Despite being widely perceived as one of the top quantitative trading firms and market makers in the industry, Alameda Research may have been hiding financial struggles dating back to 2018, according to a recent report. According to sources familiar with the matter, Alameda was experiencing financial losses as early as 2018, and a significant loss from a failed XRP trade in mid-2018 reduced the company’s assets by more than two-thirds.
Early Financial Struggles at Alameda Research Undermine Perception of Top Quantitative Trading Firm in the Cryptocurrency Industry
According to a report from the Wall Street Journal (WSJ), Sam Bankman-Fried’s (SBF) Alameda Research experienced significant financial losses as early as 2018. Alameda Research, a quantitative trading firm co-founded by SBF and Tara Mac Aulay in September 2017, was SBF’s second venture in the financial industry. Before starting Alameda, SBF worked for Jane Street, where he traded international exchange-traded funds (ETFs). He later took on the role of director of development at the Centre for Effective Altruism.
According to reports, when SBF founded Alameda Research, the trading firm was making millions through arbitrage trades. SBF, as an arbitrageur, identified opportunities in countries like Japan and South Korea, where Bitcoin was being traded at a premium, such as the “Kimchi premium” in South Korea, where Bitcoin was sometimes 30% higher in value. There are numerous reports of Alameda making millions through cryptocurrency arbitrage, but a recent report from the Wall Street Journal published on December 31, 2022, suggests that Alameda’s trades were not always profitable.
According to the Wall Street Journal (WSJ) report, even after stepping down as CEO of Alameda Research, SBF remained in control of the company until its collapse. The WSJ’s Vicky Ge Huang reported that Alameda “took big gambles, winning some and losing plenty.” The report also states that SBF frequently borrowed money to fund these bets and promised investors double-digit returns in exchange for their assistance. Austin Campbell, Citigroup’s former co-head of digital assets rates trading, said that his firm was considering partnering with market makers like Alameda, but he became skeptical of SBF’s company.
“The thing that I picked up on immediately that was causing us heartburn was the complete lack of a risk-management framework that they could articulate in any meaningful way,” Campbell detailed.
SBF’s Solicitation of Lenders Raised Questions About Company’s Financial Stability
According to sources familiar with Alameda’s trading, the arbitrage opportunities that initially fueled the company’s profits dried up, and the firm’s trading algorithm allegedly made a number of poor bets. In spring 2018, Alameda suffered a significant loss on a bet on XRP, leading to the loss of over two-thirds of the company’s assets. In response, SBF reportedly began soliciting loans again, promising potential lenders returns of 20%. A document reviewed by the WSJ shows that SBF’s lawyer presented Alameda as a top market maker in one pitch to a lender, but did not disclose any financial information.
According to sources familiar with the matter, SBF sought out lenders at a Binance Blockchain Week event in Singapore in January 2019. While Alameda sponsored the event with $150,000, it is alleged that SBF used the conference to solicit lenders and distributed pamphlets to potential investors. The pamphlets claimed that Alameda had $55 million in assets under management (AUM), but it is unclear if this information was accurate. In February 2019, SBF decided to relocate Alameda from California to Hong Kong. Former associates of the firm reported that Alameda made roughly $1 billion in profits during the 2021 crypto bull run, but when the bull run ended, SBF’s bets started to fail.
Reports indicate that Alameda’s former CEO, Caroline Ellison, had a significant negative balance on FTX in May 2022, several months before the collapse of FTX. Complaints, including an indictment in Manhattan, charges from the U.S. Securities and Exchange Commission (SEC), and a lawsuit from the Commodity Futures Trading Commission (CFTC), suggest that Alameda’s losses were so significant that SBF allegedly borrowed funds from FTX customers to keep the company afloat. The WSJ also notes that SBF considered shutting down Alameda before the collapse of both companies, but ultimately did not follow through with the plan.
Joy Rice is a computer science graduate and crypto writer with a strong understanding of blockchain technology. She writes about the latest developments in the crypto industry, and is passionate about educating and informing readers about the potential uses of blockchain.