Original title: FTX's Balance Sheet Was Bad
first level title
Original compilation: Leo, BlockBeats
an "empty box"
There's so much to say, but I'm going to start with Serum.
If a struggling company reaches out to potential investors in the days leading up to filing for bankruptcy and sends a balance sheet to those investors so they can consider whether to invest, but doesn't receive funding and the company subsequently files for bankruptcy, then Its balance sheet certainly won't look good, and it's not a state of affairs that matches the original "fortress-style" balance sheet.
Even a bankruptcy can cause a series of worse chain reactions. Sam Bankman Fried's FTX balance sheet was sent to potential investors last week (before filing for bankruptcy on Friday). The data was very bad. This Excel on FTX The watch seems to be full of "ghosts" and if you stare at it for too long you'll go crazy.
Antoine Gara, Kadhim Shuber and Joshua Oliver of the Financial Times reported on Saturday:
"Investment materials obtained by the Financial Times show that on the day before SBF's bankruptcy, FTX international held only US$900 million in easy-to-sell assets, while its liabilities were as high as US$9 billion."
The largest chunk of liquid assets listed on FTX international's balance sheet last Thursday was $470 million in Robinhood stock held by SBF Personal, which was not listed in Friday's bankruptcy filing ( These include 134 corporate entities). "
It looked bad, but somehow it got worse and worse.
A balance sheet listing FTX international, seen by the Financial Times, points to the problems that led to SBF's bankruptcy. It cited $5 billion in withdrawals last Sunday, and an $8 billion record of negative equity in what it described as a “hidden, poorly labeled fiat account (fiat@).”
According to the table, the vast majority of FTX’s recorded assets are either illiquid venture capital investments or tokens that are not widely traded, and these numbers “are rough and may vary slightly; of course there may be spelling mistakes, etc. As time goes by, as deals go through, they change a little bit.”
The table shows that FTX Trading’s assets total $900 million in “liquid” assets, $5.5 billion in “illiquid” assets made up of tokens, and $3.2 billion in illiquid private equity investments. There is also a $7 million holding called "TRUMPLOSE." No bitcoin assets are listed, despite a whopping $1.4 billion in bitcoin liabilities.
As bad as all this is, it doesn't make you accept that this so-called FTX balance sheet published by "FT Alphaville" is not so much a balance sheet as a list of hasty apologies . If you easily add the "liquid," "illiquid" and "illiquid" assets to the "deliverable" value (as of last Thursday), minus the liabilities, you do come up with about $700 million Positive net worth (about $9.6 billion in assets, $8.9 billion in liabilities), but also a "hidden, poorly labeled internal fiat account" with a negative $8 billion balance.
I don't think this number should be subtracted from net worth - although I don't know how this balance sheet should be calculated! It doesn't matter. If you try to calculate the amount of a balance sheet by "hidden, poorly internally labeled accounts", Microsoft's Clippy will show up in front of you and tell you insanely that you cannot ” to perform common operations on the numbers in the cell. The result of adding and subtracting these numbers with ordinary numbers is not a number, which is a crime!
But the following passage drives me nuts:
“As of last Thursday, the company’s largest asset was Serum (tokenized as SRM) worth $2.2 billion. According to data provider CryptoCompare, SRM’s market cap on Saturday was $88 million, suggesting that if sold on the market, The value of SRM held by FTX will be greatly reduced, and the data of CryptoCompare considers the liquidity of the token.
Taking a closer look at the balance sheet, the largest "deliverable" figure: $2,187,876,172 in SRM, which was worth $5,430,110,335 before then ("before this week" means before last week - "before Nov 8", Nov 8 Everything related to FTX crashed after the problems with FTX came to light on the 1st day).
As of around 11 a.m. on the 14th, CoinMarketCap shows that the price of SRM token is $0.25, the "market value" is about $65 million, and the "fully diluted market value" is about $2.5 billion. Last Thursday, when the balance sheet came out, this set of figures may have been a bit higher — like $0.35 to $0.40 per token. SRM was trading around $0.80 before Tuesday, when bitcoin prices plummeted during FTX’s death throes. To put it in perspective, FTX is sitting on two-thirds of SRM's fully diluted market cap, which is about 20 times its fundamental market cap.
