Editor's note: this trilogy was written in August 2021, fifteen months before FTX's subsequent meltdown. We have kept it up to show our thinking at the time, and the view of the broader market. We reflected on the fallout and what can be learned in a coda to the trilogy, "The Casino and the Genie."
You can find Part One and Part Three here.
MrCheeze had a bad July.
A year earlier, the gamer had made a bet: no one would ever finish The Legend of Zelda: Ocarina of Time in less than 7 minutes. It just wasn’t possible.
Savestate, another gamer, took up the gauntlet. It would take a flawless performance to succeed, he knew — no wasted button presses, or flubbed movements. In the end, he triumphed with just fractions of a second to spare. On July 22, Savestate completed Zelda in 6:59.767.
Why would anyone do this?
Savestate and MrCheeze are “speedrunners,” — players that aim to complete games as rapidly as possible, often in the hopes of setting a new record. People have speedran all manner of games including Super Mario 64 (1 hour 38 minutes 21 seconds), Sonic the Hedgehog (54 minutes 17 seconds), and Grand Theft Auto V (5 hours 49 minutes 8 seconds).
While the goal of speedrunning is, explicitly: go fast, it takes a lot more than that to be successful. As much as being fleet-fingered, speedrunning is about knowing what you can afford to ignore, to miss out on, and still win. The goal is not to reach the game’s conclusion with the protagonist’s coffers swollen and every sidequest finished, but simply to arrive.
In both its strengths and deficits, FTX reads like a kind of speedrun. In just 26 months, the company has secured an $18 billion valuation, becoming one of the most popular crypto exchanges in the world. That makes it one of the fastest companies ever on a value accrual basis, besting legendary businesses like Coinbase, Stripe, Square, and Slack.
But like every speedrunner, to achieve that velocity, FTX has had to make concessions. In particular, the exchange has played fast and loose with regulation, shrugged off accusations of conflicts of interest, and largely ignored retail traders.
Those lapses may take a toll. Believers will note that the company seems to have the capital, connections, and will to resolve its most significant problems. Of course, only time will tell how effective FTX is in filling the gaps.
Today, we’ll explore different dimensions of the FTX empire, with the help of never-before-seen data on the business. Our investigation will touch upon:
- Early days. FTX’s fast start and near-instant product-market fit.
- Product. How the company differentiated on reliability and creativity.
- Customer base. Winning over serious traders from around the world.
- Metrics. An inside look at FTX’s traction.
- Competition. How FTX compares to Coinbase, Binance, BitMEX, and others.
- Bear case. The ways FTX might implode.
Let’s get to it.
An early look
It’s hard to know what a company looked like in its early days. Thanks to Chris McCann at Race Capital, readers can get an inside look of what FTX looked like to the early investor. The team at Race agreed to share their investment memo with The Generalist, making it public for the first time.
You can review it in its entirety here, and we’ll discuss some of the main takeaways, below.
The contours of FTX seem clear even at this early stage. As the memo highlights, this is a fast executing team riding scalding product-market fit. FTX grew daily trading volume from $50 million to $150 million in less than two weeks. It jumped to $300 million two weeks after that.
The level of product innovation is also notable. A snapshot from the memo outlines the pace of development.
From this list alone, FTX’s product demonstrates admirable creativity, as well as a frightening affection for risk. Offering futures for altcoins within the first few months of operating is not the kind of move a more cautious exchange like Coinbase would make; neither is offering 101x leverage given the riskiness of such investments.
This product suite makes more sense when considering FTX’s market. Race Capital summarizes the state of play in 2019, noting that though crypto futures markets saw similar volume to spot markets, they remained much less competitive.
On July 25th, 2019 the total spot market volume was $10B per day and the total futures market was $11B per day. However, in the futures market, there are many fewer players with the top three (Bitmex, Huobi, OKEx) regularly driving 3x more trading volume vs. their spot market equivalents.
FTX had an avenue of attack. That was helped by the turmoil at one of the futures market’s dominant exchanges: BitMEX. Under investigation by the Commodity Futures Trading Commission (CFTC) for serving US customers, the exchange had seen a “spike in net-outflow.” FTX was positioned to capitalize.
Finally, Race Capital notes the conflict of interest that spooked other investors. At least one crypto capitalist mentioned to me that the connection between FTX and Alameda dissuaded them from investing in this round. The primary fear, as we articulated in Part One, was that FTX would offer preferential terms to Alameda — it’s unclear whether this happened. The possibility for distraction as leadership operated two organizations simultaneously was also of concern.
Despite these worries, Race Capital led the $8 million round, joined by Lemniscap, One Block, FBG, and others. So far, that faith has been extraordinarily repaid. In the following sections, we’ll analyze the company from the ground up to try and understand its $18 billion valuation. First, we need to explain what we mean when we refer to “FTX.”
FTX is not a monolith. Unlike most of its age, the company is really a constellation of different entities that formally and informally interact.
The central nodes of this network are Alameda and FTX.
Alameda is a crypto investment firm. It was founded by Sam Bankman-Fried (SBF), Gary Wang, and Nishad Singh to capitalize on the arbitrage opportunity presented in the Asian markets in late 2017. It has grown in the intervening years, becoming one of the most influential allocators in the ecosystem, investing directly in protocols as well as private companies. Several sources confirmed that Alameda may be the single largest investor in the crypto ecosystem, trading billions in assets a day.
As we’ve discussed, Alameda was FTX's primary market maker in its early days, providing liquidity. The firm makes up a much smaller percentage of volume today, as we'll see later.
FTX is a cryptocurrency exchange. The company was incorporated in Antigua and Barbuda, but is headquartered in Hong Kong. As we mentioned last week, this provenance is not accidental. Hong Kong has historically been much friendlier to the cryptocurrency sector than the US.
