How billionaire Bankman-Fried survived the slump and still expanded

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

It may seem strange. Other multi-billion dollar crypto giants went bankrupt this year. FTX’s main competitor, Coinbase, has seen its share price plunge 70% and laid off a fifth of its workforce as crypto prices plummet.

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Pro Exclusive: FTX's Sam Bankman-Fried on becoming a billionaire and investing

Pro Exclusive: FTX’s Sam Bankman-Fried on becoming a billionaire and investing

Still, FTX is somehow becoming a lifeline of the industry.

The 30-year-old billionaire says that’s because he’s been able to set aside ample cash, keep overheads low, avoid borrowing and move quickly as a private company.

“It was important that the industry got through this in one piece,” Bankman-Fried told CNBC in an interview at FTX headquarters in Nassau, Bahamas. “It’s not going to be good for anyone in the long run if we have real pain and real blowouts – it’s not fair to customers and it won’t be good for regulation.”

In the weeks surrounding the cryptocurrency Terra USD implosion and the collapse of crypto hedge fund Three Arrows Capital, billions of dollars were wiped out in the crypto industry. Lenders with exposure to Three Arrows were the next domino to fall. In July, FTX signed a deal giving it an opportunity to buy lender BlockFi after providing a $250 million line of credit. FTX also renewed $500 million in Voyager Digital, which later filed for bankruptcy, and held talks to acquire South Korean crypto exchange Bithumb.

Bitcoin, the world’s largest cryptocurrency, has lost more than half of its value this year.

“Not Immune”

While Bankman-Fried’s FTX cryptocurrency exchange is suffering from the decline in digital assets, he said growth in market share has helped offset the pain.

“I don’t think we’re immune to that,” Bankman-Fried said. “But we’ve put a lot of work into growing our footprint over the past year…and we have a less retail-heavy platform — retail tends to be more sensitive to market sentiment.”

Most of FTX’s volume comes from clients trading “at least” $100,000 a day, he said. Bankman-Fried described the group as having “highly engaged, high-volume” users who are “fairly demanding.” It ranges from small quant trading firms to family offices and day traders. FTX’s demographics have been less price-sensitive and have held up relatively well in crypto’s bear market, according to the company.

Adding to its success with professional retailers, it’s an expensive land grab for the US retail public. FTX bought the naming rights to the NBA Arena from the Miami Heat, formerly American Airlines Center. It has courted high-profile investors and brand ambassadors like Tom Brady and Gisele Bundchen, and ran a Super Bowl ad starring Larry David.

The cryptocurrency exchange brought in around $1 billion in revenue last year, CNBC reported in August. Bankman-Fried confirmed the numbers are in “the right range” and will see a “similar” number this year depending on how severe the market slowdown is. He also said the company is profitable.

He pointed to the low headcount as a factor responsible for profitability. FTX has around 350 employees — about a tenth of Coinbase’s workforce.

“We’ve always tried to grow in a sustainable way — I’ve always been very suspicious of negative unit economics, any economics without a real, clear path to profitability,” he said. “We hired a lot less than most companies, but we also managed to keep our costs under control somehow.”

Bankman-Fried earned a Physics degree from Massachusetts Institute of Technology and began his career 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 the broad arbitrage opportunities that seemed “too good to be true.” In 2017, Bankman-Fried founded his own trading firm, Alameda Research, to begin trading the asset full-time. According to the CEO, in some cases the company made $1 million a day by buying on one exchange in one market and selling back on other global exchanges.

Alameda Research still accounts for about 6% of FTX’s exchange volume, according to documents seen by CNBC. While Bankman-Fried is still a major shareholder in Alameda, he has retired from day-to-day operations.

Bankman-Fried said he has worked to eliminate conflicts of interest at Alameda for the past several years. “I no longer operate Alameda – none from FTX. We see it as a neutral piece of market infrastructure.”

FTX has seen tremendous growth since Bankman-Fried launched it alongside co-founder Gary Wang in 2019. It most recently raised $400 million in January at a valuation of $32 billion, bringing its total venture capital funding over the past three years to about $2 billion.

FTX Trading Ltd. is headquartered in Antigua, while FTX Derivatives Markets is based in the Bahamas, where Bankman-Fried resides. FTX Trading has acquired companies in Switzerland, Australia, Cyprus, Germany, Gibraltar, Singapore, Turkey and the United Arab Emirates, among others.

