Alameda Research Was Set for Doom Even Before Crypto Crash

Before Sam Bankman-Fried (SBF) was arrested and charged with fraud, he claimed Alameda had been profitable until the recent cryptocurrency crash. However, with new reports from the Wall Street Journals, Alameda’s predicaments were inevitable even before the recent cryptocurrency crash. 

Alameda engaged in risky bets with the company’s funds. Some were lucrative, but most were unproductive and cost the company a lot of money. A deep dive into its past trading activities revealed the now-bankrupt trading firm was frivolous in its trades and incurred severe losses before FTX came into the mix.

Alameda’s Big Arbitrage Play in Japan

The report also revealed that the crypto trading firm lost money from its trading algorithm. The algorithm, designed to take automatic and quick calls trades, made the wrong calls and incurred heavy losses for the firm. 

SBF’s first big trade play was arbitrage trade which involved Japan. Crypto trading in Japan at that time was complex, so Bankman-Fried took the initiative to take advantage of the situation. His firm Alameda would buy bitcoin at a lower rate from other countries and resell them at a higher price there.

The venture was lucrative and earned Alameda between $10 million to $30 million before the price difference stopped in early 2018. The cost of funding the trade was expensive and cut into the profit.

Alameda Neared Collapse in 2018

One of the ways SBF raised capital for his trades with Alameda was from loans. He borrowed $100 million worth of ether (ETH) from Skype co-founder Jaan Tallinn.

Tallinn reportedly asked for his money in 2018, and when he got reimbursed, Alameda’s assets fell two-thirds to $30 million. The decline was also attributed to a heavy loss in the price fall of  XRP. The losses almost led the company to collapse.

In a bid to salvage the situation, Bankman-Frieds sourced money from lenders. He promised them up to 20% returns in cash and crypto to entice them to relinquish funds and prevent Alameda’s collapse. 

Citigroup Cites Risk Management Fault in Alameda

Citigroup, an investment bank, approached Alameda in 2020 to form a crypto lending business. The deal, however, was short-lived as Citigroup discovered a lack of risk-management framework in the company.

Austin Campbell, the then CEO of Citigroup,  grew uneasy about his discoveries and backed out of the deal. He also noted that most of his questions about the firm’s structure went unanswered, fuelling more doubt around the company.

Bankman-Fried’s FTX Exploitation

SBF launched FTX in April 2019. Reports show that he used Alameda’s funds to expand the exchange and entice potential buyers into trading with it. He then devised a means by which he could be able to move money from FTX unnoticed.

According to reports, Bankman-Fried instructed that a code be planted on FTX’s backend to allow him to move money from the exchange without being noticed. He also ensured that Alameda’s FTX collateral got sold if it dropped below a certain threshold.

Recent reports have shown FTX was going to crash eventually. He only borrowed time by sourcing money from FTX, which he opened explicitly for that reason.