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Crypto is crazy. It really is. But this week, it really outdid itself. FTX, and Sam Bankman-Fried, seen by many as the golden boy of the industry - declared bankruptcy. So how did a crypto exchange making 8+ figures a day in trading fees, with a modestly sized team, who sponsored the Miami Heat stadium in a 19-year $135m deal, go bankrupt?

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This Week’s Deep Dive: Leading Sports Crypto Sponsor FTX File for Bankruptcy

FTX blowing up has been seen by many as the most shocking thing to happen in crypto.

I’ve spoken to people who have been in the space for longer than me (5 years) and there’s consensus that this really is the craziest thing that has happened - in an industry that is already labelled as the ‘digital wild west’.

But how did FTX, a crypto exchange making 8 figures in trading fees *per day* and a modestly sized team blow up? How did Sam Bankman-Fried, crypto’s golden boy, go from being the richest person under 30, one of the biggest donors to both American political parties and industry counsel to congress and SEC chairman Gary Gensler - to having a net worth of -$600m within the space of 7 days?

This might be a long read but stay with me. Because this story is absolutely crazy. I’ll also detail just how entrenched FTX were in sports. 

Let’s start with what FTX is (or was).FTX is a crypto exchange, that allowed people to trade crypto and buy/sell crypto for/with fiat.

It was a literal money printer. The high liquidity and variety in assets meant it attracted a wealth of money from established, high-volume traders and funds. Its variety of assets also attracted a lot of retail customers — looking at the next 100x coin that they’ve found on YouTube.

FTX quickly became one of the biggest exchanges in the industry, raising a total of $2bn between 2019 and 2022, from some of the most notable VCs in the world such as Tiger Global as well as large institutional players like Blackrock.

The behemoth looked from the outside, to be on an absolute tear. 8 figure daily trading fees, Super Bowl ads, acquisitions left right and centre — a 19-year stadium rights deal with the Miami Heat…it looked like FTX were totally legitimate.

What made them seem even more, was their CEO and founder Sam Bankman-Fried, known as SBF by the industry.

SBF had quickly climbed the Forbes rich list due to FTX’s stupendous rise. What’s more, he became one of the most important voices when it came to regulation in the US.

SBF quickly became the darling of the industry, one of the richest young people in the world — and was seen as the ‘adult in the room’ by many in congress. I mean, just look at this clip of SBF talking about the 08 banking crisis - and why crypto’s transparent nature meant it was far more difficult to do something similar. Little did we know that he’d go on to do the exact same thing, just using a different asset.

The wild part is, SBF was also lobbying to push through a bill that would harm the autonomous and trustless nature of Decentralised Finance (DeFi).

Why? No one really knows. In hindsight, it was probably to encourage people to continue trusting his centralised service; FTX.

So far, to summarise, we have these parts of the story:

• FTX was one of the biggest crypto exchanges in the industry and was making a *lot* of money

• FTX raised $2bn from some of the most credible investors worldwide, as well as Tom Brady, Steph Curry and more.

• SBF was seen as crypto’s golden boy and was a big political donor in the US, and was consistently speaking to the US government about the regulation of crypto.

• FTX were big sports sponsors. And look, this is fine when you’re literally printing money.

• SBF was pushing to regulate De-Fi in a way that was prohibitive for users

• SBF was one of the biggest donors to both American political parties

So just how did this all come crumbling down?

On November 2nd, this article broke down the relationship between FTX and Alameda Capital as part of the "Sam Blankman-Fried empire."

Who are Alameda Capital?

They’re a market maker and trading firm that SBF founded before FTX and the primary source of liquidity to FTX.

Alameda Capital should have been a money printer for SBF’s empire. There was a Chinese wall between the two entities, but essentially - we can presume Alameda had access to all the data FTX had. Weight of money, trading volumes, which traders moved markets - and so on and so forth. This should have in essence, been the easiest market-making job in the history of finance. It’s even come to light that

It’s like going to a casino and knowing which slot machine is going to pay out next.

There were rumours that FTX even added lag to the UI for their retail traders so that Alameda could front run (get in front of) their trades!

It was actually confirmed today that Alameda were able to purchase specific tokens before they were listed on FTX (which usually gives them a price boost).

We have a seemingly profitable crypto exchange with a market maker Chinese walled, who had the game rigged.

And yet, somehow, FTX ended up giving Alameda in excess of $10bn which caused an enormous hole in their balance sheet.

WTF, right? Why?!

**‘Why’ is something you might ask yourself several times throughout this newsletter. 

This is probably a good time to introduce another character in this horrifying story; Caroline Ellison. Caroline was the CEO of Alameda Capital — who reportedly had a romantic relationship previously with SBF.

To make this romantic, entangled, fraudulent web even weirder - Glenn Ellison (father to CEO of Alameda Caroline Ellison) is the Department Head of Economics at MIT. Prior to getting appointed to his current role, SEC Chairman Gary Gensler was a Professor for the Practice of Global Economics & Management at MIT. The same Gary Gensler that SBF had open lines of dialogue with about crypto regulation.

