You are currently viewing Billionaires You’Ve Never Heard of #bonus: How Sam Bankman-Fried Generated the Biggest and Fastest Fortune in History

Billionaires You’Ve Never Heard of #bonus: How Sam Bankman-Fried Generated the Biggest and Fastest Fortune in History

Sam Bankman-Fried (born in 1992) is the founder and CEO of the crypto trading firm Alameda Research and crypto exchange FTX.

He owns a bit more than 50% of FTX which owns 90% of Alameda (Alameda made $1 billion in profit in 2020, likely much more in 2021).

Sam dived into crypto when he learned about them at 24 years old. He has since acquired the biggest fortune faster than anyone else in history.

His net worth amounts to $26.5 billion as these lines are written, but it’s increasing so fast that it will likely reach $30 billion by the time you finish this article.

This is how he’s doing it.


Beginnings

Sam Bankman-Fried was born at the University of Stanford in 1992. Both of his parents are law professors there.

He attended a private high school near San Francisco and hated it.

He once came back from school crying because it was too boring. So he was sent to math camp where he learned to solve puzzles in the context of hunts.

When he came back, he organized a series of these hunts for local high schools.

Sam started reading about utilitarianism at 14 years old. While the philosophy was introduced to him by his parents, he went much further in its practical adoption than they did.

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He entered MIT at 18 years old and studied a bachelor’s in physics with a minor in mathematics.

University was nicer for him as he didn’t have to attend classes. When asked about his studies, Sam declared that they were “f****ing useless” and that he hadn’t learned anything that helped him in life or for his job.

“Most people already know that, but they’re afraid to speak out”, he declared.

At MIT, Sam joined a fraternity whose members would spend time playing board and computer games. He particularly enjoyed those. When he was a kid, he forced his brother to play two games at the same time with a timer. It seemed it was the only way he could occupy his mind.

He stayed at uni thinking about becoming a physics professor, but philosophy once again took a hold of his life.

In his second year, Sam found out about Effective Altruism. It changed everything for him.

Effective Altruism uses quantitative evidence and reason to do the absolute most good possible. It’s not about giving $10 USD to charity. It’s about giving $10 USD to THE charity that will have the strongest impact possible.

Obsessed about the idea to do good, Bankman-Fried decided to focus on making as much money as possible to give it all away afterward.

He gave up becoming a professor and one year before graduating, did an internship at the trading firm Jane Street Capital. His specialty was ETFs arbitrage-trade (explained below). He loved it.

He became a full-time employee after graduating in 2014 and gave half of his salary to charity.

Three years later, Sam sat down and wondered what he would do for the rest of his life. Simultaneously bitcoin went on its first mainstream bull run and almost touched 20k.

Sam had never been interested in crypto before.

But he decided to investigate further.


Alameda Research

When he looked at the crypto world in October 2017, Sam found out there was much more enthusiasm and demand for cryptos than there were firms ready to provide them for buyers.

When supply and demand differ in different geographical areas, it means prices differ too. For example, you can buy, let’s say, one ETH for 2k somewhere, and sell it for 2.2k in another country where the demand for ETH is higher and supply lower.

This type of trade is called arbitrage trade.

Step 1: buy somewhere it’s cheap.
Step 2: sell somewhere it’s expensive.

“Free money”, said Sam.

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There were so many opportunities for arbitrage trade that Sam decided to quit his job at Jane Street and contacted his friend Gary Wang, a Google engineer.

He told Gary he wanted to start an arbitrage-trading firm.

Gary estimated the chances of success at around 25%.

So Sam went ahead. He scrapped a million dollars from his savings and investment from friends and family and founded Alameda Research at the end of 2017.

He hired his friends from college and moved into an Airbnb in Berkeley, California.

He also took a job as director of the Center for Effective Altruism but quit one month later.

“In retrospect, it was dumb to do both” Sam said.

In the beginning, setting up Alameda seemed impossible.

There were many regulatory hurdles and no obvious ways to obtain sufficient liquidity. Nobody wanted to work with them. Furthermore, they couldn’t obtain any Korean won due to restrictions on the currency.

But they didn’t give up. They focused and solved one problem after the other and arbitrage-trading became possible.

Alameda specialized in buying BTC in the US to sell them in Japan for a 10% premium.

By the time January arrived, Sam was moving $25 million of BTC per day. They were selling so much that his team couldn’t convert Japanese yen fast enough.

Unfortunately, the spread died in early 2018, so they just focused on trading other coins instead.

