- After Bitcoin fell to $20,000 in June 2022, Alameda's net asset value was about $10 billion, SBF trial reveals.
- Former Alameda CEO Caroline Ellison regretted not having hedged more and offered to step down, according to recent declarations.
- SBF is on trial for orchestrating a multibillion-dollar fraud, leaving a lot of customers, individuals, and organizations alike, suffering exposure-related losses.
The Sam Bankman-Fried (SBF) trial continues, with the FTX founder himself on the stand. His lawyer Mark Cohen continues to cross-examine him after last week’s discoveries that SBF thought it was legal to move FTX cryptocurrency deposits to its sister hedge fund, Alameda Research, run by Caroline Ellison, SBF’s girlfriend at the time.
SBF could have embezzled more funds given the opportunity
The SBF trial’s latest declarations suggest that he could have misappropriated more customer funds if Alameda Research’s CEO Caroline Ellison had hedged better. In retrospect, on November 2, a Coindesk report on Alameda Research's balance sheet helped spark the fall of FTX. SBF responded to the report by publishing his version of what the balance sheet looked like in 2021 and 2022. Ultimately, it all pointed to Alameda not sufficiently hedging against the risk of an extreme market crash. The October 30 court session reiterated the assertions.
SBF resumed the stand on Monday, October 30, with the jury attending after being sidestepped on Judge Kaplan’s direction. The judge wanted to determine which parts of the testimony should be exposed to the jury and which ones should be kept separate.
According to SBF, the FTX exchange was trying to increase its trading speed and was developing a database so that even non-developers could have access, including himself. He would spend up to 12 hours a day on this endeavor, either directly or indirectly, with the expectation that if successful, the initiative would bring between $1 to $2 billion in annual revenue.
He also revealed that FTX tried to manage risk, on the off-chance that a customer went negative. SBF claimed that he had discussions with both Alameda Research executives, Caroline Ellison and Sam Trabucco. The latter left the company in August 2022, claiming he “needed to relax” and had “bought a boat”. FTX imploded a few months after, with Trabucco still keeping a low profile.
Specifically, the conversation was about hedging, which to the layperson is basically taking an offsetting position in an asset or investment that reduces the price risk of an existing position. A hedge is, therefore, a trade that is made with the purpose of reducing the risk of adverse price movements in another asset.
When Bitcoin price fell below $20,000 in June, Alameda Research’s net asset value (NAV) was $10 billion. This represented a colossal loss for the hedge fund, causing Ellison not only to weep, according to SBF, but also to consider stepping down. Nevertheless, they agreed to hedge more.
SBF: In September, I asked her again about hedging. I asked what the scale was. She gave me that number. I told her I was glad - but that it should be a bigger number, at least twice as much. She sent me some spreadsheets.— Inner City Press (@innercitypress) October 30, 2023
Cohen: Any more?
SBF: She agreed
In a November 6 post on Crypto X from FTX’s rival exchange, Binance, CEO Changpeng Zhao (CZ) indicated that his exchange would be liquidating its FTT holdings. Customer withdrawals grew to $1 billion, leaving SBF concerned.
In response, Ellison tried to cauterize the withdrawals, tweeting that FTX would be buying FTT at $22 per token, relative to its price immediately before the crash, at $25. Nevertheless, withdrawals still increased, with November 7 recording $4 billion in net withdrawals – 100 times an average day, according to SBF. This had SBF anticipating a liquidity crisis. At this point, the hedges had little to no impact.
Cohen: Then what?— Inner City Press (@innercitypress) October 30, 2023
SBF: Alameda asset crash. We had very little margin left.
Cohen: What impact did the hedges have?
SBF: Very little. I took down the tweet thread.
Meanwhile, it is imperative to remember that SBF is on trial for orchestrating a multibillion-dollar fraud, leaving a lot of customers, individuals and organizations alike, suffering exposure-related losses.
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