When you add that, plus the various donations SBF made to American political parties — it is all types of weird. The paper trail is mind-boggling. I’m not a conspiracy theorist at all, but it is admittedly crazy.

It’s probably an appropriate time to now introduce the man who started this tsunami of bankruptcies and liquidations; Changpeng Zhao (CZ), CEO & Founder of Binance.Binance are the biggest crypto exchange in the world and FTX were becoming their main competitor. Binance has 70% of the market share (probably more now) and this was slowly being chipped away at by the hypergrowth FTX were seeing.

CZ, actually invested in FTX in 2019, but later sold his stake in 2021, Reuters reports. Zhao was paid about $2.1 billion worth of FTT.

*But wait, what is FTT?*

Good question.

FTT is the FTX’s native token. The token was created to encourage traders to hold it in exchange for cheaper transactional fees. Fairly simple concept, think loyalty points but in token form. This isn’t an issue, unless you for some crazy reason - use this loyalty point token as collateral for real cash…

CZ and Binance still had a lot of this FTT token from their 2019 investment.

And when this aforementioned article came to light, CZ felt something wasn’t right.

This was the first domino:

CZ tweeted that Binance would be selling their FTT holdings.

Now, this wouldn’t normally be an issue - but the article above stated that the Alameda balance sheet was full of FTT, meaning a reduction in price here would harm the trading firm massively - and as a byproduct also hurt FTX.

From Simon Taylor Fintech Brainfood newsletter:

Basically, both sides of Alameda’s books were completely filled with FTT.

This meant when CZ began to unwind his position in FTT - the rest of crypto followed. No one wants to be holding the bag, least of all when a whale in the market is liquidating.

To summarise so far:

• Alameda Capital, the sister company of FTX, had a pretty sweet (but illegal?!) set-up…front running traders and having unlimited access to capital

• FTX has a native token, FTT

• FTX’s balance sheet was filled with FTX’s native token

• CZ, the crypto kingpin and CEO of Binance, set off a chain of liquidations in the market for FTX’s native token FTT

Naturally, SBF went to social media to reassure investors. Everything is fine with FTX, he tweeted. Business as usual, apparently.

But the drop in FTT was also followed by retail traders worrying about FTX’s solvency, beginning a litany of withdrawals from the platform - up to $6bn worth to be exact.

In theory, an exchange should keep customer funds 1:1 - so any amount of withdrawals should technically be fine.

But not for FTX.

The twist in this tale comes when it’s revealed that Alameda used FTT as collateral for FTX’s customer funds…

Yes, you read that right. The FTT token that FTX created, Alameda used as collateral for real cash (other assets) which FTX gave to them, and that cash was customer funds. It was in FTX’s T&Cs by the way, that customer funds were to be untouched.

A lot of people thought it’d be impossible for FTX to become insolvent.

Again, let’s point to the crazy amount of money they were making on a daily basis from fees due to absurdly high volumes and also the fact their team was moderately small - surely meant they should be the opposite of insovlent?

But when you make up money, and then give it to your sister company who should be printing cash (but aren’t for some crazy reason), and you then take that made up money back as collateral for cash - and then that collateralised asset bombs - you’re going to be in trouble no matter how much you’re making.

Then came a sudden twist. 

CZ and Binance agreed to take FTX over. CZ’s killshot (unwinding his FTT position) had worked with SBF and FTX on their knees pleading for help. CZ signed an LOI (letter of intent) to acquire FTX.

This, unsurprisingly, fell through after CZ and team had 24 hours worth of due diligence on FTX. Not a good look.

FTX had no choice but to file for voluntary bankruptcy. Alameda capital, did, as well.

The craziest bit, though, is SBF was seemingly close to getting special dispensation for FTX because of his status within the industry but also with regulators.

The SEC were asleep at the wheel and allowed someone to use made-up financial instruments in a very similar way to the 08 banking crisis, all under the guise of crypto.

There’s so much more here - including SBF being a supposed altruist who was insistent on giving away his wealth (whilst living in a $50m property in the Bahamas), allowing people in the Bahamas to withdraw funds after they announced bankruptcy and also FTX being ‘hacked’ 48 hours after the unwinding was announced. Oh, and also - SBF and his inner circle had created an emergency back door to the entire platform meaning they could remove everything at the click of a finger and run away, just in case they ever got in trouble. Some are even saying Alameda didn’t even trade crypto, but instead invested in over 400 seed rounds. Some of these investments have CEOs on social media with 6 followers. The level of fraudulent activity here is truly astounding and will only get crazier the more is revealed.

What does this mean for Crypto and Sports?

This is a major hit for crypto’s credibility.

But the thing is, this wasn’t crypto itself. It was people working in crypto, who used their status and riches to keep the government and SEC respectively, sweet.

De-Fi protocols, that are trustless and work on smart contracts have held up well in comparison.