FTX includes two subsidiaries: FTX.com and FTX.us.
For most people, FTX.com is what comes to mind when the name “FTX” is evoked. This is the company’s fullest featured product, but for regulatory reasons, it is not available in the United States. When we discuss the product suite in a moment, we will mostly be referring to FTX.com.
FTX.us is a watered-down version of the global platform. In that respect, it has a similar relationship to FTX.com as BinanceUS does to Binance’s better known, global offering.
Now is where things get really confusing. In August of last year, FTX acquired Blockfolio, a crypto news and portfolio tracking app. We’ll talk more about the implications of the purchase later. But just last week, the company shared that it was rebranding Blockfolio to...FTX. C’mon guys.
For the sake of our sanity, we’ll refer to Blockfolio by its original moniker, and unless explicitly noted, FTX will mean FTX.com.
Across these venues, FTX offers its own token: FTT. Much like Binance’s BNB, FTT grants discounts on fees, along with other benefits. If you choose to stake FTT, perks include enhanced voting power, bonus NFTs, airdropped rewards, and further rebates. FTT can be used towards an account’s collateral requirements, too, something we’ll unpack in a moment. To maintain scarcity and create pricing pressure, FTX “buys and burns” FTT.
Finally, there’s Serum, a decentralized exchange (DEX) founded by FTX and Alameda. Unlike Uniswap or Sushiswap, Serum is built on Solana rather than Ethereum, which allows for faster throughput. Just as it did with FTX, Alameda will provide liquidity on Serum, with FTX routing some of its flow to the DEX.
That’s a lot to take in, but should become clearer as we unpack the business. With context set and definitions settled, it’s time to delve into the product.
Product: Power center
Why start a cryptocurrency exchange?
By the time SBF considered building in the space, fearsome competitors abounded. Coinbase had raised more than $500 million in funding, Binance was moving more than $1 billion on hot days, and BitMEX was winning the derivatives war.
As we’ve noted, much of SBF’s decision rose from dissatisfaction with the current offerings, but it was also a reflection of where power resides in the crypto ecosystem. Though a competitive space, exchanges represent the sector’s heart. They serve as on-ramp, capital hub, and data source. If SBF sought greater influence and impact, there was no better product to build than an exchange.
FTX has become the home of the market’s most vigorous traders. It’s done so by building a performant core, providing high leverage, and offering access to unique markets. It has also shown a willingness to extend its empire through new products.
A performant core
Across my interviews, this was mentioned again and again: FTX just works. Informed by their expertise at Alameda, SBF and his team have built an exchange perfectly suited for the serious trader.
That starts with reliability. One source (not an investor) noted that FTX is the most dependable exchange on the market, remaining open even during trading peaks that have shuttered others. That’s managed by strictly budgeting users' API calls: roughly 20 trades can be made per second on the platform. This represents a limitation for some — to accommodate, FTX adjusts this budget based on account size and activity.
Sources also expressed affection for FTX’s liquidity and risk engines. While the former is apparently especially good at reducing clawbacks (losses covered by an exchange’s clients, as occurred on competitor OKEx), it’s the latter that garnered most praise in my conversations.
Unlike other exchanges, FTX allows for “cross-margining.” That means that multiple currencies including USD, BTC, ETH, AAVE, XRP and dozens of others, are counted as contributing to a user’s collateral. This is a meaningful improvement. Most exchanges treat cryptocurrencies separately, meaning that your collateral is calculated on an asset-by-asset basis. For investors looking for leverage, rules like this present a hassle: either your margin is lower than it should be since just a fraction of holdings are included, or you have to go through the pain of shifting from one asset to another.
Part of FTX’s popularity is due to the leverage it offers traders. Thanks to the risk engine described above, it is able to provide a higher margin with less work, relative to other exchanges.
For most of its brief history, FTX has offered 101x leverage. Hypothetically, that meant that if a trader added $100,000 to their account, they could invest $10.1 million. While winning trades can make a huge sum of money thanks to this leverage, losers can find themselves quickly buried by a bad bet.
After its most recent fundraising round, FTX noted it was reducing the available leverage on the platform to 20x. As part of the announcement, the company revealed that leveraged trading makes up a relatively small portion of volume on the platform. Per SBF, the average investment on margin was 2x at the time of the update.
Though the change was reportedly made to encourage “responsible trading,” a 20x leverage limit still puts FTX on the high side. Huobi recently reduced available leverage from 125x to 5x, with both OKEx and Kraken offering the same limit. Bitfinex offers 10x.
FTX is not alone in this elevated position, of course. Binance followed suit shortly after SBF’s announcement, also choosing a 20x limit, down from 100x. BitMEX still offers 100x on certain contracts.
Though perhaps not the main reason behind FTX’s success, its provision of leverage has nevertheless played a role. As the company looks to court a more cautious audience and stricter geographies, a milder approach seems necessary.
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If Coinbase is the normie of crypto exchanges, FTX isn’t afraid to play the hipster. Yes, the platform offers both spot and futures, but it also caters to those with more eccentric tastes.
Want to dabble in lumber futures? Great.
Looking to bet on a Trump 2024 run? No problem.
Interested in speculating on an upcoming IPO? Come this way.
FTX is a truly creative exchange, one that seems to constantly be looking for new opportunities to offer. That lumber market, for example, was spun up just a day after FTX started receiving user requests. It reportedly took only 2 hours of work. This is what becomes possible when a culture is aligned around experimentation, and a market maker like Alameda is on hand to provide liquidity.
