From Billionaire to Millionaire in Three Days: A Guide • CEO Letter #71

Taylor Culbertson -

Yowza, it's Taylor, CEO of Hedgehog, your friendly neighborhood crypto investment dashboard. I say yowza because that's the mood right now — the Hedgehog cul-de-sac is pretty chill, but the rest of the Crypto City is in flames freaking out. If you checked prices recently, you will have noticed, because BTC is down to ~$17.3k and ETH is down to ~$1,260, among many other tumbling coins.

I'll keep the intro short today so we can dive right in. But of course there's still a giveaway at the end of the newsletter, don't miss it!

Last week's email was titled "This newsletter includes three billionaires." After the events of this week, one of those dudes is no longer a billionaire. Well, technically — his net worth is still $900+ million, but we don't round up for multi-millionaires. This guy lost multiple billions! Which is sort of impressive? Make a fortune, lose a fortune — it all happens fast in crypto.

Guess what else: This drama was sparked off by one of the other billionaires. (Billionaire #3 minded his business. You know something is wrong when Elon Musk had the least chaotic week…)

So, who are these rascals? Sam Bankman-Fried, CEO of popular exchange FTX, and Changpeng Zhao, CEO of top-dog exchange Binance. Here's a blow-by-blow timeline of what happened:

  • 11/2 — CoinDesk reports that Alameda Research, a massive trading firm also controlled by SBF, has its balance sheet heavily intertwined with the fortunes of FTX: "Bankman-Fried's trading giant Alameda rests on a foundation largely made up of a coin that a sister company invented, not an independent asset like a fiat currency or another crypto." The sister-company coin being referenced is FTT, the "exchange token" created by FTX.
  • 11/4 — Independent newsletter Dirty Bubble Media asks, "Is Alameda Research Insolvent?" following an earlier investigation of SBF's history in the industry. Speculation starts going wild on Crypto Twitter.
  • 11/6 — Binance CEO CZ tweets: "As part of Binance's exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came [sic] to light, we have decided to liquidate any remaining FTT on our books. We will try to do so in a way that minimizes market impact." Spoiler alert: market impact was not minimized. The price of FTT, already down from around $25 to around $23, slides to $22.
  • Still 11/6 — The CEO of Alameda Research offers to buy Binance's unwanted FTT at $22, hoping to protect the price of FTT, but CZ says Binance will opt for the open market instead.
  • Still 11/6 — CZ follows up: "Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won't pretend to make love after divorce. We are not against anyone. But we won't support people who lobby against other industry players behind their backs." This is a reference to SBF's regulatory suggestions that we discussed last week, as well as historical bad blood between the two CEOs. SBF is a big political donor; Crypto Twitter wonders if he encouraged special scrutiny of Binance.
  • Still 11/6 — SBF tweets that everything is fine, actually, nothing to see here!
  • 11/7 — CZ claims to be surprised by the kerfuffle: "I was out with friends yesterday when the topic of whale alerts came up. Following our principles, I decided to be transparent. So I wrote a thread in 5 mins, and posted it. Little did I know it was going to be 'the straw that broke the camel's back.' Everyone wants more transparency in our industry, right? My tweets were simple. There were questions about a large ($580m) FTT deposit to Binance, and we were transparent about the fact that we are closing our FTT position."

    He pooh-poohs "conspiracy theories that I somehow orchestrated this whole thing," meaning the now-plunging price of FTT, down into the teens at this point, and the general loss of confidence in FTX. Approximately nobody believes CZ's Pollyanna act, but there you go, that's what the man said. "I spend my energy building, not fighting," CZ insists.
  • Still 11/7 — In response to the torrent of user withdrawals, SBF tweets (and later deletes) that "A competitor is trying to go after us with false rumors" but not to worry, "Assets are fine." He adds, "We don't invest client assets (even in treasuries)," a claim doubted at the time which becomes rapidly more doubt-worthy as events continue to unfold.
  • 11/8 — Users have issues withdrawing funds from FTX.
  • Still 11/8 — The next bombshell drops. Both SBF and CZ tweet that Binance is in talks to possibly buy FTX. According to SBF, "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. This is one of the main reasons we've asked Binance to come in." Many immediately point out that this contradicts his earlier statements about FTX having safeguarded client funds.