As Simon says in his newsletter:

In terms of FTX specifically, this is probably the worst exchange to go bankrupt in a sporting context.

This thread by Tom Bason (thanks Tom!) highlights some of FTX’s sports relationships.

Here’s a list that I compiled, mostly stealing Tom’s thread: 

• The FTX Arena - aka the Miami Heat basketball team’s stadium. A 19 year stadium naming rights deal for $135 million.

• The stadium naming rights deal for the California Golden Bears Athletic, a college football team in the US

• A NIL deal with FSU Softball

• A NIL deal with one of college basketball’s biggest teams; Kentucky

• The Official Cryptocurrency Exchange and NFT partner" of MSE - giving them access to a range of sport properties, including Washington Capitals, Wizards, Mystics and Capital City Go-Go.

• The official crypto exchange partner for the MLB

• The Mercedes F1 team (who have already taken their FTX logo off cars for the race just gone this weekend)

• A range of global athlete ambassadors including Tom Brady (who was also an investor), Steph Curry, Nomi Osaka, Shaquile O’Neal, Trevor Lawrence, Shohei Ohtani, Udonis Haslem. Some of these athletes were also investors in FTX.

• Professional esports team, TSM, agreed to be paid $210 million from FTX over 10 years to change its name to TSM FTX.

It’s clear this will have a cascading impact on sports. These partnerships were big and will need to be replaced otherwise these sports brands risk not being able to meet their own financial obligations. I’m sure they will be replaced, especially those that have valuable sport real estate.

When I see crypto blowups like this (not to this scale of course) — I’m not an inch sympathetic to the sports brand because the lack of due diligence is usually lacking massively.

But exchanges themselves are very simple business models and unless the people at the heart of them do something really stupid and fraudulent, like FTX, they’re profitable. Brokerages in traditional markets are, likewise, usually highly profitable. They’re very simple businesses.

When you see the CEO of FTX sitting with government officials and actually helping shape the future of the industry via regulation — the level of legitimacy is heightened.

Obviously, when things come crumbling down, there are levels fraudulence, incompetence and negligence that seem almost impossible. That’s why it was such a shock. And honestly, some of the smartest people I know in this industry who have been around the block were shocked by this. If they were, I have a sympathy for sports brands who partnered with FTX.

Hindsight is 20/20 but when you see the CEO of FTX on the cover of Forbes with the quote “only Zuck has been as rich this young” - it’s hard to compare this to say - a crypto entity a football team is sponsored by that we find out actually *doesn’t* exist. That, I have no sympathy for at all.

Will sports brands be more careful in the future, and will centralised crypto companies be more prudent with their cash? I think the answer is probably - but not by much.

Centralised crypto companies, especially exchanges, will for the most part be cash rich. Their demographics cross over massively with sports entities and these companies will still need to market.

What is clear is that when people talk about regulating crypto - the first port of call here should be the centralised, off-shore providers. And regulation in crypto is super complicated, due to the global, 24/7, permissionless nature of the technology.

To be better safe than sorry, maybe sports leagues, teams and should only partner with fully regulated centralised entities? But again - I doubt this will happen.

The sports and crypto relationship has certainly been dented by this but is unlikely to end here. There’s an appetite from both sides of the relationship to increase revenues and to market their brands respectively, and that for most people, will be enough.

When we see Manchester City, Barcelona and Fulham football clubs respectively partnering with companies that literally do not exist - I find it unlikely this event will scare partnerships teams, rightly or wrongly (probably wrongly).

If you’re working for a rights holder, do your due diligence.

More sports crypto stories & things to put on your radar

• MPs in the UK drew attention to many dubious crypto projects that have had links to football teams over the last 18 months. Most notably, John Terry’s NFT project - which shockingly - infringed on various IP.

• Many people are claiming that Crypto . com could be the next exchange to go, considering they also have a native token. I have no high conviction thoughts on this, but definitely something to keep an eye on.

• UplandMe have entered a multi-year agreement with FIFA, starting in this year’s World Cup. 

• Eterlast have raised $4.5m to build ‘the next generation of sports gaming experiences’ 

• Scottie Pippen got a custom NFT made by Smolverse, who are part of the magic universe. 

• Adidas are doing more Web3 things…an interesting bit of promo here. Something to keep your eyes on!

• Sorare’s latest ambassador is none other than Lionel Messi. Quite the coup from the french based startup.

• Nile has launched Swoosh - a Web3 platform. 

• An Adidas Bored Ape made a cameo in a World Cup advert

Great reads, great tweeting and more general ‘stuff’ that could impact you

• Mark Cuban has been tweeted his crypto thesis since the FTX collapse and I think they’re overall fairly good. 

• Instagram’s first NFT drop went really well and really badly at the same time. Drift’s NFT drop on IG crashed their minting mechanism.

Thank you!

Thanks for reading the latest edition of the Sporting Crypto newsletter. I’m really happy to see so many people enjoying it and sharing it with their networks. If you enjoyed this, please tell your friends who might be interested - and share it on social :)

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