LUNA crashed, so TerraUSD had no support and the whole market crashed. The situation with FTX is different, but there are similarities. TerraUSD "debt" - here is played by FTX's client balances; LUNA's role is played by FTT and SRM. In both cases, people lost faith in businesses and it turned out that these debts were not backed by anything.

Or as it sounds Familiar, or that might sound familiar, because SBF said it to me last year on Bloomberg's Odd Lots podcast (now that blog is "notorious"). I asked him a question about liquidity mining, and he replied:

You start out with a company that makes empty boxes, and in practice they might dress up the box as a life-changing, world-changing agreement, like, it's going to be in 38 days or whatever Replace all big banks within. But what it does you can basically ignore or pretend it doesn't do anything, it's just a box. So what is this protocol, it's called "Protocol X", it's a box, you need a token.

So you have this box , it's kind of silly, but it's like the end game, right? The box is obviously worth zero, but on the other hand, if everyone now thinks the protocol has a token market cap of about $1 billion, that's how people price it, then there's some market cap. Each will be marked to market. In fact, you can even finance it, right? You put the X token in the lending agreement and use it to borrow dollars. If you think it's less than two-thirds of the total, you can even put some in and get the dollars out. Never give your money back. You will be liquidated eventually. In a sense, it's kind of like a real tokenizable thing.

It turns out that the box It's FTX (and Serum). This looks like a life-changing, world-changing company that will replace all banks. It has tokenFTT (and SRM) with a market cap in the billions. You can even finance it, or FTX/Alameda: they can put FTT (and SRM) tokens in the box, and get the money out (from customers). They can take the dollars out, you know, and never give the dollars back. They were eventually liquidated. These tokens, FTT and SRM, are in a sense a bit like real tokenizable things. But in other senses - no!

But where did the money go

In the last chapter, I tried to capture the problem of FTX's balance sheet death spiral to bankruptcy. But, as I said, something important is missing from this account. What’s missing is money, and FTX at one point had about $16 billion in client funds, but most of its holdings were tokens it created itself. It didn't pay $16 billion for those tokens, not even $1 billion. The money came in, but when customers came to FTX and pried open the safe door, all they found was boxes full of cobwebs and Serum. Where did the money go?

I don't know but the main story seems to be that FTX gave money to Alameda , Alameda lost everything. I'm not sure about the order of operations here. The most reasonable explanation is that Alameda first lost money, spent money to support other failed crypto companies during the crypto market crash this spring and summer, and then FTX transferred customer funds to support Alameda. Alameda never got the money back, and eventually everyone noticed that the money was gone.

So Reuters last week Report:

According to two At least $1 billion in customer funds disappeared from crashed crypto trading platform FTX, according to people familiar with the matter

The trading platform’s founder, SBF, secretly moved $10 billion in client funds from FTX to Alameda Research, according to people familiar with the matter

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They said that much of this huge sum of money has been disappear. The Wall Street Journal reported last weekend:

According to people familiar with the matter, Alameda Research and FTX executives knew that FTX lent client funds to Alameda to help it pay off its debt

Crypto hedge fund Three Arrows Capital collapsed in June, putting pressure on crypto brokerages including Voyager Digital, people familiar with the matter said. Here Comes the Losses, Alameda Faces Heavy Calls from Lenders

Later on Wednesday, Hong Kong time, Alameda CEO Caroline Ellison said in a video conference with Alameda employees that according to people familiar with the matter, she, SBF and two other FTX executives, Nishad Singh and Gary Wang, all Aware of Decision to Send Client Funds to Alameda

Ellison said on the phone that FTX used client funds to help Alameda pay off its debts

Informed sources said Alameda had taken out loans to fund illiquid venture capital

At this point, we're purely speculative, but you can imagine a variety of scenarios that could happen:< /p>

1. Earlier this year , prices and companies in the crypto market plummeted, Alameda saw a huge opportunity, it used as much money as it could to buy a lot of assets at extremely low prices, but due to the crypto winter, the company couldn't use a lot of money , and still receiving calls from lenders, Ellison and SBF decided after discussion that they could not pass up this opportunity to use the funds of FTX customers to process. They will make a fortune in a short period of time by trading without losing money, and then pay back the client's money with interest. Then, the story ends sadly - but understandably, if you run an opaque business in a lightly regulated industry, and customers entrust you with their money, you use that money to make what you think is a good bet, but the bet Lose, which happens sometimes.

2. Earlier this year At that time, both the price of the crypto market and the company plummeted, Alameda was in trouble and lost a lot of money, and faced calls from lenders, Ellison and SBF realized that without financial assistance, Alameda would go bankrupt, so they used FTX Client funds back Alameda and stake redemption rights. This story is not much different from the previous one, worse but also quite understandable. This is how things like this are typically handled, why would anyone use client funds with the default assumption. No one wants to fail, no one wants to admit they lost money, and if there's a lax "money pot" they can use to cover up the loss, and sometimes they do.

3. Crypto market Prices and companies plummeted earlier this year, FTX/Alameda said: "We're in a confidence-driven industry, and if these companies collapse, then investors lose confidence in crypto trading platforms, and that's not good for our business." Or In a good way, hopefully cryptocurrency prospers, or in a bad way, or both. So they bailed out these companies with their customers' money. Here is a video of SBF and I discussing the possibility of this approach at the Bloomberg Crypto Summit in July, in which he says: "We have a clear bailout principle that is for Keeping the crypto ecosystem healthy, we lost relatively little money in the process.” Alameda/FTX is willing to pay to bail out other companies if doing so increases confidence in cryptocurrencies. Of course, there is no mention of the possibility that FTX would do this with client money.

4. Crypto market With prices and companies plummeting earlier this year, FTX/Alameda saw an opportunity to take new customer deposits cheaply and used them for nefarious purposes. Like, you pay zero dollars for equity in some bankrupt crypto lending platform, you transfer customers to FTX, you will cash out the money at will, assuming most people will trust FTX (their savior) and not cash out, then you can Use their deposits to fund your wild speculations. If FTX/Alameda has already used customer deposits for some nefarious purpose and lost a lot of money, getting more customer deposits would be a way to maintain this bad cycle.

5.FTX/Alameda Invest your client's money in a luxurious lifestyle. That seems unlikely here - they're sleeping on bean bag chairs in the office, but that's usually a very common symptom of losing client money and you'll need some accounting work.

6.FTX/Alameda will Clients' money leads to effective altruism. SBF appears to be generously funding many charities, AI and epidemic research, Democratic political candidates, etc. One of the $500 million projects on the balance sheet is “Anthropic,” a venture capital investment in an artificial intelligence security company. At the previous Bloomberg Crypto Summit, I asked SBF: "You're in an industry that moves money away from people (who don't speculate) to animal charities, epidemic research, and Biden. Is that view too cynical, or not at all cynical, or what?” Assuming FTX and Alameda earn a lot of fees and spreads from running crypto exchanges and market makers, so they justifiably take money from many customers , and use it for charity. But "not cynical enough" might be the right answer.

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