In crypto markets, market cap is (as CoinMarketCap puts it) "the total market capitalization of the circulating supply of a cryptocurrency, similar to the free float market capitalization of a stock market," while fully diluted market cap is "the market capitalization calculated when the circulating supply is at its maximum ". If for example a company creates a class of tokens with a total supply of 10 billion, keeps them, and then sells 1 million tokens worth $1 to outside investors, then the market cap of the token is $1 million, while the fully diluted market cap It is 10 billion US dollars (1 US dollar multiplied by 10 billion total), the remaining 9.999 billion tokens of the issuing company will actually have a value, which is indeed 9.999 billion US dollars in mathematics. We discuss this later.
What is Serum, Serum is a "decentralized transaction protocol that brings high speed and low transaction costs to decentralized transactions", running on the Solana chain. Additionally, SRM is Serum's utility and governance token. If you keep SRM in your wallet, you can get a discount on the fees for trading the Serum protocol. Additionally, when the protocol charges transaction fees, it uses a portion of the fees to buy and burn SRM. The result is that SRM functions a lot like a stock in Serum: if the Serum project does well, and a lot of decentralized transactions happen on its exchange, then it will collect a lot of fees, and use those fees to buy SRM, which will push the SRM up value, making SRM investors rich. (SRM investors can also vote on how Serum is run.) If you like Serum as a business, as a decentralized crypto trading platform, then you should buy SRM because SRM is roughly a cash flow requirement for the business .
One crucial thing about the Serum protocol is that it was created and promoted by FTX and Alameda Research. Alameda Research is a crypto hedge fund affiliated with FTX, also created by SBF. FTX is a centralized crypto exchange, but many people in the crypto space do not believe in centralized exchanges (for some reason!), they prefer to trade on decentralized exchanges. Serum, in a loose but meaningful manner, became "FTX's decentralized exchange."
Back to the above topic, a company creates a class of tokens, keeps a large number of tokens for itself, and sells a small amount of tokens to the open market. About 3% of the value of SRM is held by the public, or traded on exchanges. About two-thirds of the other 97% is held by FTX and Alameda.
How did they get the SRM? You can look at the SRM token distribution chart, but the main point is that they are not bought in cash on the open market. FTX's balance sheet says that "prior to this week" it held $5.4 billion in SRM, which doesn't mean Alameda or FTX spent $5.4 billion in cash (their own, their investors', their customers’ or anyone’s), and purchased a large number of SRM tokens on the open market. As the original backers of the Serum protocol, they got all the SRM tokens for free (presumably they paid some start-up costs).
Ignore this nightmare balance sheet for a moment and think about what FTX's balance sheet should have looked like. Conceptually, customers give you money - apparently about $16 billion in cash, unrelated tokens, etc. - and you keep that money for them. In the simplest logic, you keep your customers' money exactly in the form of value they give you: someone deposits $100, you keep $100 for him; someone deposits 1 bitcoin, you keep 1 bitcoin for him . For reasons we've already discussed, operate legally! But that's not how FTX works, and you can also think of some more complicated balance sheets, where some customers have a lot of funds and tokens loaned to other customers. But overall, your balance sheet still looks roughly like this:
Liabilities: what you owe your customers for the money they give you;
Assets: Things you buy with the money.
The most basic question is how serious this mismatch is. for example:
$16 billion in liabilities and $16 billion in liquid dollar-denominated assets;
$16 billion in liabilities and $16 billion in BTC assets - not ideal, very risky, but understandable on a macro level;
$16 billion in liabilities and the "Magic Beans" you bought in the market for $16 billion? Very bad;
The $16 billion in liabilities and assets are mostly Magic Beans you invented yourself and acquired at zero cost? Ignoring the value of the magic beans, where did the money go? Where did that $16 billion go? It would suck to spend $5 billion of user funds on Serum, but FTX didn't do it and couldn't because there wasn't $5 billion of SRM to buy at the time. FTX puts customers’ money into some unidentified “black hole” and says, “We’re really worth $5 billion in SRM tokens, isn’t that amazing?” Not so!
