How Alameda Research blew up

This time was not different

Nov 16, 2022

Disclaimer: I’m not privy to any confidential or insider info, so this is just an educated guess at may have transpired at Alameda Research and FTX. Everything here is strictly my own personal opinion, not that of CoinAlpha nor Hummingbot Foundation. Nothing here is legal, investment, or financial advice.

It looks like Sam Bankman-Fried (SBF) co-opted FTX customer deposits and secretly lent them to rescue his market making firm Alameda Research in exchange for FTT collateral, sometime after the LUNA crash in May.

But why did Alameda Research need rescuing at all?

The market believed that Alameda was a money-printing machine that should have been able to weather the LUNA storm:

Mudit Gupta @Mudit__Gupta

How did Alameda manage to lose 10 billions? They had such an unfair edge over other market makers and hedge funds. They should've been swimming in profits. The hole is much bigger than what they could've lost in UST directly. Where did the money actually go?

And more interestingly, why couldn’t SBF just Alameda Research die?

To a fawning Sequoia Capital, SBF said he wanted to make FTX the world’s dominant financial super-app:

“I want FTX to be a place where you can do anything you want with your next dollar. You can buy bitcoin. You can send money in whatever currency to any friend anywhere in the world. You can buy a banana. You can do anything you want with your money from inside FTX.”

The logical decision would have been to let Alameda perish and focus on building FTX.

Why did SBF risk everything to save Alameda?

Well, I think I might know.

I don’t have access to any confidential information, but CoinAlpha and Alameda Research both started in the Bay Area in 2017 amidst a close-knit community of nascent quant crypto funds, and I’ve chatted with Sam about how his firm is structured.

And since Hummingbot is the most widely used open source market making tool in crypto, many projects have asked me for advice around hiring market makers, so I’m quite familiar with Alameda and their business model. Also, FTX is one of Hummingbot’s most popular exchange connectors, so I’ve talked to both individual and professional users who run bots there.

Unfortunately, that didn’t prevent me from bamboozled by SBF’s engineering mindset, work ethic and all the social proofs around him. I’m a SRM bag-holder and was so confident that it was all just FUD that I bought even more SRM the morning of Tuesday November 8, right before it all went down.

But what pisses me off the most is that whenever my non-crypto friends and family asked me which crypto exchange they should use, I recommended FTX and FTX.us. They trusted me to help them navigate the dark, shadowy world of crypto, and I funneled them to a slaughterhouse.

I was too consumed with Hummingbot to pay attention, but in the last week, I finally looked at the facts which came out and triangulated them against what I know about Alameda Research’s business

In hindsight, the red flags should have been obvious. I think I finally understand how it all worked, so I put together a video to explain my theory.

Watch it here on Substack or via YouTube: