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Coin Metrics Analyst: “FTX Might Have Provided Massive Bailout For Alameda In Q2”

Did this Coin Metrics analyst uncover the key to the whole Alameda/ FTX story? Because let’s face it, it doesn’t make sense. Both of Sam Bankman-Fried’s businesses were extremely profitable. FTX was the world’s third-biggest exchange and growing, why would anyone risk killing that golden goose? There must have been an underlying cause. Did this Coin Metrics analyst uncover it in the on-chain data? He might have.

The Head of R&D at Coin Metrics, Lucas Nuzzi, ends his thread with a warning: “Important to note that this is my own personal highly-speculative take on what happened based on these on-chain artifacts.” The case the Coin Metrics analyst is making rests on solid on-chain data, but the interpretation of what said data means is “highly-speculative.” So, take it with a grain of salt and don’t go around saying this is exactly what happened, because it might not be. 

That being said, yikes! 

The Coin Metrics Analyst Makes The Case

Lucas Nuzzi starts with a statement of fact, “I found evidence that FTX might have provided a massive bailout for Alameda in Q2 which now came back to haunt them.” And then, he poses a mystery. “40 days ago, 173 million FTT tokens worth over 4B USD became active on-chain.” Where did those tokens go? You guessed it, Alameda Research. The day was September 28th. A record-breaking $8.6B in FTT moved that day.

“That was by far the largest daily move of FTT in the token’s existence and one of the largest ERC20 daily moves we ever recorded at Coin Metrics,” Nuzzi tweeted. What was happening around Alameda and FTX near that time? Nothing special, really.

  • On August 24th, Sam Trabucco stepped down from the Co-CEO position at Alameda Research. “I will stay on as an advisor, but otherwise will not continue to have a strong day-to-day presence at the company,” Trabucco tweeted.
  • On September 27th, Brett Harrison stepped down from the CEO position at FTX. “Over the next few months I’ll be transferring my responsibilities and moving into an advisory role at the company,” Harrison tweeted.
  • This one is the kicker. On September 28th, Sam Bankman-Fried tweeted, “Heads up: rotating a few FTX wallets today (mostly non-circulating); we do this periodically.  Might be a few more coming, won’t have any effect.”

If all of this is true, that last SBF tweet will probably make an appearance in court.

FTTUSD price chart - TradingView

FTT price chart for 11/09/2022 on FTX | Source: FTT/USD on TradingView.com

So, What Did Alameda Do With The Money?

Believe it or not, the FTT tokens came directly from the original ICO smart contract. The Coin Metrics analyst “found a peculiar transaction that interacted with a contract from the FTT ICO. This 2019 contract *automatically* released 173 Million FTT from the token’s ICO.” Strange, but both organizations are joined at the hip. There might’ve been legitimate reasons.

Then, things took a bizarre turn. “Alameda then sent that *entire* balance to the address of the deployer (creator) of the FTT ERC20, which is controlled by someone at FTX.”

WHAT?

 

The Coin Metrics Analyst’s Theory

According to Lucas Nuzzi, Alameda Research wasn’t immune to the crypto contagion that plagued the space in Q2. In fact, the company might’ve blown up with 3AC, Voyager, and Celsius. “It ONLY survived because it was able to secure funding from FTX using as “collateral” the 172M FTT that was guaranteed to vest 4 months later.” That’s an extremely risky move. It almost seems like FTX didn’t have a choice.

They didn’t, because “the FTT ICO contract vests automatically. Had FTX let Alameda implode in May, their collapse would have ensured the subsequent liquidation of all FTT tokens vested in September.” If the scenario the Coin Metrics analyst poses is real, SBF and company had to do it. And they paid a heavy price for it. “The Alameda bailout likely put a dent on FTXs balance sheet to the point where it was no longer solvent. This would have been fine if the price of FTT didn’t collapse and a bank run ensued.”

This Is Where CZ And Binance Come In

In this scenario, CZ And Binance somehow found out about the deal. And the biggest cryptocurrency exchange by trading volume had a heavy FTT bag. “As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT),” CZ tweeted when he announced they were liquidating their position.

What did this heavy FTT bag mean? The Coin Metrics analyst explains, “As large holders of FTT, they could start deliberately tanking that market to force FTX to face a liquidity crunch.”

And they did.

And then, Binance offered to buy FTX and relieve them of their problems.

Presumably for pennies on the dollar.

A master stroke by CZ and team, if true.

But remember the Coin Metrics’ analyst warning, “Important to note that this is my own personal highly-speculative take on what happened based on these on-chain artifacts.” Don’t go around saying this is exactly what happened, because it might not be. 

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The War Is Over!: Binance Announces FTX Buyout And The Market Recovers

Did Binance just do what we think it did? The world’s biggest cryptocurrency exchange by trading volume will likely buy one of its biggest competitors. The market was in turmoil, the players were in panic mode, but this news calmed the waters in a big way. What’s next, though? Will Binance actually go through with the buyout? Is the deal final? And what does this story says about FTX’s business model? Were they fractional-reserving their way to success?

Let’s analyze the official but not abundant information out there and try to reach our own conclusions.

Sam Bankman-Fried Bends The Knee

After a whole morning of radio silence, the mind behind FTX and Alameda Research finally spoke. In a Twitter thread that will live for the ages, Sam Bankman-Fried was as vague as one can be. “We have come to an agreement on a strategic transaction with Binance for FTX.com,” he tweeted. Then, he announced that “our teams are working on clearing out the withdrawal backlog as is. This will clear out liquidity crunches; all assets will be covered 1:1.”

Wasn’t that supposed to be the case from the beginning, though? 

Then, Bankman-Fried proceeded to effectively declare a winner. “A *huge* thank you to CZ, Binance, and all of our supporters. This is a user-centric development that benefits the entire industry,” he tweeted about his new boss. “Binance has shown time and again that they are committed to a more decentralized global economy while working to improve industry relations with regulators. We are in the best of hands.”

Is the deal set in stone, though? According to River’s CEO Alexander Leishman, “The DD on this deal is going to take forever. Bankruptcy still on the table if Binance decides they don’t want to touch it after digging deeper.”

BNBUSD price chart - TradingView

BNB price chart on FTX | Source: BNB/USD on TradingView.com

The Binance CEO Announces The Win

Allegedly, CZ knew what he was doing the whole time. After distancing himself from the concept of war and saying Binance was focused on building, today CZ really showed his true colors. “This afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire FTX.com and help cover the liquidity crunch,” he humbly tweeted. 

However, CZ is admitting to a liquidity crunch that shouldn’t be there. And then, he clarifies that the deal isn’t done yet. “There is a lot to cover and will take some time. This is a highly dynamic situation, and we are assessing the situation in real time. Binance has the discretion to pull out from the deal at any time.”

Analyzing the little data we have, DeFinace Capital’s Arthur Ox tweeted, “Given how little time it took to close this deal. It’s likely Binance acquire FTX for nominal/negligible amount and assume all the liabilities of FTX.” And then, he gave advice, “if I am previous round investor of FTX, I will probably start engaging litigation lawyer now.”

The Future For Binance And FTX

The analysts are having a field day with this story.  Dylan LeClair, who’s been covering the ins and outs from day one, recently tweeted that the resolution “confirms that FTX is insolvent without a bailout from Binance” and that “Alameda was speculating with user funds.” Those are severe accusations, but he’s got some data to back them up. 

Questioning the liquidity crunch, LeClair asks, “was your “proprietary trading desk” directionally trading using user funds. We could all see the movements flooding back from Alameda wallets on-chain yesterday as reserves got depleted.” Taking it to the next level, economist Tuur Demeester is concerned with the implications, “If Binance buys FTX and hence takes over the claims of its depositors, it seems likely that Binance then would also become (or remain) a fractional reserve operation.”

What a time to be alive.