Quite simply, FTX's SRM reserves far exceed the circulating supply of SRM in the entire market. If FTX tried to sell them on the market for a week, a month or a year, it would flood the market and cause the price to plummet. Maybe make a few hundred million dollars for them. But I think the realistic value of huge SRM should be close to zero. This isn't a review of Serum: it's a review of the size of the stash.
But I do want to comment on Serum, because SRM is not a token that FTX got into trouble for some reason; SRM is a token that FTX made. A loose but reasonable analogy - Serum (protocol) is FTX's decentralized exchange subsidiary, and SRM (token) is the subsidiary's stock. A small number of shares are publicly traded, but largely held by its parent company, FTX. The open market price of the few outstanding shares can probably be judged by the value of the subsidiary. But in the real world, the value of the subsidiary is closely tied to the value of FTX's overall business. If everyone thinks "yes, FTX is a good trading platform, the leader in secure crypto trading platforms", then Serum has a good chance of becoming popular and profitable. If everyone thinks "FTX is a scam", life will be difficult for Serum.
At this juncture, FTX is selling its Serum stake for rescue financing, its huge reserve Serum is just "toast" due to hidden internal poorly labeled accounts!
Does this sound familiar? This is much the same as when I talked about FTT last week, FTT is the application token of FTX Cex, I wrote:
FTX issues a class of token called FTT, the property of this token is that you are entitled to some discounts, but its main property is that FTX regularly uses a part of its profits to buy back FTT tokens, which makes FTT a bit like FTX's Stock: The higher the profit of FTX, the higher the price of FTT will be. But it's not FTX stock - actually FTX is a company, owns stock, and venture capitalists buy it, but it's much like FTX stock, FTT is a bet on FTX's future profits.
I have written about FTX potentially lending large amounts of client funds to Alameda and using Alameda’s FTT token as collateral:
If you think that tokens are “similar to stocks” and you think that crypto trading platforms are securities broker-dealers, then your thinking is too far. If you go to an investment bank and say, "Lend me $1 billion and I'll put $2 billion of your stock as collateral," they'll say no and think you're making trouble. The problem is that this is a mismanagement of risk, and (at least some of the time, illegally too) if people start worrying about the financial health of an investment bank, its stock will fall, which means its collateral will Devaluation, which means its financial situation will deteriorate, which means its stock will fall, and so on into a death spiral.
Last week, it struck me that one of FTX’s main assets — one of its main assets that enable it to pay its customers’ balances — is the token it just minted. But I was wrong! In fact it is the two tokens it makes! (Before this week) FTX's two largest asset balances were the $5.9 billion FTT token ($553 million after last Thursday's crash) and the $5.4 billion SRM token ($2.2 billion after the crash). Roughly two-thirds of the money FTX owes clients is backed by tokens it made up itself.
The third largest asset is SOL,The token of the Solana chain. Solana is not something made by FTX, it exists independently of FTX. But it definitely has something to do with Alameda, FTX, and SBF, who are the main supporters of the Solana ecosystem. It's not that Solana is "FTX's blockchain", but in fact it is a bit like it, and there is also a risk of misoperation here.