Beyond spot and futures trading, FTX offers access to the following markets:
- Tokenized stocks. Instead of flipping over to Robinhood, investors can get exposure to public securities through FTX’s “tokenized stocks.” These tokens follow the price of the underlying securities like Tesla, Robinhood and Alibaba, and can be traded 24/7, allowing investors around the world to partake. Binance offers a similar product.
- Leveraged tokens. Instead of managing an actually leveraged position and dealing with the collateral issues described earlier, traders can choose to invest in a token like ETHBULL. This ERC20 asset gives the investor a 3x long position in Ethereum, meaning that if ETH increases by 10% on a given day, ETHBULL will jump 30%. FTX offers leveraged long and short tokens for ETH, BTC, DOGE, MATIC, EOS, and others. FTX was the first exchange to offer this product, and it’s provided another way for investors to easily add risk.
- Volatility tokens. Another ERC20, volatility tokens do exactly what you’d expect: track the volatility of the related market. In that respect, it’s a crypto version of VIX, which measures the volatility of the CBOE. Tokens like BVOL track Bitcoin’s volatility 1x, while iBVOL does the inverse. Thus far, FTX only offers volatility tokens for BTC.
- Prediction market. Right now, speculators can bet on two presidential elections: Donald Trump 2024 and Jair Bolsonaro 2022. These are futures contracts that expire at $1 if the stated candidate wins the election, and drops to $0 in the case of a loss. The Trump prediction market for the 2020 campaign saw significant activity during the last electoral cycle. There appears to be minimal volume traded at the moment, with less than $40 exchanged over the prior 24 hours, at the time of writing.
- Fiat market. Users can trade between fiat, moving from USD to EUR, for example. Other currencies supported include the British Pound, Canadian Dollar, “Brazilian Token” (linked to the Real), and Turkish Lira.
There’s good reason why one FTX investor referred to the company’s product innovation as “ridiculous.”
The company seems to be showing typical daring with some of its newer bets. Though the markets mentioned above represent the core offering, FTX is not content to sit on its laurels.
One indication of this is the platform’s experimentation with NFTs. FTX offers a system for creators to upload and sell their creative wares. Given the state of the page, it seems to be a relatively new experiment — the majority of items for sale are FTX branded, including hoodies, water bottles, caps, and of course, a set of FTX condoms printed with the words “increased liquidity for a smoother experience.” Yikes.
(At least the purchaser can be sure it is the rare contraception with 100% efficacy: anyone who sees it is sure to run for the hills.)
More palatably, bidders can purchase a $1 million lunch with SBF, or snag a limited edition Travis Scott t-shirt. (Interestingly, the FTX.us version of this page almost exclusively offers NFL player cards.)
Are these NFTs?
It’s a fair question. Most fail to demonstrate true exclusivity and veer away from the collectibles and digital artwork the form has favored.
Does this suggest FTX has broader aspirations? Will this page become a sort of crypto Craigslist? It seems unlikely. For now, the company's NFT product feels like the rough v1. In time, FTX may hope it can rival specialized platforms like OpenSea.
FTX Pay is similarly inchoate, though it benefits from a clearer product sense. Here, FTX seems eager to pick up where Stripe left off. The Collisons decided to end support for bitcoin payments in 2018. While a return to crypto is rumored, FTX will hope that their expertise in the sector gives them a wedge.
FTX Pay represents the first attempted incursion. With a simple widget, users can accept payment in either fiat or crypto, receiving funds in a digital wallet. Of course, FTX notes that using a company account is “recommended,” perhaps foreshadowing broader business-facing features.
In total, FTX has succeeded in building an empire that is both extremely reliable and overtly experimental. That’s proven a good fit for its customer base.
Customers: Swimming with sharks
“It’s a sharky market,” one source said of FTX.
When I asked what that meant, they explained that, unlike Coinbase, for example, the average user on the platform is a serious trader, often a professional. That means that, particularly when it comes to more baroque investments, users should be wary of the heft of the person on the other side of a given trade.
This impression corresponds with SBF’s account. He noted that FTX has a “disproportionate share of the large traders” with the majority of volume coming from users moving more than $10 million a day.
While this is a useful qualitative introduction to FTX’s customer base, we can go deeper. In researching this piece, we gained unprecedented access to FTX’s user data and metrics, thanks to leadership’s cooperation. For the sake of clarity, The Generalist made no promises (explicit or implied) to access this information, and FTX’s team did not seek any assurances about the tone or content of our coverage.
Institutions and retail
As of June 17 of this year, FTX counted 1.25 million retail users, of which 130,000 actively trade on a monthly basis (10%). A further 2,700 institutional clients use the platform, with 1,017 trading monthly (38%).
As you might imagine, there’s much greater parity between retail and institutions when speaking of volume and to a lesser extent, revenue. Retail contributed $372 billion in average monthly volume with $43 million in revenue. Institutions drove $446 billion for $23 million in revenue.
From this data, we can infer that the average active retail customer trades roughly $3 million per month, and contributes $337 in revenue. Active institutions average $439 million in monthly volume, bringing in $23,000 in revenue.
While such figures move along with the market, the numbers give us an indication of the base’s complexion.
Whales and minnows
We can get a still clearer picture by looking at concentration of volume, learning whether FTX is powered by a select group of whales, or schools of minnows.
One rather curious chart shared by FTX gives us a picture.
The two columns on the left are our attempt to clarify the information. FTX essentially breaks down its volume concentration into eleven tiers, with each the decadic logarithm of the previous category, with an upper limit of $30 billion.
If that made absolutely zero sense, don’t worry. The simplest way to understand this data is by ignoring the logarithms, and looking at the ranges on the left.
For example, Tier 11 accounts for the portion of FTX’s business that contributes roughly $30 billion or more in monthly volume. Tier 10 accounts for monthly volume between $3.16 billion and $31.6 billion. Tier 9 accounts for between $316 million and $3.16 billion, and so forth.
