Bankman-Fried Spun His Spending Spree, and Investors Let It Slide

VC investors had collectively handed Bankman-Fried $2 billion with virtually no strings attached, helping lift the firm to a $32 billion valuation in just three years. Now FTX has filed for bankruptcy, and Bankman-Fried is out as CEO. Customers have potentially billions of dollars stuck in the crypto exchange. Ironically, the stakes in the startups are some of the few assets with any value that FTX’s new CEO has managed to find in the company’s messy web of subsidiaries.

The intertwined, largely unregulated crypto industry has been waylaid by plunging prices, the blowup of the terra-luna stablecoin ecosystem and the implosion of heavily leveraged crypto hedge fund Three Arrows Capital. While the industry was unraveling, FTX painted a picture of strength. Bankman-Fried highlighted opportunities to bolster the firm by snapping up ailing companies. People saw him as an industry savior, even a lender of last resort.

In May, bitcoin prices were down 40% from a year prior, and crypto lenders like Voyager Digital faced huge losses. Voyager had lent money to Alameda Research, FTX’s sibling firm, which was also controlled by Bankman-Fried. While FTX seemed relatively unscathed, trading losses and the need to repay crypto lenders hit Alameda hard, according to Reuters and The Wall Street Journal. People close to the company have pointed to that moment as a turning point in FTX’s descent. Bankman-Fried funneled money from FTX to cover Alameda’s losses.

Peter Smith, CEO of crypto exchange Blockchain.com, told The Information that “the biggest warning sign” that FTX and Alameda were in trouble was Bankman-Fried moving to bail out BlockFi and buy Voyager in June and July, respectively. “When someone does something that’s not in their economic interest, you have to look for what the reason is,” Smith said.

In the meeting with investors, Bankman-Fried said the logic for buying an option to acquire BlockFi was that market makers that traded on FTX’s exchange needed lower costs of capital from lenders. “If you reduce that for market makers, you can drive more maker volume on FTX,” he said. “If BlockFi is captive to FTX, that drives volume.”

But the moves didn’t necessarily make sense for FTX, investors started to believe, because it appeared to be holding up well. “‘Contagion’ was the word he’d use” to justify FTX’s acquisition of Voyager and its investment in BlockFi, one FTX investor told The Information. But the investor didn’t see contagion hurting FTX at that moment.

Investors also said they were shocked at how rapidly FTX unraveled. At its last investor advisory meeting, also in September, FTX executives had said the firm had $1.5 billion in cash and was committed to reducing spending on marketing deals and keeping payroll costs flat. Bankman-Fried was about to head to the Middle East to try to raise more money.

Notes from that meeting listed highlights from the year, including that the firm “navigated the crypto meltdown well.” The only “lowlights” listed were declining trading volumes in regulated markets like Japan and occasional stability issues with its back-end infrastructure. After an unprofitable second quarter, the company expected to return to profitability in the third quarter after taming marketing expenses.

FTX’s investors also heard that Bankman-Fried himself had shorted the terra USD stablecoin and its sister token, luna, meaning he was getting richer off the crash, two people familiar with the matter said. (It’s unclear whether that was true.) And FTX executives told investors the collapse of Three Arrows didn’t hurt FTX’s balance sheet, investors said.

In the meantime, venture capitalists paraded Bankman-Fried in front of their own investors. One of Bankman-Fried’s closest investors, Ravi Mhatre of Lightspeed Venture Partners, joined him on stage in October as the VC firm sought new investors for its cryptocurrency fund. The same month, Bankman-Fried hobnobbed with Silicon Valley luminaries at the investor conference for cryptocurrency fund Paradigm.

In meetings with FTX’s investors, Bankman-Fried interspersed discussion of the cryptocurrency derivatives exchange with his market maker, Alameda, even though they were apparently separate entities.

In those meetings, Bankman-Fried faced other questions from investors, including about executive departures that hit Alameda and FTX. He tried to explain them away. Sam Trabucco, co-CEO of Alameda, became “too rich to work,” Bankman-Fried said, according to meeting notes. “He’s a 28-year-old billionaire. He loves boats. That’s what he wants to do now.”

The departure of FTX U.S. president Brett Harrison “was a long time coming,” he said. Harrison wanted to live in Chicago, but FTX had insisted employees working on the U.S. exchange live in Miami. Bankman-Fried and other employees on the international exchange lived in the Bahamas, with much of his inner circle sharing a penthouse.

Bankman-Fried did say he made a mistake on Alameda’s largest single investment: It had plowed more than $1 billion into Genesis Digital Assets, a crypto-mining company. “We feel like we messed up on sizing,” Bankman-Fried said, according to notes from the meeting. “Once you invest that much, it’s your problem, not theirs.”