Another big asset is the $616 million MAPS token($865 million "before last week"). MAPS is the token of Maps.me 2.0 (which is a derivative of Serum and issued by FTX); according to data from CoinMarketCap around 11 am on the 14th, its market value is about 3 million US dollars. Likewise, the MAPS held by FTX is 200 times the total value of the actual tradable MAPS in the market. This is roughly the same as Serum, albeit on a smaller scale (lots of similar stuff on the balance sheet: Bloomberg's Annie Massa reports on the projects,Click to learn）。
In round numbers, FTX’s balance sheet last Thursday showed customer liabilities of about $8.9 billion, compared to assets worth about $19.6 billion before last week’s crash and $9.6 billion after the crash (according to FTX’s data, as of last Thursday). Of the so-called $19.6 billion in assets, approximately $14.4 billion is in tokens related to FTX (FTT, SRM, SOL, MAPS). Only $5.2 billion in assets ($8.9 billion in customer liabilities) are presumably normal financial assets. (Even so, this is mostly illiquid venture capital; only about $1 billion is liquid cash, stocks, and crypto tokens — half of which is Robinhood stock). After what happened to FTX, predictably, everything related to FTX fell apart. The balance sheet released last Thursday valued the combined assets of FTT, SRM, SOL and MAPS at $4.3 billion, which is still too high.
I am not saying that all assets of FTX are fictitious, fabricated. This shitty balance sheet lists USD and JPY accounts, stablecoins, uncorrelated tokens, stocks, venture capital, etc., all of which were not created or controlled by FTX. This balance sheet reflects the state of FTX after the $5 billion customer exodus last weekend; presumably FTX ran out of more liquid normal assets (Bitcoin, USD, etc.) It is "a cat and a dog". Surprisingly, however, much of the balance sheet that FTX distributed to potential rescuers consisted of stuff it made up itself. Its balance sheet is mostly made up of stuff it made up itself! This (made up) is not the normal composition of a balance sheet! no!
Fine, that's how cryptocurrencies work. This may sound familiar, not only to FTT we talked about last week, but also to Terra and Luna earlier this year. Terra, a blockchain system run by Do Kwon, has raised billions of dollars by selling a dollar-pegged token — TerraUSD — that are considered a store of value because they are another token created by Kwon LUNA support. For a while, it was thought that the Terra ecosystem was promising, so LUNA was valuable, so Terra could go around saying its TerraUSD token was very safe, because billions of dollars of TerraUSD "debt" was secured by billions of dollars of LUNA. Then one day people changed their minds and LUNA crashed, so TerraUSD had no support and the whole market crashed. The situation with FTX is different, but there are similarities. TerraUSD "debt" - here played by FTX's client balances; LUNA's role is played by FTT and SRM. In both cases, people lost faith in businesses and it turned out that these debts were not backed by anything.
Either that sounds familiar, or it might sound familiar, because SBF said it to me last year on Bloomberg's Odd Lots podcast (now that blog is "notorious"). I asked him a question about liquidity mining and he replied:
You start with a company that makes an empty box, and in practice they might dress up the box as a life-changing, world-changing protocol that will, say, replace all the big banks in 38 days or whatever. But what it does you can basically ignore or pretend it doesn't do anything, it's just a box. So what is this protocol, it's called "Protocol X", it's a box, you need a token.
So you have this box, it's kind of dumb, but it's like the ultimate game, right? The box is obviously worth zero, but on the other hand, if everyone now thinks the protocol has a token market cap of about $1 billion, and that's how people price it, then there's some market cap. Each will be marked to market. In fact, you can even finance it, right? You put the X token in the lending agreement, and then use it to borrow dollars. If you think it's less than two-thirds of the total, you can even put some in and get the dollars out. Never give your money back. You will be liquidated eventually. In a sense, it's kind of like a real tokenizable thing.
first level title
but where did the money go
In the last chapter, I tried to capture the problem of FTX's balance sheet death spiral to bankruptcy. But, as I said, something important is missing from this account. What's missing is the money, FTX at one point had about $16 billion in client funds, but most of its holdings were in tokens it created itself. It didn't pay $16 billion for these tokens, not even $1 billion. The money came in, but when customers came to FTX and pried open the safe door, all they found was boxes full of cobwebs and Serum. Where did the money go?
I don't know, but the main story seems to be that FTX gave the money to Alameda, and Alameda lost it all. I'm not sure about the order of operations here. The most reasonable explanation is that Alameda first lost money, and during the crypto market crash this spring and summer, Alameda spent money to support other failed crypto companies, and then FTX transferred customer funds to support Alameda. Alameda never got the money back, and eventually everyone noticed that the money was gone.