This is an unusual way to present such information, but it makes a kind of elegant sense: there’s value in knowing how much of an exchange’s volume comes from a group ten times the next largest.
With that in mind, we can see that FTX’s userbase benefits from some serious whales. More than 25% of total volume comes from a grouping that moves more than $30 billion per month. More than 50% comes from a segment that moves more than $3 billion. This is a market designed for those with considerable appetites.
As indicated by the presence of the Turkish lira on its fiat exchange, FTX has a global userbase. Reviewing data from March of this year, Turkey is actually FTX’s largest market from a userbase perspective, with more than 20% coming from the country. Others in the top ten including Korea, Gibraltar, Australia, China, and Japan.
(Aside: we couldn’t confirm that “GBR” referred to Gibraltar, but since the United Kingdom receives a separate entity, this seemed the likeliest conclusion.)
These shares change when analyzing on a volume basis. Most volume comes from institutions, which FTX doesn’t nationalize. Beyond that though, most trading comes from Taiwan, followed by China, and Hong Kong. This breakdown indicates that FTX’s power base is really in Asia, with Singapore and Korea also included.
Finally, looking at revenue by country, we get yet another view. Though there are fewer Korean than Turkish users, for example, they are the biggest revenue contributors. Switzerland, Australia, Gibraltar, and Canada round out the top five. We can assume that users in these countries are comparatively active and engage in costlier trades.
It is perhaps telling that the United States is not included in this analysis.
Management: Masters of leverage
Given the intensity of SBF’s schedule, it’s perhaps to be expected that the rest of FTX operates with similar ferocity. One source noted, “I’ve never seen a team that loves working somewhere so much. They work so fucking hard."
We spoke enough about SBF in Part One, so today we’ll focus on other key players before touching on FTX’s culture, and finally, employee leverage.
Next to SBF, FTX’s most significant leaders are Gary Wang (CTO) and Nishad Singh (VP of Engineering).
Per one of the company’s employees, Wang was SBF’s roommate at MIT, where the pair developed a close friendship. After graduation, Wang worked at Google, building the company’s Flights product. One source indicated they believed Gary had actually joined Google after his startup in the travel space was acquired, though we’ve been unable to verify that point.
Regardless, that stint gave Wang experience building high-traffic systems that require low latency — certainly relevant in building an exchange.
Zane Tackett, an FTX employee, described Wang as a reserved presence who earns respect through the calibre of his work. A “savant-level” engineer, Wang is famed for spinning up FTX’s risk engine in a matter of weeks, an insane feat. The core of the system is still used today.
Nishad Singh provides a solid counterbalance. If Wang is reserved, Singh is a more hands-on presence. While Wang often operates as an individual contributor, Singh runs the engineering team.
As we mentioned last week, Singh attended the same high school as SBF, though it’s unclear how close the pair were during that period. From even that early age, Singh showed signs he was uncommonly determined and ambitious, necessary features to work at FTX. Indeed, as a young man, Singh set the world record for the fastest 100-mile run completed by a 16-year-old.
Both Wang and Singh are said to share SBF’s interest in effective altruism, giving the trio a partially shared worldview.
After Wang and Singh, FTX relies on functional leadership from Sina Nader (COO of FTX.us), Brett Harrison (President of FTX.us), and Dan Friedberg (General Counsel).
It represented something of a coup when Nader left his role running Robinhood’s crypto division to join FTX. While the initial expectation was that Nader would run the company’s US subsidiary, he ended up in the role of Dealmaker-in-Chief. As we’ll discuss further, FTX has embarked on a rather remarkable BD spree, minting partnerships with major sports leagues like the MLB. Much of that is spearheaded by Nader.
Slipping into the space vacated by Nader is Brett Harrison. Formerly of Jane Street, one source described Harrison as SBF’s “old boss.” Harrison is the point person on FTX.us, a role he seems well-suited for given his time building trading systems at Jane Street, Headlands Technologies, and Citadel Securities.
Though a less-heralded addition, the hiring of Dan Friedberg as GC may prove particularly critical. While FTX has stayed mostly under-the-radar to date, its size (and attention-grabbing advertising deals) means it can expect to attract real regulatory attention. That will keep the former Fenwick & West partner busy in the years to come.
Will Friedberg be up the task? He has been active in discussing the legal ramifications of bitcoin and other cryptocurrencies for several years which should provide ample experience. In the process, though, he’s attracted ire from bitcoin supporters who allege professional involvement with Ultimate Bet and Absolute Poker, two entities that were shutdown by the DoJ for illegal gambling practices. We were unable to confirm the veracity of this suggestion, or the extent of Freidberg’s involvement, but it’s a story worth watching. Ultimately, successful navigation of the US market may depend in large part on his reputation and savvy.
To understand FTX’s culture, you have to first grasp what the company is not. In particular, SBF’s firm seems to sit in opposition to Coinbase.
Over the last few years, Coinbase has effectively geared itself to build trust. It has become the most recognizable exchange in the US by moving slowly but carefully, while maintaining an easy to use application. In many respects, it operates like a classic large Silicon Valley company, sourcing talent from the same pool of elite businesses: Facebook, Google, Airbnb and so on.
FTX is geared for speed. Everything the firm does seems to be toward this end. Rather than hiring tenured Big Tech engineers, used to the sanity and balance of working at an established corporation, FTX favors young, hungry, Wall Street types. In addition to being willing to work extremely hard, these individuals have the benefit of context. This was something SBF stressed in our conversation: FTX strongly prefers hiring people that actually understand the product and genuinely know trading. The result is a culture more similar to an East Coast quant fund than a Valley startup.