    CZ says, "To protect users, we signed a non-binding LOI [letter of intent], intending to fully acquire FTX.com and help cover the liquidity crunch. We will be conducting a full DD [due diligence] in the coming days."
  • 11/9 — Sike, no dice. "As a result of corporate due diligence," Binance posts, "as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com. In the beginning, our hope was to be able to support FTX's customers to provide liquidity, but the issues are beyond our control or ability to help." Yikes! CZ: "Sad day. Tried, but 😭"
  • Still 11/9 — Justin Sun, a notorious Very Rich Blockchain Person described by CoinDesk as "the founder of the Tron cryptocurrency network and Grenada's ambassador to the World Trade Organization," tweets that "Further to my announcement to stand behind all Tron token (#TRX, #BTT, #JST, #SUN, #HT) holders on #FTX, we are putting together a solution together with #FTX to initiate a pathway forward." What does this mean? No one is sure! But the post is retweeted by SBF, so… it probably means something.
  • 11/10 (today) — SBF tweets an apology thread with some high-level explanation and promises to do his utmost to make users whole. At this point there is no trust so… who knows. Everybody yells at him.
  • Still 11/10 — FTX seems to have reopened withdrawals? Unclear exactly what's happening since this just broke as I'm wrapping up the newsletter. Bruh.

I think that's everything we know for certain so far. My appreciation to Byrne Hobart for the timeline in his newsletter, which helped with reconstructing what happened. Oh, I forgot, at some point in there FTT dropped to about $4. Let me introduce another acronym: RIP 💀

Miscellaneous additional notes:

  • Apparently SBF asked various Silicon Valley billionaires to bail him out before resorting to Binance.
  • Industry insiders react in real time — Coinbase CEO Brian Armstrong, Circle CEO Jeremy Allaire, and former BitMEX CEO Arthur Hayes among them.
  • Popular crypto show UpOnly streams a conversation between hosts Cobie and Ledger, Wintermute CEO Evgeny Gaevoy, streamer Jim Talbot, trader Gainzy, Do Kwon (yes, of LUNA fame), and Martin Shkreli (who told Do Kwon that "jail is not that bad," which doesn't have anything to do with anything, but… wow). See the "intern notes" for a summary.
  • CoinMetrics head of R&D Lucas Nuzzi tweets, "I found evidence that FTX might have provided a massive bailout for Alameda in Q2 which now came back to haunt them."
  • CZ posts the note he sent to Binance staff.
  • The SEC and CFTC are getting involved and will examine FTX operations. Cherry on top: "Most of FTX's legal and compliance staff quit Tuesday evening," Semafor reports.
  • And Solana, which was heavily supported by FTX, is down ~40% over the past 24 hours. This weekend the price was in the mid-$30s, by yesterday it had dipped to $14, and this morning it's around $18. The Solana network is still up and running though, so that’s a nice change.

The story is still playing out and we'll know more soon. In the meantime, what do we conclude from all this? First, if you have money locked up in FTX, or you're worried about the overall market crash, I'm sorry, that's brutal. Don't be afraid to log off and go for a walk. Losses are painful but life goes on. Hang tight, because we don't know how this ends yet.

I can tell you what the streets are saying, and by streets I mean Reddit:

This whole thing goes way back to 2019 before Binance incubated FTX. In 2019, CZ tweeted that some small derivatives exchange was attacking futures markets on Binance.

He then invested in that small derivatives exchange, built them up, cashed out, weirdly took payment in their own tokens last year instead of taking entire settlement in tether or bitcoin, Alameda balance sheet rumours from substack gets picked up by coindesk, CZ goes public about dumping their tokens on the market, bank run, CZ swoops in and serves it back cold.

Played SBF like a f'n fiddle! GG

And CZ shared his own takeaways, at least the ones he's willing to make public:

1: Never use a token you created as collateral.

2: Don't borrow if you run a crypto business. Don't use capital "efficiently". Have a large reserve.

Binance has never used BNB for collateral, and we have never taken on debt.

Stay #SAFU.🙏

One bright spot in all this mess is that Binance and fellow exchanges OKX and Kucoin have pledged to publish auditable proof of reserves so that anyone can check that they do in fact have the funds they claim to have. Hopefully this becomes a trend as CoinDesk has reported.

Okay, that's all for today. Believe it or not, a bunch of other stuff happened this week, but I think I've hit you with enough links for now.

Tldr: Billionaire bags are pretty heavy. Former billionaire bags are even heavier, probably because they have to carry said bags themselves. The industry will metabolize this disaster as it has with many others before, but man… reinventing finance is one heck of a rocky rollercoaster ride.

Here's another bright spot, the giveaway! My question this week: If you were a billionaire, how would you lose all your money?

Hit reply and send me your answer, and you'll be entered to win some Hedgehog merch. The winner gets to pick three options from this list:

  • cozy Hedgehog hoodie
  • comfy Hedgehog baseball tee
  • snazzy Hedgehog socks
  • insulated stainless steel water bottle with Hedgehog logo
  • official Hedgehog team baseball cap

I hope SBF’s bags are recyclable,
— T

To get future newsletters delivered straight to your inbox every week, sign up here! Check out past newsletters in the complete archive.