The collapse of the FTX exchange in November 2022 stands as one of the most severe and significant shocks to the crypto community in recent memory. Many still recall those events with dread and fear of a repeat.
In our new comprehensive guide, we’ll explore what went wrong with FTX and how Alameda Research was involved.
Introduction to Alameda Research
What is Alameda Research?
To understand what is Alameda Crypto, one must look at how the firm operated within the broader cryptocurrency industry—Alameda Research.
Once one of the largest trading firms in the cryptocurrency industry, it was widely known and successfully managed substantial capital, provided liquidity for crypto exchanges, engaged in cryptocurrency market making, arbitrage, and various other trading activities, which we will detail further below.
As a result, Alameda had a considerable influence on the prices of various cryptocurrencies. As everyone who witnessed the events of 2022 knows, this influence was indeed significant.
Alameda’s logo. Source
Key figures and founders
But let’s take a step back. The company was founded in 2017 by a young and promising crypto entrepreneur, Sam Bankman-Fried (SBF). Interestingly, he started Alameda just a few years after graduating from the Massachusetts Institute of Technology (MIT).
SBF. Source
Subsequently, the management of the firm passed into the hands of Caroline Ellison, who was at the time Sam Bankman-Fried’s girlfriend. It later emerged that the affiliated duo of FTX and Alameda Research had been involved in fraudulent schemes in collusion with each other. In late December 2022, during legal proceedings, Caroline admitted to deceiving FTX’s creditors.
Caroline Ellison. Source
Alameda Research and FTX exchange
Partnership with FTX
What is Alameda FTX, and how were they intricately connected? The relationship between Alameda Research and the FTX exchange was foundational, sharing a common founder Sam Bankman-Fried and often working in close coordination.
Overall, Alameda Research played a crucial role in the creation and development of the FTX cryptocurrency exchange, serving as its largest market maker. Essentially, this means it acted as a crypto liquidity provider, actively buying and selling cryptocurrencies on FTX to maintain stable prices.
Contributions to the FTX ecosystem
Initially, this partnership was an excellent example of creating a dedicated crypto trading ecosystem. At the time, it helped both companies achieve significant recognition and success in the market. For instance, in 2021—just a year before its collapse—the trading platform earned a staggering $1.02 billion in revenue.
Additionally, Alameda made a significant contribution to the development of FTX’s products and services. As an algorithmic trading firm, Alameda was actively involved in developing trading algorithms and strategies and provided crypto arbitrage opportunities. These contributions helped FTX expand its functionality and offer more competitive conditions to its clients, attracting many traders to the platform.
Exploring Alameda's crypto activities
Role in cryptocurrency market making
As we mentioned earlier, one of Alameda Research’s main activities was cryptocurrency market making. This involves the process of providing liquidity on financial markets. Market makers continuously place buy and sell orders on the exchange, thus narrowing the spread (the difference between the buying and selling price).
This significantly improves the trading environment on exchanges, making trading smoother and reducing the risk of price slippage. Market making makes markets more predictable and less volatile, which is crucial for both retail and institutional investors.
Quantitative trading strategies
Besides this, Alameda was heavily involved in its quantitative trading strategies. In simple terms, these are quite complex strategies based on mathematical models and algorithms. These strategies helped the company analyse vast amounts of market data, identify patterns, and make swift trading decisions. The result was evident: this approach enabled Alameda to minimise risks and maximise profits.
Here are a few examples of such strategies:
- High-frequency trading. The goal of this strategy is to execute as many trades as possible in the shortest time.
- Arbitrage. In this strategy, the company would buy assets on one exchange at a lower price and sell them on another at a higher price.
If this all sounds a bit confusing, check out our special guide on the basics of cryptocurrency trading.
However, it was these excessively aggressive quantitative trading strategies that eventually became one of the reasons that led the company to its downfall. All the strategies mentioned above carried significant risks, which ultimately caused financial problems for Alameda.
Controversies and challenges
Controversial events or incidents
In addition to this, some of Alameda’s investments sometimes raised serious questions within the community. A considerable amount of money was poured into businesses that had nothing to do with Web3—video game studios, betting platforms, online banks, and publishing houses. For instance, the presence of the strawberry farm 80 Acres Farms, a fertility clinic, and the weight loss supplement producer Equator Therapeutics in the investment portfolio seems utterly illogical.
As a result, many of these investments turned out to be unprofitable. This is when another highly unpleasant detail came to light: Alameda Research had been using FTX clients’ funds to cover its losses. In the end, this gross violation triggered the collapse of both companies.
Challenges faced by Alameda Research
Public reaction was swift. When all the above-mentioned corporate secrets became known, investors began withdrawing their funds from FTX en masse, further exacerbating the situation.
Ultimately, Alameda and FTX faced a severe liquidity crisis. The company was unable to quickly liquidate its assets to meet all its obligations to defrauded creditors. As a result, this led to the spectacular collapse of both companies, which significantly damaged the reputation of the entire crypto industry and plunged the market into a prolonged bear cycle.
Conclusion: Alameda Research's impact on the crypto industry
While Alameda Research was a fairly successful and well-known company in the cryptocurrency industry, it is remembered more for its dramatic collapse than for its successes. In the long run, the collapse of Alameda and FTX undermined public trust in the industry and led to increased scrutiny and pressure from regulators worldwide.
On the other hand, it was precisely due to this dark event that a new standard of transparency called Proof of Reserves (PoR) emerged in the cryptocurrency market, and many companies began paying much more attention to the security and protection of user funds.
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This article is not investment advice or a recommendation to purchase any specific product or service. The financial transactions mentioned in the article are not a guide to action. It’s not intended to constitute a comprehensive statement of all possible risks. You should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about making any operations with cryptocurrency.
