Deep Digging: How did FTX’s SBF make tens of billions of dollars in three years?

In early April, FTX disclosed that it had named the Miami Arena with a generous sum of $135 million. This news did not cause much sensation, but FTX boss Sam Bankman-Fried (hereinafter referred to as SBF) has been making various news in the circle with his legendary myth of getting rich and his iconic afro. For example, he claimed in February that his personal net worth had reached an astonishing $10 billion. On the Forbes just released global rich list, SBF, who has only been in the cryptocurrency circle for three years, ranked 274th with $87 in assets, which is almost the same as Zong Qinghou's wealth. (The data in this article are all before April 14)

Not only that, judging from the crazy copycat market in the past two months, SBF's wealth map has expanded greatly, and may have far exceeded the figures previously disclosed by the media.

According to the exposed address, in February, Sam put $1.4 billion into mining on 1inch and SushiSwap, with the main fund pool being ETH/WETH+stablecoins, and the annualized rate of return ranging from 10% to 70%. It is speculated that Sam's daily mining income can reach $2 million/day. By April, the number of assets on the address soared to $2.3 billion, of which $500 million was on the Ethereum chain, and there were also up to $1.8 billion in crypto assets on the Binance chain. These funds were mainly used for lending and mining on the three major projects of Venus, MDEX and Belt.fi. In just two months, SBF's assets on this address alone increased by nearly $1 billion.

Since liquidity mining became popular last summer, Sam's ferocious mining has become well-known in the circle. Shenyu once ridiculed SBF as a "vampire" because of the huge amount of mining funds. Wherever it went, APY dropped sharply, and small-capital miners were all "trembling."

On-chain mining is more risky than traditional mining machines. The main reason is that some projects are not audited, loopholes are occasionally exposed, and the operation process requires a high threshold of knowledge. In the case of high handling fees, it is more friendly to large funds. Why is SBF so "arrogant" in mining, a way to make money? The main reason is that mining is still just a small part of his entire trading empire.

Earn your first pot of gold through cross-exchange arbitrage

As a former quantitative trader on Wall Street, SBF was not an early coin hoarder. According to stories reported by major media, SBF's first pot of gold mainly came from cross-exchange arbitrage. At the beginning of 2018, SBF discovered that there was a price difference between exchanges in different countries, among which Bitcoin on Korean exchanges had a premium of about 30% compared to the US market. However, due to foreign exchange controls, if Bitcoin purchased in the US market is sold on Korean exchanges, it is difficult to exchange Korean won back to US dollars.

Therefore, SBF set its sights on Japan, a country that also had a bitcoin price difference but nominally abolished foreign exchange controls. During this period, Japan's bitcoin premium lasted for a month, and the daily arbitrage income could reach $25 million. If operating costs are not considered, SBF's first pot of gold income reached as much as $750 million.

What’s interesting is that now, we have observed again that the mainstream coins on South Korea’s mainstream exchanges have super-high premiums, with premium rates exceeding 10%. Will there be another “SBF” who will get rich by arbitrage this time?

Operate the exchange to obtain daily cash flow

FTX is a crypto derivatives exchange managed by SBF. According to the official website, FTX's 24-hour trading volume is currently around US$7.5 billion, of which BTC and ETH account for more than 50%. FTX's Maker Fee and Taker Fee are roughly between 0-0.07%. If calculated based on the median of 0.035%, the weekly fee income can reach US$14 million. According to this data, at a net profit margin of 60%, FTX's annual net profit can reach US$460 million.

This data is also close to the income inferred from the weekly destruction of the platform currency FTT. FTX will use 33% of the handling fee, 10% of the social benefits and 5% of other income to destroy FTT. The data released on April 8 showed that the official destroyed $3.8483 million worth of FTT that week. Assuming that all the destroyed amounts came from FTX, the weekly income of FTX is about $11.63 million.

However, we still have reservations about FTX's real trading volume. As early as two years ago, a third-party research organization BTI conducted statistics on the volume-washing behavior of exchanges. The ratio of volume-washing in major digital currency exchanges ranged from 1 to tens of thousands of times. FTX is an n-line exchange in China, and since the end of last year, due to regulatory reasons, FTX can only use FTX.us to provide services to US users, and the daily trading volume is very small. Although FTX has launched the "Real-time Quantification of Digital Asset Trading Volume" and used a series of quantitative methods to publicize the real trading volume, the transaction amount announced by FTX is still suspected of exaggeration.

(Real-time assessment of digital asset trading volume, data source: FTX official website)

Accumulate capital through platform coins

In addition to issuing the platform coin FTT in the name of his own exchange, SBF is also best known as a Serum consultant and the owner of the control of SushiSwap time locks. The issuance of FTT and Serum was led by SBF himself. The total issuance of FTT is 350 million, of which 175 million belong to the team. Calculated at a price of $57, it is worth tens of billions of dollars.

In addition, the Serum project is closely tied to FTT. At the beginning of Serum's launch, 5% of Serum's native tokens were allocated to FTT holders, and the total amount of SRM was 10 billion, which means that the SBF team can get at least $3.5 billion worth of SRM by holding FTT. At the same time, 20% of the total SRM will be allocated to the Serum team and consultants. As a project consultant, SBF is also behind this $14 billion fund.

In the wallet address mentioned above, SRM is the largest crypto asset held by SBF, with a total of more than 18 million pieces. CoinMarketCap shows that the current circulation of SRM is 50 million pieces, and the number held by the SBF address alone accounts for more than 36% of the circulation.

Deploy ecosystem through crypto asset management

The crypto agency Alameda Research is also the largest part of SBF's entrepreneurial map. In addition to self-operated quantitative trading, acting as a market maker to provide liquidity, and project analysis and research, Alameda Research has also invested in many tokens and equity projects in the primary market, most of which are DeFi projects. We have no way to measure the valuation of these projects. But Alameda Research does not care about the so-called value investment, "make money if there is money", and even has disputes with projects because of selling platform coins. FTX officials also disclosed that Alameda Research has been implementing hedging arbitrage transactions on BitMEX. The agency has long dominated the list of Top 25 Traders announced by BitMEX, with a profit of nearly 1,700 bitcoins, which is worth more than $100 million at a price of $65,000.

(Top 25 Traders, data source: BitMex)

Through the SBF fortune secrets we compiled, we can see that it is not easy for anyone to copy this path. The accumulation of SBF's original capital mainly comes from the following points: looking for cross-border trading opportunities, issuing platform coins, and having top trading strategies. The magic of SBF lies in the breadth of its industrial layout and its strong execution, which is beyond ordinary people. Therefore, it took only 3 years to complete the path that most people on the Forbes list took decades to complete.

However, SBF also mentioned that most of his assets lack liquidity. I wonder if SBF can get out of the bear market unscathed, or is it just a short-lived "legend" in this bull market cycle?