How the King of Crypto Sam Bankman-Fried was taken down

UPDATE: More has been learned about FTX and what transpired in the days leading up to its bankruptcy filing. For the latest, see the newsletter that followed the following:

The most famous player in the crypto space has been taken down.

I'm talking about the founder of crypto exchange FTX and once-richest 30-year-old in the world, Sam Bankman-Fried.

In just 24 hours, his net worth was eviscerated — falling from $16 billion to under $1 billion, according to Bloomberg's billionaire index — all as his largest competitor swooped in to pick up the scraps after a public Twitter spat just days prior.

It's wild. Absolutely wild. Like Jesus and Judas wild — and I'm not just saying that because SBF was a self-described altruist who wanted to give his fortune away to charity (but maybe I am saying that because someone sold him out to seal his fate.)

Sam Bankman-Fried, founder and CEO of FTX, testifies during the House Financial Services Committee hearing titled Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States, in Rayburn Building on Wednesday, December 8, 2021. (Photo By Tom Williams/CQ-Roll Call, Inc via Getty Images)

To understand the drama, let's first establish FTX's competitor: Binance. Binance is the largest crypto exchange in the world. It was founded by Chinese national Changpeng Zhao, who is known colloquially as CZ. In terms of scale, Binance is a behemoth. It boasts trading volumes that are 10X what FTX had, and trumps Coinbase by nearly the same margin.

And yet, as large as it is, it doesn't have the same press or respect in Washington D.C. or in New York. Part of that could be that its founder is a Chinese national who has moved Binance's home base around Asia multiple times, and that doesn't necessarily bode well from a regulatory perspective. And, part of it could be because CZ has focused aggressively on scaling other markets around the world. Either way, Binance is huge.

Founder and CEO of Binance Changpeng Zhao, commonly known as "CZ", attends the "CZ meets Italy" at Palazzo Brancaccio on May 10, 2022 in Rome, Italy. Changpeng Zhao is the founder and CEO of Binance, the world's largest cryptocurrency exchange by trading volume. (Photo by Antonio Masiello/Getty Images)

Now, back to FTX. Even though they are small relative to Binance, they had been growing fast. So fast that CZ may have begun to worry. In fact, Binance actually divested its stake in FTX in one of its later investment rounds. In exchange, it received more than $2 billion in BUSD, Binance's stablecoin and FTT, FTX's native token.

If you're asking yourself why does Binance have its own stablecoin and why does FTX have its own token, welcome to crypto! (You're going to love it here!)

Both exchanges have used their native tokens to save on payment and processing fees, and generally offer discounts to users to use them on their platforms. It's kind of genius, because ... think of them like gift cards. Stores use those to get you to come back all the time. Turns out crypto exchanges are no different. And to be fair, some people did use FTT tokens to pay to trade crypto on FTX.

However, as history has shown us this year, any crypto token can quickly lose its value — and when it does that can cause disastrous knock-on effects for anyone holding a lot of them. In this case, it was FTX's token, FTT, that wobbled and tanked more than 75% on Tuesday.

So how does something go from $22 to under $5 in a few hours? Well, this time it was personal.

First off, let's remember the backstory: SBF is the crypto golden boy. But, last week the luster of his image started to wear. As SBF defended some of the policies regulators have been pushing for crypto to begin following normal anti-money laundering rules, purists turned on him. As I wrote then, a crypto Civil War was brewing. I did not think that war would end in a week, but what followed ensured it.

Next, CoinDesk runs a story on November 2 with dubious implications for SBF and FTX. The report claimed to show that SBF's Alameda Research, his sister firm, had a significant chunk of its assets in FTT. Like billions of dollars in FTT. But who actually uses FTT? Turns out, not a lot of people. Like, fewer than 200 active wallets! Because, again, you could also just trade on FTX and pay fees using any other currency rather than their "gift card" FTT tokens.

Ok, so SBF's sister firm Alameda has a lot of FTX tokens on their books. That by itself isn't an issue — BUT it becomes a rather large issue if Alameda, or FTX has any loans out using FTT as collateral and FTT begins to drop in price. Then, all of a sudden that becomes a BIG problem! (Maybe you can see where we're going with this.)

Remember, of course, that CZ is still sitting on a bunch of FTT. And remember, that SBF's public image among those in crypto has now taken a hit due to his beliefs that maybe crypto shouldn't be used for money laundering. All fine, but then SBF takes a pot shot at CZ on Twitter, jokingly asking in response to someone talking about CZ lobbying in D.C. if he's even allowed there.

In the days that followed SBF's pot shot and the CoinDesk report that seemingly laid the table for anyone wanting to tank SBF's FTX empire by pressuring FTT's price, CZ took to Twitter to make an announcement of his own: Binance would begin selling off its stack of FTT tokens.

In a later tweet, CZ seemingly references SBF's regulatory stance, saying, "We are not against anyone. But we won't support people who lobby against other industry players behind their backs." As the offloading begins, FTT's price begins to drop 15%. The head of Alameda Research then takes to Twitter to appeal to buy Binance's stake to end the drawn-out selling pressure:

But by then, it's too late. The panic has been set in motion. No amount of tweets from SBF about how safe FTX was could slow the number of customers rushing for the exits. Having seen this exact scene play out at three other major crypto exchanges this year, users flocked to FTX to drain their accounts. In a flash, FTX sees nearly $500 million leave the platform and eventually pauses withdrawals, citing a "backlog" of transactions from users.

Finally, in a move that signals checkmate, and after reportedly failing to find any outside interest in a deal to keep them afloat, SBF bends the knee and accepts a buyout from his competitor Binance.

After all was said and done, FTT had collapsed nearly 85% in less than a week, FTX had a new owner, and SBF was wiped out. Seemingly dancing on SBF's grave, CZ took the time to offer up his advice:

Whether it was true before or not, there's no disputing it now: Crypto has only one king of the world. And his name is CZ.

Disclaimer: Alameda Ventures is an investor in the author's startup Trustless Media, and SBF is an NFT holder in the community-owned crypto show Coinage.