Sam Bankman-Fried turns US$2 Trillion Crypto tout into buying opportunity

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Bloomberg

20th July 2022 – (Bahamas) Over the span of 14 days in June, Sam Bankman-Fried, wunderkind quant-turned-cryptocurrency billionaire who started in Hong Kong, carried out a dealmaking spree unlike any other in the brief history of the industry. Transactions came in dizzying, rapid-fire succession: The co-founder and chief executive officer of digital-asset exchange FTX bought two companies, propped up the crypto platform BlockFi, and tried to save another, Voyager Digital, with a large loan.

In all, Bankman-Fried committed about US$1 billion, a staggering sum to be risking—even for someone worth US$10 billion—in the midst of a crypto rout that’s wiped out US$2 trillion in market value in only eight months. To his legions of hardcore fans, this is further proof that SBF, as they all call him, is the patron of crypto, a benevolent, deep-pocketed investor and philanthropist who’s defending the industry in its time of greatest need.

Perhaps. An alternative interpretation is that Bankman-Fried’s wheeling and dealing have revealed the full scope of his plans to dominate the crypto industry. Just like other financial barons before him—John Pierpont Morgan a century ago and Warren Buffett in modern times—he’s exploiting the bad fortune of rivals to expand his empire on the cheap. And if there’s an element of saving the industry to the bailouts he’s arranging, it’s because the crisis, if big enough, will ultimately imperil his core businesses, too.

“He’s not doing this out of the goodness of his own heart,” says Chris McCann, who’s known Bankman-Fried since 2018 and is a general partner at Race Capital, one of the first venture firms to invest in FTX, the company at the heart of SBF’s enterprise. “His ambition knows no bounds at this point.”

It could all backfire, of course. The whole thing feels, in Wall Street parlance, as if he’s trying to catch a falling knife, as witnessed by Voyager Digital’s bankruptcy filing just days after its rescue loan. If it works out, Bankman-Fried will have amassed vast control, both direct and indirect, of the industry. That’s a troubling thought for scores of devoted crypto converts who believe that decentralization is what makes their market different, and better, than the traditional financial system run by a few big banks and trading companies.

“It’s dangerous for the whole industry to have connections to FTX,” says Elliot Chun, a partner at Architect Partners, a crypto M&A and strategic-financing advisory firm. “That typically is not good for a free-market scenario, particularly the free markets that crypto enthusiasts embrace.”

Sam Bankman-Fried’s Crypto Empire

Bankman-Fried, for his part, says the greater risk to the industry would be if no one acted. “The last thing we wanted was a contagion spreading. The last thing we wanted was customer assets that weren’t protected,” he says. The question of, “‘Is there a good investment that we could make in return for it?’ That was kind of a secondary thing.”

Still, his public comments and behind-the-scenes maneuvers suggest more, and bigger, deals are almost certainly on the horizon. Bloomberg reported that FTX was exploring a potential takeover of Robinhood Markets Inc., the app-based brokerage for both equities and crypto once worth almost $60 billion before plunging in value in recent months. Bankman-Fried later said there were no active negotiations. Last year he even floated the idea of one day buying Goldman Sachs Group Inc. It wasn’t clear if he was joking. 

He wants to “win everything and more,” McCann says.

Bankman-Fried got a relatively late start in crypto. An MIT physics graduate, he didn’t fully dive in until 2017, when he left quant trading firm Jane Street to introduce his own venture, Alameda Research. Able to focus on crypto full time, he quickly built a name for himself, as Alameda rocketed up an online leaderboard that ranked trader performance.

His burgeoning clout came in handy when he decided to start FTX in Hong Kong two years later. His fans flocked to the exchange, lured by low fees and attractive product offerings, and it soon became one of the biggest platforms in crypto derivatives trading. He’s estimated to own more than 50% of FTX, 70% of FTX US (begun in 2020), and almost all of Alameda. Now based in the Bahamas, FTX raised US$400 million in January at a US$32 billion valuation, and FTX US was valued at about US$8 billion.

