Alameda Research, the FTXs sister firm, has gone bust. But, how did this happen? What made them into such a disastrous collapse? Who was behind this downfall? Let’s see how the decline of Alameda Research happened.
Alameda Research founded by Sam Bankman-Fried in 2017, was known as the sister firm of FTX. It was a quantitative trading firm founded by Bankman-Fried two years before he founded FTX.
FTX came into the world like a storm where the name appeared in every public place, TV advertisements, and such places that get the attention of people.
But years later, in 2022, we heard that both these firms founded by Bankman-Fried have declined due to the loss of billions of dollars.
Many details regarding this collapse are still unknown, but certain employees and others related to this firm have given the media some reports and details.
Where It Began And How It Ended?
In 2017, Sam Bankman Fried started a small trading firm when he was 25 years old. It was Alameda Research, which is considered the beginning of his crypto empire, as well as its demise.
Bankman-Fried established FTX in 2019 in large part to meet the financial needs of Alameda Research for its trading business. However, due to the way the two entities were set up when one unit experienced problems this past spring, they also affected the other.
Alameda’s primary revenue stream was from buying Bitcoin and other cryptocurrencies in one region of the world and selling them in another, pocketing the difference. It powered its transactions with margin or borrowed funds, to increase profits.
When more experienced investors like hedge funds poured in, transactions eventually turned out to be significantly less profitable for Alameda. They had no issues repaying its loans in either dollars or cryptocurrencies due to the rising price of Bitcoin and other cryptocurrencies, which is predicted to continue.
However, Bankman-Fried had thought of creating a cryptocurrency exchange that may generate income to support Alameda’s operations. Thus FTX was born.
FTX created its token, FTT, which was the focal point of the partnership between FTX and Alameda.
Alameda was the principal market maker for the token, purchasing and selling the FTT. Alameda started utilizing its holdings as collateral for extra loans to support its trading activities after FTT became well-liked by the investors of the exchange who were drawn in by the trading discounts it provided.
This spring, as the cryptocurrency market started to fluctuate, the issues got out of control. Falling crypto prices made FTT less valuable, and Alameda had difficulty making payments to its lenders.
Thus, chaos was about to begin.
Bankman-Fried used to emphasize that FTX and Alameda were independent organizations, but the two were actually closely tight.
Early in November, the balance sheet of Alameda Research was leaked and revealed a significant bankruptcy. FTT coins introduced by FTX made up a large portion of Alameda’s balance sheet. And this is how it started and ended up in decline.
What Led Alameda Research To This Downfall?
Several traders claim that many of Alameda’s huge bets likely took the firm to significant losses starting in May 2022, as the rapid fall of the stablecoin terraUSD and its sister cryptocurrency luna accelerated the decline in the cryptocurrency market.
In fact, Bankman-Fried confirmed during a Twitter conversation that his company’s dangerous leverage had grown significantly around the time of Luna’s crash.
Alameda was probably using excessive leverage or debt that can magnify wins and losses, in addition to placing large bets.
One method the company’s leaders used to do this was to use the collateral for loans to be highly liquid cryptocurrencies, such as FTX’s own token, FTT, and a related one, serum.
Venture investments were yet another capital outflow. The bitcoin miner Genesis Digital Mining and the now-defunct cryptocurrency broker Voyager Digital are just two of the more than 150 investments in Alameda reportedly made across the whole cryptocurrency industry.
To pay on those bets, Alameda reportedly took out loans.
Lenders tried to recover money that was invested in these risky unsecured notes as the cryptocurrency market fell. FTX and Alameda subsequently took the questionable action of attempting to repay some of those Alameda loans using the money from FTX customers.
According to reports, there is $5.1 billion in unpaid debt for Alameda alone.
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Alameda Research Now
After all these losses in May and June this year, there were certain media sources reported that Caroline Ellison, CEO of Alameda Research, Bankman-Fried, and other FTX executives such as Nishad Singh and Gary Wang, was aware of the deals between FTX and Alameda.
The co-CEO of Alameda, Sam Trabucco resigned from the position in August 2022. Then, Caroline Ellison became the only CEO of Alameda.
Following a liquidity crisis at FTX, it signed with Binance a letter of intent on November 8th, 2022, for FTX to be bought by Binance. Following the public disclosure of the issues and the FTX takeover agreement, Alameda’s value was impacted and was estimated to have decreased by more than 90%.
In October 2022, the principal shareholder Bankman-Fried’s net worth was expected to be $10.5 billion, but it now stands at roughly $1 billion.
The website for Alameda was taken down on November 9, 2022. The following day, Bankman-Fried announced that Alameda Research will cease trading and close.
In November 2022, Alameda Research, FTX, and more than 130 associated companies filed for Chapter 11 bankruptcy protection.
Later on December 11, 2022, Bankman-Fried was arrested in The Bahamas after the US prosecutors criminally charged him for attempting to fraud investments on his investors and money lenders.
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