This preference for employees that know the work manifests in the organization structure, too. SBF remarked that he is “skeptical” of roles like that of a “project manager.” As he explained, he favors putting managerial power in the hands of those contributing to a given task, rather than sitting one or more abstractions away. Doing so risks miscommunication or misguidance — it’s hard to provide sound advice when there’s insufficient understanding of the core problem.
As with the company’s predilection for hiring traders, the goal here is to reduce latency. Those best equipped to move fast in solving a problem are — for FTX, at least — those that truly understand it.
Perhaps the most striking part of FTX’s management is the leverage it has achieved. With just 82 employees, the company is able to operate one of the world’s largest crypto exchanges, ship new products at a pace only Binance matches, and sign a string of buzzy partnerships.
This is ludicrous. A few points of comparison:
FTX is wildly efficient with each employee supporting $2.7 billion in monthly volume. That’s more than 110x volume per Coinbase team member, eclipsing Binance, Kraken, and Uniswap, too. Only BitMEX with its 13 employees surpasses FTX in this regard.
Maybe even more crazily, FTX relies on just a handful of engineers. How many?
No, that's not a typo, but the actual dev headcount shared by an FTX employee.
A platform that moves hundreds of billions in volume every month is built and maintained by a crew the size of an ice-hockey first team.
There is something fitting about a company that profits from providing leveraged products benefiting from it itself.
In reviewing FTX’s internal data, we can get a detailed picture of the company’s growth, revenue mix, and retention. All figures, unless explicitly noted, were up to date as of June 21, 2021.
Like the rest of the crypto market, FTX benefited from a bumper year. This was true from a user, volume and revenue perspective.
Daily active users rose from an average of 2,032 in 2019 to 14,922 in 2020. That represented a 634% (!) jump. The company has managed to maintain a torrid pace in 2021, with daily active users averaging 60,753, a 2,890% increase from 2019, and up 307% from the prior year’s average.
Weekly and monthly active user numbers saw similar growth. This was, of course, helped by massive growth in total registrations. FTX went from 74,000 users in June of 2020 to 1.2 million a year later. That’s a 1521% increase. It is, genuinely, a quite mind-boggling rise.
As you’d expect, volume has moved in tandem. The daily average moved nearly 600% between 2019 and 2020, surpassing $1 billion. It has effectively 11x from that base in 2021, reaching a $10.9 billion daily average.
This flow has been split across FTX’s different venues. The company breaks out volume on both FTX.us and Blockfolio, giving us a sense of the flow these platforms see. As a note, this data spans a shorter time frame, from late January through mid June of this year.
We can see that Blockfolio’s highest daily volume was just $25 million over that period, an indication of the novelty of a feature that was only added in 2021. FTX.us is seeing considerably higher volume, cresting $600 million.
Both have little impact on total trading volume. FTX.us drove less than 1% of volume over the period demonstrated, while Blockfolio contributed 0.036%. FTX’s business is, for now at least, firmly ex-US.
An interesting sidenote regarding FTX’s volume is Alameda’s declining share. At the start of 2020, roughly 45% of flow came from the fund — that dropped rapidly, starting in March of that year. As of June 2021, Alameda contributes just 5%, a strong indication that FTX has successfully diversified its sources of liquidity.
Finally, we can turn to revenue. FTX’s average daily revenue was $40,437 in 2019, rising to $237,616 the following year. By 2021, that figure had surpassed $2.2 million, a casual 840% increase. That put the business at a $803 million revenue run rate, without factoring in further growth. While it’s unlikely FTX will be able to scale at quite the same pace, management is certainly not letting up. SBF has publicly noted he expects revenue to surpass $1 billion in 2021.
Where does this revenue come from?
Like other exchanges, FTX makes money from a range of sources including fees on futures trades, fees on spot trades, and interest. We can see that over time, the company has successfully diversified revenue, growing spot revenue, for example. Even recent purchase Blockfolio seems to be contributing, certainly beyond what one might have expected given its volume. "Other" revenue presumably captures smaller plays like NFT sales.
Related to the mix shown above, FTX shared data related to their fees. Over time, the company seems to have reduced fees on its global platform to roughly 0.02%.
It's notable that the FTX.us regularly charges 5-10x that amount, roughly 0.2%. Blockfolio’s fees come in even higher, around 0.8%. This goes some way to explaining how the division seems to have outperformed volume from a revenue perspective.
While FTX will likely reduce fees on Blockfolio and the US exchange as volume increases, growing these properties could meaningfully grow revenue.
One of the most expressive moments of my conversation with SBF came when asking about retention. He responded, forcefully:
We want to be in the position where we never lose a customer. If we lose a customer we fucked up. And I want to figure out what or why they chose a platform other than ours. And what we can do to be better.
FTX’s numbers indicate that obsession is paying off. Most cohorts, particularly those from 2019, increase their volume traded over time, often significantly. The May 2019 grouping, for example, traded 580% more volume in May of 2021, as it did in May of 2020.
Is this growing volume the result of broad customer retention, or whales moving more of their trades through FTX? Looking at retention among monthly active traders, suggests it’s the latter.
While early cohorts have seen reasonable gains (May 2019 grew 48% between 2020 and 2021), they don’t compare to the growth in volume. More recent cohorts appear to be moderately declining.
SBF has previously said that FTX is in a position to grow off its balance sheet. While The Generalist’s information is limited here, we have secured some indications.
Specifically, 2021 average expenses are listed as $428,610 per day, an annual run rate of $156 million. That represents a 421% increase over 2020. Given volume grew 11x and revenue surpassed an 8x increase, FTX appears to be operating within its means, at least from these rough figures.
What accounted for the jump in expenses? We don’t know, but we can make a solid guess: marketing.