For two years, Alameda did very well, making up to $1 million of profit per day (they’re now making at least $2.7 million a day).

Always looking to do it better and faster, Sam quickly became frustrated with the exchanges Alameda was using.

Crypto exchanges were designed for the average American that wanted to buy half a bitcoin every year or so; not for a professional trading firm.

At the end of 2019, Sam went to a conference in Macau where he found out that Bitcoin Cash was splitting into two new cryptocurrencies.

This was a major hurdle for exchanges. They wouldn’t know which bitcoin cash would become which currency.

In the confusion, investors lost $25 million because of exchanges’ poor execution.

Sam knew he could do better.

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He flew to Hong Kong to attend yet another meeting and exposed his professional exchange idea to a bunch of Asian traders and investors.

This is where it gets tricky.

While some reported that Sam moved to Hong Kong to build an exchange, others have said he really did it to take advantage of further arbitrage-trading opportunities.

In any way, Sam called Gary Wang and the rest of the team in Berkeley, rented a WeWork, and canceled his ticket home.

Alameda was relocating to Hong Kong.


FTX

Sam took profits from Alameda, raised $8 million, and used them to set up FTX which launched in May 2019.

FTX means FuTures eXchange, which Sam admitted wasn’t a great name.

The decision to launch an exchange was controversial at Alameda.

To understand why, we need to go back a bit.

Sam’s most important aspect in life is efficiency. When he set up Alameda, he only hired the people he absolutely needed and no more.

He’s always been scared that too many people would make the company slow and ineffective. As a result, Alameda has always been understaffed and many employees left, completely burned out.

Not only did Alameda lack people, but now the best engineers were leaving to go build FTX.

So Sam got to work. He registered the company in Antigua and Barbuda and launched from Hong Kong.

In the beginning, FTX was built by two engineers. Only around 30 engineers are working on it as these lines are written (while Coinbase and Binance have hundreds of open job positions).

This meant that the exchange is automated for speed, efficiency, and automatism.

One of the problems when creating an exchange is that you need customers to get liquidity but that no customer will come if you don’t have liquidity.

It’s an egg-and-chicken problem.

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But Sam had an edge. Alameda, as a trading firm, became the first (and biggest) customer of FTX, providing roughly half of the liquidity it needed.

In order to go over the fact that a US-registered entity couldn’t deal with an exchange based outside of the US, Sam moved Alameda from the US to the British Virgin Islands.

In December 2017, FTX announced it had sold 15% to Binance (the biggest crypto exchange) for $70 million.

In January, Sam raised $40 million from another crypto-focused VC.

Then he worried he wasn’t growing as much as he should.

So he decided to niche down and focused on pro traders.

To do so, he brought to the crypto world a range of financial products that were restricted to the traditional financial markets, like futures and options.

FTX subsequently offered tokenized versions of stocks. Instead of buying an Apple share, you can buy an Apple token that is going up or down according to the value of Apple’s shares.

The advantage is that while the stock market is only open 8h a day, crypto is a 365/24/7 game.

Focusing on traders was a great decision.

Since their only purpose is profit, they operate many more trades than “crypto believers” that buy and hold. More orders means more money for FTX (they take roughly 0.04% of commission).

Since the platform scales well, FTX enjoys 50% of margins, give or take.

In July 2021, Sam raised a monstrous round of $900 million that sent FTX’s valuation to $18 billion – compared to $1.2 billion just a year ago.

FTX worked directly with the investors without going through an investment banker.

Technically, Sam didn’t need the money, but he still raised to attract industrial whales that could help him develop his brand.

He used the money to sponsor the esports league TSM for $210 million, renamed the Miami Heat arena for $135 million, and renamed the UC Berkeley’s football field for $17.5 million.

Then he paid a bunch of stars (Kevin O’Leary, Tom Brady, etc) $30 million to be ambassadors of FTX.

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He also bought a bunch of crypto companies.

His need to race to grow FTX comes from his belief that politicians are always reluctant to forbid platforms and games once a significant proportion of their electorate adopted them. This is how PokerStars survived in the 2010s during the poker crackdown.

In September 2021, FTX announced it was moving to the Bahamas due to more flexible travel restrictions and clearer crypto regulative laws.

The platform has now an average daily trading volume of $11.5 billion, is the second biggest derivatives exchange in the world, the fourth biggest exchange in general, and has 2 million users.

To grow as fast as possible, Sam is already seeking to raise yet another round of $1.5 billion.