The exchange has spent about half of its cash on bailouts and takeovers, most recently Anthony Scaramucci’s purchase of a 30 percent stake in Skybridge Capital.

“We still have some things to use if it’s useful or important,” Bankman-Fried said.

Three Day Deals

FTX benefited from being a private company this year. FTX doesn’t have the daily ups and downs of a publicly traded stock, especially growth stocks that have been hit by higher interest rates this year. Bankman-Fried also said that the lack of thousands of shareholders allowed FTX to act quickly when it came to closing deals in a matter of days.

“I think it makes it practically a lot harder to do this as a public company,” he said. If “you have three days from start to finish to transfer the money, you cannot conduct a public participation process around the possible conditions of a chaotic situation.”

Bankman-Fried said many of the deals were closed within days when the team “didn’t sleep much that week.” The often lengthy due diligence check came instead in an abbreviated Excel spreadsheet. The finances have not been audited. The team had at least some expectation of losing money.

“It was unclear if it would be a net positive or negative – there were potential benefits in a case where things were going well,” he said. “We got to the point where we felt we could do something that had a reasonable chance of helping for an amount of money that we were willing to lose if things went wrong.”

It’s too early to tell if Bankman-Fried’s distressed crypto bets will pay off. Some companies have rejected a bailout altogether.

After extending a line of credit for Voyager, FTX and Alameda wanted to buy and restructure the company. It outlined a plan to purchase Voyager’s digital assets and loans at market value. The company responded to the offer, calling it a “low-ball offer disguised as a white knight’s rescue.”

“It surprised me. It didn’t surprise our legal team,” he said. “I honestly just assumed they’d see our offer and just say … of course we accept that.”

Bankman-Fried said there was further discussion and the responses were “disappointing”. The problem, he said, is that there are no fees for the proposal.

“If you’re in the business of charging, then our proposal may not be what you like,” he said. “I think it was a lowball offer for consultants who wanted to charge fees in this case. I didn’t have that in mind. I had the customers in mind. But that’s my current best understanding of what happened.”

The next… Warren Buffett?

Bankman-Fried’s recent moves in crypto have drawn comparisons to Warren Buffett’s strategy in 2008. The legendary Berkshire Hathaway chairman and CEO stemmed the bleed during the financial crisis with a $5 billion investment in Goldman Sachs. That eventually gave the Omaha, Nebraska-based conglomerate a $3 billion profit.

“There are some parallels,” Bankman-Fried said. “There are probably more differences. First, I don’t think Warren Buffett would call me the next Warren Buffett. Insofar as there’s a parallel lately, it’s been looking at what assets are in a place that needs them pretty badly in the capital.”

Bankman-Fried said he’s finding places where he can “make good investments at the same time and help support them and their customers and their ecosystem.” Although sometimes only one is offered, not both.

He also praised Buffett’s long-term value investing skills. The investor has shown that “you don’t have to have brilliant innovation or insight, you can do it by just piecing together good decision after good decision over the decades and putting that together.”

Like Buffett, Bankman-Fried signed the Giving Pledge: a pledge by the world’s richest people to donate the majority of their wealth to charity. Bankman-Fried said he gave away about $100 million this year, with a focus 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 no interest in the excesses of a yacht or a Lamborghini.

But the two humble investors are at odds when it comes to their positions on cryptocurrencies.

Buffett and his business partner Charlie Munger have been critical of cryptocurrencies for years. For example, in 2018, Buffett called Bitcoin “probably rat poison squared.” Earlier this year, Buffett said he wouldn’t buy all of the world’s bitcoins at $25 because they “do not produce anything.”

Buffett has called the underlying blockchain technology “important” — but hasn’t slacked on the idea that “Bitcoin has no unique value at all.” Blockchains are digital databases that store cryptocurrency transactions and, in some cases, other data. Its main use was to power cryptocurrencies like bitcoin. However, fans of the technology say it could be used in healthcare, supply chain logistics and other areas of finance.

“I definitely don’t agree with that,” Bankman-Fried said. “I should hope [Buffett] also disagrees. I don’t think you should run a company if he thinks that, but I don’t think he really thinks that. I think that was very likely an exaggeration,” he said. “He missed some of the power of blockchain — he also missed some of the impetus for it and what makes people want a new tool.”

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