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Marketing: Mass appeal
On June 4, FTX’s team made an announcement: they had just bought the naming rights to the Miami Heat’s stadium. For 2021, the venue previously sponsored by American Airlines would become the “FTX Arena.”
If that $135 million outlay represented a statement of intent, what has followed has only bolstered it. Two days later, FTX forked over $210 million for the naming rights to eSports Team SoloMid, with “TSM” suddenly gaining an extra three letters, becoming TSM FTX. Just three weeks after that, FTX signed a deal with Major League Baseball, the first cryptocurrency company to do so. The league’s umpires now don an FTX patch on their jersey.
FTX is taking America seriously. Recognizing it is late to the game, with Coinbase a much more established brand, FTX is willing to play aggressively, brute-forcing its way to name recognition. There’s also something illustrative about the way the company is choosing to spend its marketing budget. A few takeaways:
- FTX wants to be mainstream. There are more targeted ways to spend ~$500 million. Clearly, FTX is after a grander prize — mass appeal. This is a company that views itself more similarly to Robinhood than Gemini.
- FTX is interested in sports. Sure, making plays in the NBA and MLB guarantee a huge audience. But we shouldn’t read FTX’s sector of choice as incidental. Sports betting is exactly the kind of market FTX might want to own. We’ll talk more about this in next week’s piece.
- FTX is making soft power moves. What better way to appeal to US regulators than becoming supporters of its most beloved pastimes? In a way that Binance could never hope to do given its origins, FTX is bringing Americana into its narrative. That may make the firm appear like a less foreign proposition.
Bold moves like sports sponsorships have been supported by softer maneuvers. Though it’s slightly cynical to position FTX’s philanthropic efforts as “marketing,” particularly given the founders’ sincere interest in effective altruism, they nevertheless inform how users perceive business.
On this front, FTX looks like it’s taking a page out of Stripe’s book. The company has created a climate initiative of its own with a similar structure, supporting research and novel technologies.
This is joined by FTX’s giving pledge, which donates 1% of net fees to worthwhile causes. As you might expect, this seems grounded in effective altruism, with mention of effective but “unsexy” issues like deworming receiving mention. On this front, FTX seems to have done an admirable job of bringing customers along for the ride. Rather than just donating their own money, the company encourages others to join them. To date, nearly $7.5 million has been given by users, 66% of the total donated. That’s a sign the community may have adopted FTX’s values as their own.
Overall, FTX is a business hungry for attention, but with a clear point of view. We can hope the business maintains that perspective as it seeks more universal usage.
M&A: Buying Blockfolio
"Crypto people think about tech. Sam thinks about CAC."
The Blockfolio acquisition is proof of that source’s appraisal. In purchasing the company for $150 million, FTX have both added to and diversified its customer base, setting itself up for a more retail-friendly future.
First, let’s take a closer look at Blockfolio’s product. Founded in 2014, the company started as a simple way to track crypto prices and the value of one’s holdings. Over time, it transformed into a fuller-featured app highlighting crypto news. It raised $17.5 million in funding prior to it’s acquisition by FTX.
Since the deal, Blockfolio has further expanded in functionality. Critically, it’s added trading functionality, meaning that you can buy and sell straight from the app.
Viewed purely from this vantage, Blockfolio wouldn’t seem to offer FTX a great deal. Price and portfolio tracking are table stakes for an exchange, and while having a well-built mobile app is valuable, it’s hard to imagine FTX couldn’t cook up something similar for considerably less than $150 million.
It’s in looking at Blockfolio’s userbase that the acquisition begins to look like a particularly shrewd move. For one thing, Blockfolio has a huge number of daily active users (DAUs). While FTX cracked 60,753 DAUs in 2021, Blockfolio averaged 821,000 between December 2020 and January 2021.
This is an engaged group. As FTX notes in internal documentation, “The average Blockfolio user uses the app multiple times a day, for very short sessions.”
In sum, Blockfolio counts 6.5-7 million users, with the discrepancy coming from a tracking issue. Roughly 1.75 million were active in 2020.
Critically, the demographics of this userbase differ from FTX’s. While the latter has built up strong usage in Asia, Blockfolio’s customers are mostly North American and European. The US is the company’s biggest stronghold, contributing 18%. The Netherlands (6.41%), United Kingdom (5.96%), Germany (5.74%), and Russia (3.74%) complete the top five.
What does this all add up to?
FTX essentially purchased 6.5 million users for $150 million — a CAC of $23. While we can’t expect Blockfolio to pull in the trading revenue of FTX straight away, we know that the average monthly revenue per retail user for the latter is $337. If Blockfolio can get into the same ballpark as that sum, this deal will be a steal. The payback period would be a grand total of two days. Even if we imagine that FTX only had use for Blockfolio’s US customers — of which there are 1.17 million, CAC would come in at a palatable $128.
The contours of an intriguing M&A strategy can be seen here. Companies that amass large userbases often struggle to monetize effectively. Sure, a company like Blockfolio could run ads or a subscription program, but it’s hard to compete with the lucrativeness of trading. In time, we may see FTX pick up more companies that boast large userbases but low ARPU. We’ll talk more about this next week.
Ultimately, it’s not hard to see how Blockfolio compliments FTX. In addition to adding an intuitive, consumer-friendly app under its wing, FTX adds a large and engaged userbase in geographies it has scarcely penetrated. The company has effectively added a crypto onramp in key markets, with the US especially notable. That could prove particularly vital as FTX gears up for fiercer competition.
Competition: Battle of the riskmongers
An internal document shared by leadership outlines who FTX considers its largest competitors. While many are to be expected, others offer an intriguing indication of the company’s plans.