Bankman-Fried has deftly managed his company’s capital, says Lyn Alden, a crypto investment strategist, while favoring profitability over the growth-at-all-costs approach that’s now come back to haunt many of his rivals. “They kept their employee base pretty tight,” she says, and “they raised capital when they didn’t necessarily need it.” That’s allowed him to go bargain hunting as the rest of the crypto world reels.

In June he bought Bitvo Inc., a Canadian crypto trading platform, and Embed Financial Technologies Inc., a brokerage services firm. As the crypto selloff intensified in the wake of the collapse of the TerraUSD stablecoin and amid the implosions of Celsius Networkand Three Arrows Capital, Bankman-Fried made two of his biggest moves yet, lending embattled crypto broker Voyager Digital US$485 million, and bailing out digital-asset lender BlockFi with a US$400 million revolving credit facility that came with the option to purchase the company outright.

Voyager sought Chapter 11 protection just days after its financial lifeline was announced (and before it could tap the full loan). “We didn’t have months to do due diligence. We didn’t have weeks. We had two days,” Bankman-Fried says, adding that the goal was to protect customer assets, not bolster his business.

The BlockFi deal, in contrast, is already being touted as a triumph for Bankman-Fried, even by his competitors. He likely scooped up the firm, which was last valued at US$3 billion, for pennies on the dollar, industry watchers say. “It’s a good outcome for BlockFi clients, for FTX, and also for the industry in general,” says Mauricio Di Bartolomeo, co-founder of Ledn, which made an offer to inject fresh funding into the embattled company but had its bid rejected in favor of FTX US’s deal.

The BlockFi bailout was also a strategic decision to help FTX US build out its brand and gain exposure to more potential customers, says Dan Matuszewski, co-founder of CMS Holdings which has invested in both BlockFi and FTX. An eventual acquisition would also help Bankman-Fried further expand into crypto lending. “It probably means a broader reach of retail products that FTX will be offering,” he says.

Bankman-Fried says his team has looked at roughly 10 deals—including with Celsius and Terra, both of which he passed on. He says he’s backstopped a couple of companies where his involvement hasn’t been made public. His team has been reaching out to companies rumored to be facing difficulties, analyzing their balance sheets to figure out what it would take to save the business, he says.

He’s also looked at raising fresh capital to fund more transactions, though he notes that the volume of distressed deals his team is looking at has tapered off significantly in recent weeks. “I don’t know of any other big companies that are about to fall,” he says. “I can’t promise that there are none. Hopefully we’ve gone through the worst of it.”

Some in the crypto industry already spy trouble when it comes to how much power Bankman-Fried is accumulating, especially when one takes into account Alameda Research, which, despite sounding more like a Silicon Valley robotics lab, has developed into an influential trading and venture firm. Together, Alameda and FTX are expected to become the top provider of distressed financing in the industry in the second half of 2022, according to Architect Partners.

Given the breadth and reach of his business interests, many industry insiders see potential conflicts of interest down the road. The bankruptcy filings of Voyager and Celsius highlighted Bankman-Fried’s extensive influence in the industry. Voyager’s revealed a tangled, interconnected web of investing, lending, and borrowing between the company and Alameda, while Celsius named the trading firm as one of its creditors. “The thing about FTX and Alameda is that they can make or break projects,” says Toby Lewis, chief executive officer of analytics company Novum Insights.

Bankman-Fried’s spreading market influence has the potential to reduce market competition broadly, according to Architect Partners’ Chun. “One could imagine a scenario that if FTX continues at these levels, who else is going to be around?” he says.

Still, to many, Bankman-Fried, with his Einstein-like wild hair and promise to ultimately give away virtually all his wealth, represents a cultural figure whom crypto enthusiasts can root for. He’s active on Twitter and not afraid to raise existential questions about the industry and its future. “Decentralization still needs role models, still needs leaders, and still needs people who pave the way,” says Matthew Roszak, co-founder of blockchain technology company Bloq Inc.

That doesn’t mean Bankman-Fried can’t be opportunistic when his rivals are desperate. He’s not a “kind, gentle savior,” says Race Capital’s McCann. “I wouldn’t be fooled for a minute.”

With Jenny Zhang, Yue Qiu, and Alex Tribou

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