FTX Trilogy, Part 1: The Prince of Risk
The CEO of FTX is a rare executive.
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.”
This is Part One. You can find Part Two and Part Three here.
A trader’s job is to interpret risk.
In that regard, Sam Bankman-Fried seems to have something of a knack. The man who began his career at quantitative hedge fund Jane Street has carried that training into his most recent venture: FTX.
In less than three years, Bankman-Fried has taken the cryptocurrency exchange to an $18 billion valuation, propelling it at a pace that often makes it the fastest-growing player in the space, trading places with Binance.
That performance is no mean feat in a sector bloated with wealthy competitors, overrun with hackers and charlatans, and stalked by regulators. To get this far, Bankman-Fried has had to balance peril while moving at speed. He has to interpret and manage risk.
Of course, FTX is far from a sure thing. Few other sectors carry the hazards of crypto, let alone its rate of change. But for now, the company seems to have a suitable leader: a CEO wise to the hazards but willing to step on the gas. It is perhaps an added bonus that in his sleeplessness and idiosyncrasy, Bankman-Fried is an apt avatar for the crypto market in which he operates.
Today, in Part 1 of the FTX Trilogy, we’ll outline his origins, before peering into his mind.
The life of SBF
Origins
Sam Bankman-Fried (SBF) was born on March 6, 1992, in Santa Clara County, California. The son of two Stanford Law professors, Barbara Fried and Joseph Bankman, SBF was raised in a highly intellectual environment. That would have a significant impact on his later thinking, as we will go on to discuss.
In 2010, SBF matriculated to MIT to study physics. As he tells it, he arrived as “sort of a math nerd.” During his first couple of years, he considered pursuing a career in academia, thinking of becoming a math professor. After realizing he took little joy in formal research, he expanded his horizons. Specifically, he looked for something that would suit his skills and merit his efforts:
The one thing I did sort of know was that I wanted to find out how I could have the most positive impact on the world. I’d been into utilitarianism for a very long time and had recently started getting into effective altruism, which is basically this movement...you’re trying to figure out how to impact the world try and quantify things, try and figure out what the most efficient way of doing that is...
I was playing around with a lot of possible careers which were kind of all over the place. [I] had some conversations with people and basically, they said, “You can go and work for one of these charities or organizations you think are good, or you can donate to them. And frankly given your strengths and weaknesses, maybe you’ll be able to donate more to them than you’d be able to contribute working directly for them.” So anyway I thought about that and it sounded like a pretty plausible argument.
Convinced by the idea that racking up a considerable salary that could be redirected to philanthropy was his best path to impact, SBF spent the summer of his junior year interning at Jane Street Capital. A few friends had interned there previously and said “moderately good things.”
Founded in 1999, Jane Street had risen to become one of the largest and best-respected quantitative trading firms in the world. It has maintained both that reputation and scale: in 2020, the firm traded $17 trillion in securities.
An enjoyable summer stint led to a full-time job after SBF graduated in 2014. It proved a good fit. SBF reveled in being surrounded by a “bunch of nerds” intent on surfacing and executing sharp trade ideas. He focused on international ETFs, a slightly exotic flavor that presaged some of his more eye-catching later work in the Asian crypto markets.
Though he describes Jane Street as a sterling employer, after three and a half years, the young financier decided it was time to build something of his own. He remembered his rationale at the time:
[I was thinking] I have a lot of things I want to try with my life. I don’t know what’s going to end up being the right thing. But at least one of them might go extremely well.
Alameda
However optimistic he might have been, even SBF must have been surprised at the scale and speed of his success. After leaving Jane Street in 2017, he spent time thinking through potential opportunities. Intrigued by the crypto boom gripping the markets at the end of that year, he turned his mind to the emerging ecosystem.
As he began to study the market, SBF’s trading instincts began to hit overdrive:
It had a lot of the hallmarks that might be a really inefficient system with a big need for liquidity. Which is, basically: gigantic demand all of a sudden, growing really rapidly, lots of volume, lots of retail users, and not a lot of time to build up institutions. Not a lot of time to build up liquidity…
It felt like the thing that was decently likely to have very large volume and price discrepancies.