The most noticeable absence from the list is Binance, followed by Gemini and Robinhood. Bakkt is a surprising inclusion given their much smaller size. From the list above, we can see that FTX has an interest in traditional banking (Revolut), crypto interest accounts (BlockFi), and sports betting (DraftKings).
How does FTX compare to this peer set?
King of volume Binance may be most similar to FTX. Both offer access to a large range of assets and markets. The companies have also taken roughly equivalent approaches, prioritizing speed over compliance. Both now seem to be changing their tune, though Binance seems to be struggling — on Friday, Brian Brooks resigned from his post as CEO of BinanceUS. As the former head of the Office of the Comptroller of the Currency, it was assumed Brooks would be the person to shepherd Binace toward compliance. A departure due to "differences over strategic direction" suggests choppy waters lie ahead. FTX will hope it is able to make a smoother transition.
As a derivatives-focused exchange, BitMEX represents another interesting comparison. As you’ll remember from Race Capital’s memo, this was FTX’s initial swimlane, though they have since expanded.
Despite launching in 2014, 5 years before FTX, BitMEX now trails the newcomer’s volume by more than 5x the volume. The company has also been beleaguered by regulatory issues with founder Arthur Hayes awaiting federal prosecution on charges of failing to effectively protect against money laundering. That serves as a cautionary tale for FTX, but gives greater room to maneuver for the time being.
Coinbase, Kraken, eToro, Bakkt, Robinhood can also be considered direct competitors, though they do not match up perfectly. Only some of these companies offer crypto futures, and Robinhood is, of course, best known for equities and options investing.
For the sake of parsimony, let’s focus on Coinbase. As the exchange generating most revenue, the company feels like a particularly interesting foil to FTX. What is perhaps most striking is just how much more prolific FTX seems to be from a product perspective. While Coinbase could once consider itself a true innovator, the last few years have given in the slouch of a laggard. What meaningful additions have been shipped over the past year or so? The company trails many less mature in terms of assets listed. Many offer features the old dog has yet to add. That leadership seems unconcerned only compounds the problem.
This is perhaps the second most significant difference between Coinbase and FTX: management. For all he got right, questions persist about Brian Armstrong’s ability to steward a company of Coinbase’s size. At several points in the company’s history, he’s revealed a weak grip, allowing ambitious lieutenants like Balaji Srinivasan and Asiff Hirji to empire-build. That has been enabled by a fuzzy vision for Coinbase’s next ten or more years.
Though we might worry about SBF’s durability or high risk tolerance, no one would complain that FTX’s founder suffers from a lack of vision, or the chutzpah to bring it to life.
Where FTX does fall short compared to these exchanges is on design. For all its volume, FTX is a fairly drab patch of pixels. That is perhaps the downside of hiring Wall Streeters rather than Xooglers. While Coinbase and Kraken have beautiful, intuitive consumer-grade apps, FTX still feels wonkish. The Blockfolio buy helps here, but the entire product could benefit from fresh paint and revamped flows.
Coinbase also offers some compelling features for enterprises and developers, particularly through products like Bison Trails. While FTX has surpassed Coinbase in some respects, there’s more to be done to reach true feature parity with crypto’s most trusted on-ramp.
Uniswap and Sushiswap compete as DEXs, substitutes for FTX and direct competition for Serum. Will DEXs take over from centralized exchanges like FTX, Coinbase, and Kraken? It seems possible, if at least a few years off. The creation of Serum suggests FTX considers such an occurrence plausible and that it’s happy to hedge its bets. But Serum sits far beyond the biggest DEXs as things stand. Per Coinmarketcap’s ranking at the time of writing, Serum sits 23rd by daily volume, just above BakerySwap and below PancakeSwap. While Uniswap V3 processed $1.7 billion, Serum handled just $21 million.
There’s, of course, time to make up ground, and few would bet against the FTX team. But for now, the company is a minor player in the niche realm of DEXs.
We are left with the remnants, the clues. Where does FTX stand relative to Revolut? How about DraftKings? For now, at least, comparisons are all theoretical. Could FTX segue into sports betting? We’ll be exploring precisely these questions in Part Three.
Valuation: A different game
We can use the data provided in the previous section to compare FTX to its peers on a valuation basis.
At 18x revenue run rate, FTX ends up looking rather reasonable, at least at first blush. While it’s a considerable mark-up over Coinbase, it compares favorably to Bakkt (75x), Uniswap (20x), and BlockFi (50x).
Do these companies have better margins than FTX? Are they growing faster? While we can assume all benefited from the crypto boom, FTX’s growth rate is truly bonkers — average daily revenue is up 840% YoY. It’s hard to imagine that Bakkt, which seems to have much less clear product market fit, has outperformed this benchmark.
Looking at valuation relative to average daily volume surfaces further information. While this metric probably isn’t that interesting in isolation, it allows for intriguing comparisons. For example, FTX is valued at 2.5x average daily volume, while Coinbase is just a touch below 30x.
What explains the difference?
Clearly, looking at revenue, Coinbase is more successful in extracting revenue from the volume it facilitates. That is likely down to its elevated fees, at least in significant part. Kraken seems to be valued similarly on this front.
Could FTX increase its take rate and keep its volume? Maybe. But fees can be competed away. And the company seems to be playing a different game. Rather than optimizing for the skim it can take, FTX seems to want to bring as much volume as possible onto the platform, and then layer on ways to earn. (In this respect, it’s not unlike Nubank’s playbook in the neobank space). The thinking is that if FTX has the most robust, liquid exchange, it will become the natural home for all manner of other financial relationships including stock trading, saving, payments, and so on.
That might mean the company doesn’t have quite as aggressive a fee structure, but there’s the value of its volume. Despite its dramatic leap in valuation in 2021, FTX looks undervalued in many respects.
