The winter of 2022 turned colder and darker in November when one of the largest and most popular cryptocurrency exchanges, FTX, collapsed. The company, which bailed out several crypto companies during the Terra-induced crash in May 2022, ended up filing for bankruptcy.
While the founder of FTX, Sam Bankman-Fried (SBF), and other executives are currently facing numerous Trials As for the scam, recent reports have surfaced claiming that FTX-linked cryptocurrency trading Alameda Research has been a running red flag since its early days.
A ship sinking from the start
According to a recent Wall Street Journal TransferAccording to several sources familiar with the matter, including former employees, Alameda’s collapse was a long time coming, even before FTX entered the picture.
The report noted that Alameda’s first major trade was arbitrage in Japan, where bitcoin was being sold at higher prices than in other regions. Alameda took advantage of this opportunity to generate between $10 million and $30 million in profits before the price gap closed in early 2018.
From arbitrage to bankruptcy
According to the WSJ, despite claiming to have made significant profits from his trading activities, Alameda incurred significant losses from his cryptocurrency trading algorithm due to erroneous price movements. By the middle of 2018, the company had lost more than two-thirds of its assets, due in part to a significant drop in the price of XRP.
But the SBF pooled money from several lenders and investors to rescue the bankrupt company, promising annual returns of up to 20%. In April 2019, the former CEO launched the cryptocurrency exchange FTX, which was marketed as a haven for institutional investors seeking cryptocurrency exposure. Bankman-Fried then used Alameda to fuel the growth of the exchange when the trading firm became the primary market maker for FTX.
Although FTX and Alameda have been claimed to operate independently, recent lawsuits have revealed that the two companies have been working together from the start.
I used FTX Alameda to attract clients
Arca Chief Investment Officer Jeff Dorman said of this: “The potential conflicts of interest and inherent risks are significant when a digital asset exchange also acts as the largest market maker.”
According to people familiar with the company’s strategy, Alameda has sometimes taken the losing side of a trade to lure customers into FTX. Recent lawsuits reveal that Bankman-Fried told the co-founder to create a token that would allow Alameda to maintain a negative balance in FTX regardless of the amount of collateral he posted with the exchange.
The SBF also ensures that Alameda’s collateral on FTX will not automatically be sold if its value falls below a certain level. Hence, this arrangement provided Alameda with an FTX line of credit, allowing the trading firm to borrow tens of billions in customer money to continue its bad games.
Alameda-FTX Crisis Begins After Years of Bankruptcy: WSJ Report Appears First on CryptoPotato.