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SBF's Latest Long Article: Only in Mid-November Did Insolvency Arise, Analyzing the Three Reasons for FTX's Closure: Including Binance

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The founder of the bankrupt exchange FTX, SBF, who is currently under house arrest, released a lengthy statement at 9 p.m. today, explaining why FTX is insolvent.

SBF first stated that FTX International has been truly insolvent since mid-November. The collapse was due to the relationship among these three things:

SBF's Three Reasons for FTX's Collapse: Binance's Fault

  1. During 2021, Alameda's financial report grew to a net worth of $100 billion, with $8 billion in net borrowing leverage and $7 billion in liquidity.
  2. Alameda failed to hedge its market positions. In 2022, a series of stock and cryptocurrency market crashes led to an 80% depreciation in asset market value.
  3. In November 2022, an extreme, rapid targeted collapse, fueled by Binance CEO, led to Alameda's insolvency.

Event One: SBF Believes Debt Ratio was Low, No Issues in 2021

SBF's model indicates that during 2021, Alameda's asset net worth should have been $100 billion, even if assets like SRM, which have a circulation significantly larger than actual circulation, are excluded, it should still be around $50 billion.

At that time, the "net borrowing amount" was approximately $8 billion, with the funds used for:

  • $1 billion for interest to lenders
  • $3 billion for acquiring Binance shares
  • $4 billion for venture capital

He explains that "net borrowing amount" refers to the part of the debt minus liquid assets on hand, with these loans coming from Genesis, Celsius, Voyager. Note: Only Genesis has not declared bankruptcy among these lending platforms.

SBF believes that the situation at the beginning of 2022, in units of billions of dollars, with net assets valued at nearly $100 billion, the overall risk of $8 billion in net borrowing leverage is not significant. Meanwhile, FTX International had a net borrowing leverage of $13 billion at the time, but with hundreds of billions as collateral, it should be reasonable. He states that for Alameda to collapse in 2021, a 94% collapse would be needed:

Event Two: Alameda Suffers Heavy Losses in Bear Market

SBF states that in 2022, Alameda had $100 billion in assets, $8 billion in net borrowing leverage, 1.06x leverage, and hundreds of billions in liquidity. However, during the summer, they failed to hedge properly, facing repeated Bitcoin declines, financial liquidity affected by interest rate hikes, LUNA going to zero, Three Arrows Capital bankruptcy, Alameda co-CEO resignation; lending institutions Voyager, BlockFi, Celsius, Genesis faced crises. Note: SBF almost listed all disaster events.

SBF mentions that this reduced Alameda's liquidity from $200 billion at the end of 2021 to $20 billion by the end of 2022. During the overall market collapse, Alameda's total assets also heavily depreciated by ~80%:

He believes this is a market-wide phenomenon:

Event Three: Collapse Fueled by Zhao Changpeng, Targeted Attack

SBF believes that Binance's months-long PR campaign, along with Binance founder Zhao Changpeng's tweets selling FTT, had a critical impact.

He thinks that before November, changes in Alameda's investment portfolio, compared to QQQ components, Bitcoin, and Ether, were considered successful hedges; but due to the targeted attack in November, Alameda's investment portfolio depreciated by 50% without significant changes in other major assets, rendering the hedge useless.

It eventually led to insolvency on November 10:

SBF Reiterates: No Funds Stolen, Alameda's Fault

SBF asserts that no funds were stolen, but rather the market contraction led to Alameda's fund losses, causing a lack of liquidity; and with open margin positions on FTX, FTX became insolvent during the run on the bank.

Commentary: Is this not theft?

Although SBF explains that everything seems to come from external factors, he has shown that FTX did indeed have issues with misappropriation of user funds, and that Alameda's special position would not be liquidated. Claiming "funds were not stolen" may be a failure to realize that the "thief is oneself"...