How Billionaire Bankman Fried survived the recession and is still expanding

FTX CEO Sam Bankman-Fried has been shopping for deals amid the recent carnage of the industry, and said he still has cash to spend if the opportunity arises.

It may seem strange. Other multi-billion dollar crypto giants entered bankruptcy this year. Coinbase, the main competitor to FTX, has seen its shares drop by 70% and lay off a fifth of its workforce as cryptocurrency prices crash.

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Pro Exclusive: FTX's Sam Bankman-Fried Becomes a Billionaire and His Investment Strategy

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Pro Exclusive: FTX’s Sam Bankman-Fried Becomes a Billionaire and His Investment Strategy

However, FTX somehow stands out as the lifeblood of the industry.

The 30-year-old billionaire says it was a result of amassing ample cash, keeping overheads low, avoiding lending and being able to move quickly as a private company.

“It was important for the industry to get over this in one piece,” Bankman-Fried told CNBC in an interview at FTX’s headquarters in Nassau, Bahamas. “It wouldn’t be good for anyone in the long run if we had real pain and real explosion – it’s not fair to customers and it wouldn’t be good for the organization.”

The cryptocurrency industry has seen billions of dollars wiped out during the weeks surrounding the collapse of cryptocurrency Terra USD and the failure of crypto hedge fund Three Arrows Capital. The lenders exposed to Three Arrows were the next domino to fall. In July, FTX signed a deal that gives it an option to buy the lender BlockFi after offering a $250 million line of credit. FTX also provided $500 million to struggling, later bankrupt Voyager Digital, which was in discussions to acquire South Korean crypto exchange Bithumb.

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

is not immune

While cryptocurrency exchange Bankman-Fried’s FTX suffers from a downturn in digital assets, he said its growth in market share has helped offset the pain.

“I don’t think we’re safe from it,” Bankman-Fried said. “But we have put in a lot of work to grow our footprint over the past year…and we have a platform that is less retail intensive – retail tends to be more dependent on market sentiment.”

Most of the FTX volume, he said, comes from clients trading “at least” $100,000 a day. Bankman Fried described the group as “highly engaged and large number of users” and “fairly sophisticated”. They range from small business firms to family offices and day traders. The FTX demographic has been less price sensitive and has remained relatively well in the crypto bear market, according to the company.

In addition to its success with professional traders, it is also acquiring expensive land for the US retail audience. FTX has purchased the naming rights to the NBA Stadium in the Miami Heat, formerly known as American Airlines Center. He has summoned high-profile investors and brand ambassadors including Tom Brady and Gisele Bundchen, and ran a Super Bowl ad featuring Larry David.

CNBC reported in August that the cryptocurrency exchange generated nearly $1 billion in revenue last year. Bankman-Fried emphasized that the numbers were in the “right ballpark” and this year will see a “similar” figure, depending on how severe the market slowdown is. He also said that the company is profitable.

He cited a decrease in the number of employees as one of the factors calculated for profitability. FTX has approximately 350 employees – about a tenth of Coinbase’s workforce.

“We’ve always tried to grow in a sustainable way – I’ve always been very skeptical about negative unit economics, any economies without any kind of clear real path to profitability,” he said. “We hired a lot less than most places were doing, but we kind of kept our costs in check.”

Bankman-Fried earned a degree in physics from the Massachusetts Institute of Technology and began his career as a quantitative trader at Jane Street Capital. He bought bitcoin for the first time five years ago, and said he was drawn into the industry by extensive arbitrage opportunities that sounded “too good to be true”. In 2017, Bankman-Fried launched a trading company owned by Alameda Research to start trading assets full time. The company was making $1 million a day in some cases, buying on an exchange in one market, and reselling on other global exchanges, according to the CEO.

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

Bankman-Fried said he has worked over the past few years to remove conflicts of interest in Alameda. “I no longer run Alameda – none of the FTX is running anymore. We consider it a neutral part of the market infrastructure.”

FTX has seen exponential growth since it was launched by Bankman-Fried along with co-founder Gary Wang in 2019. It last raised $400 million in January at a valuation of $32 billion, bringing total venture capital funding in the past three years to about 2 Billion dollar.

FTX Trading Ltd. is headquartered in In Antigua, with FTX derivatives markets based in the Bahamas, where Bankman-Fried lives. FTX Trading has acquired companies in Switzerland, Australia, Cyprus, Germany, Gibraltar, Singapore, Turkey and the United Arab Emirates, among other countries.