So Reuters reported last week:
At least $1 billion in customer funds disappeared from crashed crypto exchange FTX, according to two people familiar with the matter
Trading platform founder SBF secretly moved $10 billion in client funds from FTX to Alameda Research, according to people familiar with the matter
Much of that vast sum has disappeared, they say. The Wall Street Journal reported over the weekend:
According to people familiar with the matter, Alameda Research and FTX executives knew that FTX had lent client funds to Alameda to help it pay off its debts
The collapse of crypto hedge fund Three Arrows Capital in June brought losses to crypto brokerages such as Voyager Digital, and Alameda faced a flood of calls from lenders, people familiar with the matter said.
Alameda CEO Caroline Ellison said in a video conference with Alameda employees late Wednesday in Hong Kong time that she, SBF and two other FTX executives, Nishad Singh and Gary Wang, were aware of the decision to send client funds to Alameda, according to people familiar with the matter.
Ellison said on the call that FTX used client funds to help Alameda pay off its debts, according to people familiar with the matter.
Alameda took out loans to fund illiquid ventures, people familiar with the matter said
We're purely speculative at this point, but you can imagine a number of scenarios that could happen:
1. Earlier this year, prices and companies in the crypto market plummeted. Alameda found a huge opportunity. It mobilized as much money as possible to buy a large number of assets at extremely low prices. However, due to the crypto winter, Unable to access significant funds and receiving constant calls from lenders, Ellison and SBF deliberated and decided that they could not pass up this opportunity to use FTX client funds. They will make a fortune in a short period of time by trading without losing money, and then pay back the client's money with interest. Then, the story ends sadly - but understandably, if you run an opaque business in a lightly regulated industry, and customers entrust you with their money, you use that money to make what you think is a good bet, but the bet Lose, which happens sometimes.
2. Earlier this year, the price of the crypto market and the company plummeted. Alameda was in trouble and lost a lot of money. It also faced calls from lenders. Ellison and SBF realized that without financial assistance, Alameda would go bankrupt , so they backed Alameda with FTX client funds and staked redemption rights. This story is not much different from the previous one, worse but also quite understandable. This is how things like this are typically handled, why would anyone use client funds with the default assumption. No one wants to fail, no one wants to admit they lost money, and if there's a lax "money pot" they can use to cover up the loss, and sometimes they do.
3. Prices and companies in the crypto market plummeted earlier this year, FTX/Alameda said: "We are in a confidence dominated industry, if these companies collapse, then investors will lose confidence in the crypto trading platform, which is very important to our Bad for business.” Either in a good way, hopefully crypto booms, or in a bad way, or both. So they bailed out these companies with their customers' money.this is a paragraphIn a video of me and SBF discussing the possibility of this approach at the Bloomberg Encryption Summit in July, he said in the video: "We have a clear rescue principle, which is to maintain the health of the encryption ecosystem, and we are doing this. Relatively little money was lost in the process.” Alameda/FTX is willing to pay to bail out other companies if doing so increases confidence in cryptocurrencies. Of course, nothing is said about the possibility that FTX will do this with customers' money.
4. As prices and companies in the crypto market plummeted earlier this year, FTX/Alameda saw an opportunity to take new customer deposits cheaply and used them for nefarious purposes. Like, you pay zero dollars for equity in some bankrupt crypto lending platform, you transfer customers to FTX, you will cash out the money at will, assuming most people will trust FTX (their savior) and not cash out, then you can Use their deposits to fund your wild speculations. If FTX/Alameda has already used customer deposits for some nefarious purpose and lost a lot of money, getting more customer deposits would be a way to maintain this bad cycle.
5. FTX/Alameda invests clients' money in luxury lifestyles. That seems unlikely here - they're sleeping on bean bag chairs in the office, but that's usually a very common symptom of losing client money and you'll need some accounting work.
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