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How billionaire Bankman-Fried survived the slump and still expanded

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FTX CEO Sam Bankman-Fried has been searching for bargains amid the industry’s recent carnage and said he still has money to spend if opportunity knocks.

It could appear strange. Other multibillion-dollar crypto giants spiraled out of business this 12 months. FTX’s primary competitor, Coinbase, has seen its shares plunge 70% and has laid off a fifth of its workforce as crypto prices crashed.

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Yet, FTX is one way or the other emerging as an industry lifeline.

The 30-year-old billionaire says it was a results of stashing away ample money, keeping overhead low, avoiding lending and with the ability to move quickly as a personal company.

“It was vital that the industry get through this in a single piece,” Bankman-Fried told CNBC in an interview at FTX headquarters in Nassau, Bahamas. “It isn’t going to be good for anyone long run if now we have real pain and real blowouts — it isn’t fair to customers and it isn’t going to be good for regulation.”

The crypto industry saw billions of dollars worn out throughout the weeks surrounding the implosion of cryptocurrency Terra USD and the failure of crypto hedge fund Three Arrows Capital. Lenders with exposure to Three Arrows were the subsequent domino to fall. In July, FTX signed a deal that provides it the choice to purchase lender BlockFi after providing a $250 million line of credit. FTX also prolonged $500 million to struggling Voyager Digital, which later declared bankruptcy, and was in discussions to accumulate South Korean crypto exchange Bithumb.

Bitcoin, the world’s largest cryptocurrency, has lost greater than half its value this 12 months.

‘Not immune’

While Bankman-Fried’s cryptocurrency exchange FTX is affected by the downturn in digital assets, he said market share growth helped offset the pain.

“I do not think we’re immune from it,” Bankman-Fried said. “But we put a number of work in to growing our footprint over the past 12 months … and now we have a less retail-heavy platform — retail tends to be more market sentiment dependent.”

Most of FTX’s volume comes from customers trading “no less than” $100,000 per day, he said. Bankman-Fried described the group as “highly engaged, high volume” users which are “fairly sophisticated.” It ranges from small quant trading firms to family offices and day traders. FTX’s demographic has been less price sensitive and held up relatively well in crypto’s bear market, in line with the corporate.

Along with its success with skilled traders, it’s making an expensive land grab for the U.S. retail trading audience. FTX bought the the naming rights to the Miami Heat’s NBA arena, formerly American Airlines Center. It has courted high-profile investors and brand ambassadors including Tom Brady and Gisele Bundchen, and ran a Super Bowl ad featuring Larry David.

The cryptocurrency exchange brought in roughly a billion dollars in revenue last 12 months, CNBC reported in August. Bankman-Fried confirmed the numbers were within the “right ballpark” and this 12 months would see a “similar” figure, depending on how severe the market slowdown is. He also said the corporate is profitable.

He pointed to low worker head count as one factor accounting for profitability. FTX has roughly 350 employees — a few tenth of Coinbase’s workforce.

“We have at all times tried to grow in a sustainable way — I’ve at all times been deeply suspicious of negative unit economics, any economics with none form of real, clear pathway to profitability,” he said. “We hired lots lower than most places did but we have also type of kept our costs under control.”

Bankman-Fried earned a level in physics from the Massachusetts Institute of Technology and began his profession as a quantitative trader at Jane Street Capital. He bought his first bitcoin five years ago, and said he was drawn to the industry by wide arbitrage opportunities that seemed “too good to be true.” In 2017, Bankman-Fried launched proprietary trading firm Alameda Research to begin trading the asset full time. The firm was making one million dollars a day in some cases, buying on an exchange in a single market, and selling back on other global exchanges, in line with the CEO.

Alameda Research still accounts for about 6% of FTX’s exchange volumes, in line with documents seen by CNBC. While Bankman-Fried continues to be a serious shareholder in Alameda, he stepped down from day-to-day operations.

Bankman-Fried said he’s worked over the past few years to eliminate conflicts of interest at Alameda. “I do not run Alameda anymore — none of FTX does. We view it as a neutral piece of market infrastructure.”

FTX has seen epic growth since Bankman-Fried launched it alongside co-founder Gary Wang in 2019. It last raised $400 million in January at a $32 billion valuation, bringing its total enterprise capital funding previously three years to about $2 billion.

FTX Trading Ltd. is headquartered in Antigua, with FTX Derivatives Markets based within the Bahamas, where Bankman-Fried lives. FTX Trading has acquired corporations in Switzerland, Australia, Cyprus, Germany, Gibraltar, Singapore, Turkey and the United Arab Emirates, amongst other countries.

The exchange has spent about half of its money on bailouts and acquisitions, most recently buying a 30% stake in Anthony Scaramucci’s Skybridge Capital.