Bear case: How to implode
Of course, FTX could still fail to live up to its potential. Though impressive across many dimensions, the company is not immune from risk. In many respects, it has increased its jeopardy by dint of its strategic decision-making. Like the unlucky speedrunner, FTX may find it has moved so fast it has forgotten to pick up items it will need down the line. At a certain moment, the company may find its resources lacking, facing a debt it cannot pay.
In particular, FTX could face damaging regulatory action, a PR fallout, or it may miss a fundamental shift in the ecosystem. Here’s how things might go south.
"I have no idea how there's been no regulatory action against them," one source said. The thrust of this crypto investor’s confusion was that FTX doesn’t always seem to have played by the rules.
One example that this source gave was FTX’s offering of tokenized securities. Depending on the jurisdiction, offering stocks (even of the synthetic kind), is only permitted from appropriately regulated businesses. Per this individual, FTX seems to lack this approval in key markets.
Will FTX manage to correct such oversights before regulators catch the company in their crosshairs?
The US will be of particular concern. FTX has shown it considers the market of great importance, spending extravagantly on marketing and acquisitions. But new SEC Chief Gary Gensler has thus far taken an aggressive stance towards the crypto sector, which he’s referred to as the “wild west.” Many are bracing for stricter rules and closer scrutiny.
Other regulators have also shown a willingness to suit up, of late. In July, New Jersey’s Attorney General hit out at BlockFi, stopping it from operating in the state. The AG noted that the company was selling securities to customers in New Jersey without complying with its securities laws.
Will others follow suit? FTX’s expansive, risk-loving product suite and off-shore roots may mark them out for examination.
For now, FTX seems to be doing everything in its power to mitigate the risk of incurring regulatory ire. This latest funding round seems at least partially motivated by a desire to bring aboard some of the world’s most influential financiers including Sequoia Capital, Softbank, and Third Point. These funds have deep experience navigating regulatory uncertainty and should provide vital guidance.
SBF himself seems to be taking the matter seriously, and just as critically, taking it seriously in a highly visible manner. In a recent interview, he mentioned that he was spending 5 hours a day on regulatory issues and was eager to collaborate with different regulatory bodies. He has hired staff around him to bolster these efforts, not least GC Dan Friedberg. This proactive stance is a very different attitude than, say, BitMEX’s Arthur Hayes, who historically treated such bodies as disruptive interlopers.
Finally, though not a panacea, it doesn’t hurt that SBF has shown an interest in the current administration. He donated $5.2 million to Biden’s campaign in 2020, making him the sitting president’s second-largest donor, behind only Michael Bloomberg.
Can this money buy meaningful influence? It seems unlikely. But as FTX looks to win over new markets and protect its existing business, the company is jockeying on multiple fronts. It is possible it still may not be enough.
Over the course of a year or so, Robinhood managed to go from rebel-darling to societal leech in the court of public opinion. Once lauded for its innovative, zero-commission model, the exchange has encountered successive waves of censure.
Among its failures: the gamification of trading, the provision of leverage to amateur investors, the reliance on a business model tied to high-risk, high-frequency investing. Once seen as empowering a new generation of investors, the company has increasingly been cast as a dopamine-jacking social product. Whether either caricature is fair is besides the point; even tech’s darlings can be cancelled.
FTX will need to be careful it does not fall into the same trap. In many respects, it bears the markings of a prime target. The company offers high-leverage, speculative investing with little to no training required. It is pursuing a mass market, particularly thanks to its sports’ affiliations. It doesn’t take a great leap of the imagination to see how this combination could create problems with unsophisticated investors lured by leverage into making financially disastrous decisions.
To protect against pushback, FTX should invest in user education, as well as constructing its product in such a way that unprofessional investors understand the stakes of the bets they are making.
Like every other company in the space, FTX’s prosperity is highly correlated to the success of the broader crypto sector. As anyone who has observed the space will know, this is a highly volatile market that can swing from blazing heat to a frigid chill in a matter of hours. The winter that follows can last a long time.
Barring a total meltdown of the sector, it’s hard to imagine that FTX wouldn’t survive a constriction. The company is well-capitalized, and seemingly operating within its means. That suggests it would be able to make it to the next crypto spring. Indeed, it might even be positioned to capitalize on a cooldown, siphoning volume from smaller exchanges, and picking up distressed assets that expand the product suite. Still, it remains a possibility.
On this front, FTX seems to be repositioning itself proactively. I’ll share more thoughts next week, but a move into sports betting, for example, would loosen the company’s correlation with crypto and ensure a steady source of revenue regardless of the price of bitcoin.
Perhaps more worrying is the possibility we mooted earlier: a shift in usage towards DEXs. This seems feasible. After all, crypto’s foundational tenet is a belief in decentralization. As the market matures, why would its biggest believers want to enrich and empower a traditional entity?
While FTX does have Serum, its mere association hardly makes it feel free, or grassroots. And, as we’ve noted, the DEX lags many others. How can the company help itself here?
For now, it seems to be making all the right moves. And thanks to Alameda’s expansive investing practice, FTX will always have a first look at the most interesting companies being built which might renovate their own business — either through imitation or acquisition.
FTX is a company built to outrun the clock.
In its first two years of existence, it amassed a large dedicated audience, hosted massive volume, and generated impressive revenue. The exchange has forced innovation in the crypto space, and now seems set to evangelize its gospel to a larger audience.
But what if company building isn’t a speedrun?
Over the coming years, FTX will need to learn how to modulate between velocity and control, trade chaos for deliberation, and occasionally, slow down to ensure it doesn’t crash.
Read Part One and Part Three.
The Generalist’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research and consult advisors on these subjects. Our work may feature entities in which Generalist Capital, LLC or the author has invested.
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