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The Binance Vs. FTX War: Here Are The Most Recent Stats & On-Chain Data

Is this the beginning of the end for FTX and Alameda Research? Or will both organizations come out stronger on the other side? As NewsBTC reported, Binance’s CZ smelled blood in the water and announced his exchange was selling their FTT reserves. That created a sort of a bank-run that left FTX in a dangerous position. Are both of the Sam Bankman-Fried-led organizations’ destinies tied to the FTT token? Or will they be fine even if it falls?

In the most recent Bitcoin Magazine Pro report, they describe the current situation as, “a wave of panic taking shape that questions the solvency of both FTX and Alameda Research. As a result, we’ve seen nearly $1 billion in assets and token values fly out of known FTX and Alameda addresses over the last week.” Not only that, both FTT and BNB are falling. And Alameda and FTX are working overtime to keep FTT over $22.

We’ll cover all of that and more, but first, let’s go to another BM Pro report in which they described the situation that led to all of this. A document detailing Alameda Research’s reserves leaked and the whole world learned that the firm held approximately 90% of the total FTT token supply. Their sister company, FTX, issues that coin. And that’s problematic.

“It’s reported Alameda was holding $5.82 billion of FTT on June 30th, while the market cap of FTT at the time of the report was $4.2 billion. This is a result of some of their asset allocation being held in locked altcoins, which, similar to VC investments and employee stock compensation programs, has a locked/vesting period, only this time it’s using smart contracts. It should be noted that Alameda apparently applied a 50% haircut to all “locked” assets, but one could make the case that this is still generous accounting.”

There are really interesting caveats in there.

FTTUSD price chart - TradingView

FTT price chart on FTX | Source: FTT/USD on TradingView.com

FTX Is Down And Binance Is Up

The bank run seems to be on. Wallets associated with FTX are moving funds like there’s no tomorrow. The exchange’s stablecoin balances “have been depleting at a rapid pace as customers move to get funds off the platform.” And that’s not their only worry, they also have to defend the $22 floor for FTT, but we’ll get to that. This is a zero-sum game, so someone has to be winning while FTX is losing. Back to the latest BM Pro report:

“It’s a stark difference to see $451 million in stablecoins flow out of FTX over the last 7 days versus the $411 million that have flowed into Binance. That tells anyone in the market that the exchange giant (Binance), which already has approximately 60% of the volume in the entire space across both spot and derivatives markets, is out for blood and stands to gain during this FTX situation.”

This all might seem like fun and games between two giants, but the reality is this: if FTX falls, the whole crypto market will tumble. And the contagion effect would probably be tremendous and take several companies and projects down with it. “There’s a broader risk to the market here as we see Alameda unwind many other positions across tokens and bitcoin that will be used to raise additional capital,” BM Pro wrote, “we’re just in the beginning stages on what may play out here.

The $22 Level

Why is team Sam Bankman-Fried so determined to defend FTT’s $22 level? Alameda Research’s CEO, Caroline Ellison offered CZ, “if you’re looking to minimize the market impact on your FTT sales, Alameda will happily buy it all from you today at $22!” There’s that number again. Why are they so obsessed with it? According to BM Pro: 

“Alameda would likely not have such a vested interest in defending this level if it was not leveraged. Otherwise, they would let the market fall as much as it wants and simply acquire FTT at a lower price.”

Is that undeniable proof that FTX and Alameda are leveraged and their destinies are tied to FTT? Not really. It suggests it, though. “The exchange rate differential between the FTT price on FTX vs. Binance has pushed to historic highs as Alameda and crew attempt to defend their token. Meanwhile, CZ and an army of speculators have begun to sell and go short FTT.” 

We might be witnessing “a classic speculative attack unfold,” says BM Pro. However, they feel it’s even deeper. “There is a much more important battle going on, and the FTT exchange rate is a matter of solvency for Alameda.” According to analyst Dylan LeClair, the whole situation “feels like I’m watching an emerging market central bank attempting to defend its currency against speculators.”

The question is, can they?

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