Future

While most billionaires like Warren Buffett made the choice to give their fortune now instead of later when it is bigger, Sam is doing it the other way around.

As a result, he “barely” gave $35 million so far.

One of the reasons is that while he is immensely wealthy on paper, he is poor in cash in practice.

Half of his wealth is tied to FTX. When he understood that growing the exchange was what would enable him to make the most money in the long-term, he bought back the 15% of the company he had sold to Binance for…$2.3 billion (Binance made a nice $2.23 billion profit on the transaction).

While Sam has become phenomenally wealthy in a phenomenally short period of time, God knows what will the future hold for him.

FTX is unavailable for the residents of/or in the following territories:

  • USA
  • Cuba
  • Crimea and Sevastopol
  • Iran
  • Afghanistan
  • Syria
  • North Korea
  • Antigua
  • Barbuda
  • Ontario
  • Japan
  • China
  • Bolivia
  • Turkey

And in some territories of Thailand, Malaysia, and India.

As states are developing ever more regulations for cryptocurrencies, the crypto community will have to fight or adapt.

Faithful to his Effective Altruism philosophy, Sam embraced regulations and is much more transparent than other exchanges.

The Bahamas. Photo by Georgy Trofimov on Unsplash

Furthermore, FTX does not plan to remain in crypto only.

Lately, users had the chance to bet on the 2020 US presidential election or the Superbowl.

His vision is to enable users to do pretty much anything financially related on FTX, from trading puts on Ethereum to buying shares of an energy ETF.

Ironically, Sam is not a crypto believer. He’s only in the crypto to make money, and won’t hesitate to move to something more lucrative if he has the chance.


Controversies

Obviously, this story wouldn’t be complete without its share of controversies.

I became interested in Sam Bankman-Fried when I saw people on Twitter calling him Sam Bankman-Fraud.

It made me laugh.

It all starts with Tether. Tether is an unbacked stablecoin that prints billions to artificially inflate the price of Bitcoin when it dives.

Here’s how it works.

  1. The price of bitcoin tanks
  2. Tether prints billions
  3. Tether wires these billions to exchanges
  4. Exchanges exchange them against BTC
  5. The price of BTC goes back up

It has been reported that FTX received around 1/3 of all unbacked Tether that have ever been printed.

This means that when Bankman-Fried declares Tether is backed, he is whether lying…or lying.

Sam has further been sued for fraud in 2019 when he was accused of ordering to dump BTC on Binance to manipulate the price and create cascade selling.

It appears the lawsuit was settled out of court.

Finally, the last problem concerns the tie between Alameda and FTX. An exchange like FTX owns a lot of data that would tremendously help a crypto trading firm like Alameda.

Sam has declared Alameda is treated no differently than other firms using FTX for their trade, and that Alameda does not have access to any more information.


Conclusion

I wrote the billionaire series to find out about principles billionaires follow and respect when acquiring their fortune.

Sam embodies them all.

He is obsessively passionate about a cause (doing good) and does all he can to achieve it.

He looked for a problem to fix and delivered a superior product for it.

He is super dedicated to his customers, answering customer support tickets and ordering his devs to implement features users complained about on Twitter.

Sam has a grand vision, and does not hesitate to do all he can to achieve it.

He vertically AND horizontally integrated his companies: FTX does not use all of the intermediaries other companies use on one hand, and it aims at offering an increasing diversity of financial assets on the other.

Finally, he works hard. He sleeps only four hours a night, and once stayed up for 30 hours straight.

Many have compared him to Zuckerberg to his own exasperation.

Sam’s purpose isn’t to rule the world, but to donate as much money as possible.

FTX has been much more transparent about its business than Facebook and always complied with regulations.

Furthermore, while Zuckerberg owns yachts and mansions, Sam does not spend a dime of his money, except when he gives it.

He sleeps in a bean bag chair and lives with roommates.

In a Peter Thiel fashion, he expressed his incomprehension about those that own $50 billion of liquid wealth and do nothing with it.

Quite of a peculiar billionaire.

And he’s only getting started.


Thank You!

I started the billionaire series in September 2021 and published one article per week since then.

What an adventure it has been!

I have learned much more than I would have ever imagined.

If you wish to get a detailed and summarized version of the 21 articles, I will soon write an article about all of the billionaire principles I have observed.

Stay tuned!

Sources:

Wikipedia

Forbes

FTX

Forbes

Forbes

Forbes

Yahoo

Business Insider

South China Morning Post

Fortune

Forbes

Vox

Coingeek

Bloomberg

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