The exchange spent about half of its money on rescues and acquisitions, and recently purchased 30% of Anthony Scaramucci’s Skybridge Capital stock.

“We still have very little time to publish, if and when it is useful or important,” Bankman-Fried said.

Three-day deals

FTX has benefited from being a private company this year. FTX is not suffering from the daily ups and downs of publicly traded stocks, especially growth names, which this year have been hit by rising interest rates. Bankman-Fried also said the lack of thousands of shareholders enabled FTX to move quickly when trying to close deals within days.

“I think that makes it more difficult, in practice, to do that as a public company,” he said. When you “have three days from start to finish to transfer money, you can’t do a public sharing process about the possible terms of a chaotic situation.”

Many of the deals were made within days, Bankman-Fried said, when “the team hasn’t slept much this week”. Often rather lengthy due diligence comes in a truncated Excel spreadsheet. The finances are not audited. The team had at least some expectations of losing money.

“It is not clear if it will be net positive or negative – there is a potential upside if all goes well,” he said. “We got to the point of feeling like we could do something that would have a counter-intuitive opportunity to help out with an amount of money we were willing to lose if things went wrong.”

It’s too soon to tell if Bankman-Fried’s distressed bets on cryptocurrency will pay off. Some companies said no to the rescue group altogether.

After extending a credit line to Voyager, FTX and Alameda considered buying and restructuring the company. It outlined a plan to purchase Voyager’s digital assets and loans at market value. The company responded to the bid, calling it a “low ball show dressed up as the White Knight Rescue”.

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

There were further discussions, Bankman-Fried said, and the answers were “disappointing”. The problem, he said, was that the proposal did not take any fees.

“If you’re in the charging business, our suggestion might not be what you like,” he said. “I think it was a low bid for advisors looking to pay a fee in this situation. That wasn’t what I was thinking. I had clients in mind. But that’s my current best understanding of what happened.”

Next… Warren Buffett?

Bankman-Fried’s moves in cryptocurrency drew comparisons to Warren Buffett’s strategy in 2008. Legendary Chairman and CEO Berkshire Hathaway stopped the bleeding during the financial crisis with a $5 billion investment in Goldman Sachs. This eventually led to the giant conglomerate in Omaha, Nebraska, earning $3 billion.

“There are some similarities,” Bankman-Fried said. “There will likely be more differences. First of all, I don’t think Warren Buffett is going to call me the next Warren Buffett. To the extent there’s been a similarity lately, he’s been looking at assets that are in a place where they desperately need capital.”

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

He also praised Buffett’s skill at long-term and value investing. The investor showed that “you don’t need to innovate or see one great one, you can do this by simply putting together good decision after good decision over decades and multiplying that.”

Like Buffett, Bankman-Fried signed the Giving Pledge: a promise by the world’s richest people to donate most of their fortune to charity. Bankman-Fried said he donated about $100 million this year, with a focus on preventing the pandemic in the future. Like Buffett, he lives modestly. Bankman-Fried shares a house with 10 roommates and a Goldendoodle named Gopher. He drives a Toyota Corolla, and has said he has no interest in the excesses of the yacht or a Lamborghini.

But the two humble investors differ sharply when it comes to their positions in cryptocurrencies.

Buffett and business partner Charlie Munger have criticized cryptocurrencies over the years. In 2018, for example, Buffett called bitcoin “maybe squaring rat poison.” Earlier this year, Buffett said that he would not buy all the bitcoin in the world for $25 because it was “not producing anything.”

Buffett described the underlying blockchain technology as “important” — but he hasn’t backed away from the idea that “bitcoin has absolutely no unique value.” Blockchains are digital databases that store cryptocurrency transactions and, in some cases, other data. Its main use was to operate cryptocurrencies such as Bitcoin. But fans of the technology say it could be used in healthcare, supply chain logistics and other areas of finance.

“I’m definitely against that,” said Bankman-Fried. “hopefull [Buffett] It also varies with that. I don’t think you should run a company if he thinks so, but I don’t think he actually thinks so. I think that was probably an exaggeration, he said. “It has lost some of the power of the blockchain – it has also lost some of its momentum in the first place, and what drives people to want a new tool.”

Correction: Gisele Bundchen is a brand ambassador for FTX. An earlier version misspelled her name.

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