“We still have a good bit left to deploy, if and when it’s useful or vital,” Bankman-Fried said.

Three-day deals

FTX benefited from being a personal company this 12 months. FTX doesn’t have the every day ups and downs of a publicly traded stock, especially growth names, which this 12 months have been battered by higher rates of interest. Bankman-Fried also said not having 1000’s of shareholders enabled FTX to maneuver quickly when attempting to close deals in a matter of days.

“I do think it makes it lots harder, practically speaking, to do that as a public company,” he said. When “you may have three days from start to complete to wire the cash, you’ll be able to’t do a public engagement process across the potential terms of a messy situation.”

Bankman-Fried said most of the deals were done in a matter of days, when the team “didn’t sleep much that week.” What’s often lengthy due diligence got here as a substitute in a truncated Excel spreadsheet. The funds weren’t audited. The team had no less than some expectation of losing money.

“It was unclear if it could be net positive or negative — there was potential upside in a case where things went well,” he said. “We got to the purpose of feeling like we could do something that will have a nontrivial likelihood of helping for an sum of money that we were willing to lose if things went flawed.”

It’s too soon to inform if Bankman-Fried’s distressed crypto bets can pay off. Some corporations have said no to a rescue package altogether.

After extending a line of credit to Voyager, FTX and Alameda looked to purchase and and restructure the corporate. It outlined a plan to buy Voyager’s digital assets and loans at market value. The corporate responded to the bid calling it a “low ball bid dressed up as a white knight rescue.”

“It surprised me. It didn’t surprise our legal team,” he said. “I had truthfully just assumed they’d see our offer and just say … in fact, we’ll take this.”

Bankman-Fried said there have been further discussions and the answers were “disappointing.” The issue, he said, was that the proposal didn’t take any fees.

“Should you’re within the business of taking fees, then perhaps our proposal is not what you want,” he said. “I think it was a lowball offer for consultants trying to make fees on this case. That is not who I had had in mind. I had the purchasers in mind. But that’s my current best understanding about what happened.”

The subsequent … Warren Buffett?

Bankman-Fried’s latest moves in crypto have drawn comparisons with Warren Buffett’s strategy in 2008. The legendary Berkshire Hathaway chairman and CEO stopped the bleeding throughout the financial crisis with a $5 billion investment in Goldman Sachs. That eventually brought the Omaha, Nebraska-based conglomerate a $3 billion gain.

“There are some parallels,” Bankman-Fried said. “There are probably more differences. Initially, I do not think Warren Buffett would call me the subsequent Warren Buffett. To the extent there may be a parallel recently, it has been which assets are in a spot where they beautiful badly need capital.”

Bankman-Fried said he’s finding spots where he can “concurrently make good investments, and help backstop them and their customers and ecosystem.” Although sometimes just one is on offer, not each.

He also applauded Buffett’s skill in long-term, value investing. The investor has showed that “you needn’t have one sensible innovation or insight, you’ll be able to do it by just piecing together good decision after good decision over the course of many years and compounding that.”

Like Buffett, Bankman-Fried signed the Giving Pledge: a promise by the world’s wealthiest individuals to donate the vast majority of their wealth to charity. Bankman-Fried said he has given away roughly $100 million this 12 months, with a concentrate on future pandemic prevention. Much like Buffett, he lives modestly. Bankman-Fried shares a house with 10 roommates and a Goldendoodle named Gopher. He drives a Toyota Corolla, and said he has little interest in the excesses of a yacht or Lamborghini.

However the two humble investors sharply diverge with regards to their positions on cryptocurrencies.

Buffett and his business partner Charlie Munger have been critical of cryptocurrencies over time. In 2018, for instance, Buffett called bitcoin “probably rat poison squared.” Earlier this 12 months, Buffett said he would not buy all of the bitcoin on the planet for $25 since it “doesn’t produce anything.”

Buffett has called the underlying blockchain technology “vital” — but hasn’t wavered on the concept that “bitcoin has no unique value in any respect.” Blockchains are digital databases that store cryptocurrency transactions and, in some cases, other data. Its primary use has been powering cryptocurrencies like bitcoin. But fans of the technology say it might be utilized in health care, supply chain logistics and other areas of finance.

“I actually disagree with that,” Bankman-Fried said. “I should hope [Buffett] disagrees with that, too. I do not think you have to be running an organization if he thinks that, but I do not think he actually thinks that. I feel that was very likely hyperbole,” he said. “He’s missed a number of the power of blockchain — he’s also missed a number of the impetus for it in the primary place, and what’s driving people to desire a recent tool.”

Correction: Gisele Bundchen is a brand ambassador for FTX. An earlier version misspelled her name.

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