Crypto Exchange FTX Is Now Valued At $32B, Worth More Than Nasdaq

A recent funding round has given Sam Bankman-Fried’s FTX cryptocurrency exchange a $32 billion valuation, meaning FTX now has a market capitalization that’s more than the Nasdaq, Credit Suisse and Robinhood.

The Hong Kong-based crypto derivatives exchange FTX and its 29-year-old founder benefited from a $400 million Series C funding round to help fund global expansion. Simultaneously, the same group of backers raised a $400 million Series A round for FTX US, which gave the U.S. FTX affiliate an $8 billion valuation last week, Coindesk reported.

Three months ago, a Series C funding round raised $420 million, giving FTX a $25 billion valuation.

Bankman-Fried, who shares an apartment with roommates and often sleeps on a beanbag chair in his highrise office, estimates his net worth “at a mostly illiquid $10 billion,” according to an interview published Feb. 2 by New York Magazine’s Intelligencer.

Forbes in August 2021 pegged Bankman-Fried’s net worth at $16.2 billion.

Bankman-Fried had left Wall Street to buy and sell cryptocurrency when he “spotted a fabulous arbitrage” in 2018 — an investment strategy in which an investor simultaneously buys and sells an asset in different markets to take advantage of a price difference and profit from it.

The kimchi premium refers to the gap in cryptocurrency prices between South Korean and other global exchanges, especially in the price of Bitcoin. Bitcoin has been listed at a higher price on a South Korean exchange than U.S. or European exchanges due to the popularity of the No. 1 crypto in South Korea.

Unable to crack the trade in the 30 percent price gap — the kimchee premium — between Korean and American bitcoin, Bankman-Fried turned to Japan, where he took advantage of a price discrepancy. In 2017, he had founded a trading firm in Berkeley called Alameda Research. He established a chain of intermediaries, including obscure banks in rural Japan. “They moved up to $25 million a day,” The Intelligencer reported. “‘You can do the math,’ said Bankman-Fried. ‘That was the craziest trade I’ve ever seen.’”

Bankman-Fried explained how arbitrage works in crypto. After buying Bitcoin for $10,000 in the U.S., investors could send it to a Japanese exchange and sell it for $11,500 worth of Japanese yen, then convert the amount back to dollars.

Because it was global trade involving wire transfers, it would take up to a day to perform, ”But it was doable, and you could scale it, making literally 10 percent per weekday, which is just absolutely insane,” Bankman-Fried said.

Bankman-Fried succeeded where others failed because he managed to facilitate all the different components involved in the trade, Yahoo reported. This included finding the right platform to buy Bitcoin at scale, getting approval to use Japanese exchanges and accounts and getting millions of dollars out of Japan into the U.S. daily.

“You do have to put together this incredibly sophisticated global corporate framework in order to be able to actually do this trade,” Bankman-Fried said. “That’s the real task, the real hard part.”

Large arbitrage premiums exist thanks to the decentralized nature of the crypto ecosystem, Bankman-Fried said. By comparison, other financial markets facilitate a cross merging between brokers and exchanges. “So it’s really capital-intensive, and also you have to worry about counterparty risk,” he added.

Once investors and traders understand the crypto space intimately, they can figure out where the counterparty risk is close to zero, but the edge is still high. “There’s a lot of money to be made, if you can really figure out and pinpoint when there is and isn’t a ton of edge and when there is and isn’t a ton of actual counterparty risk,” according to Bankman-Fried.

So what does Bankman-Fried do with his money?

He gave $5.2 million to a Joe Biden-supporting super PAC, making him the second-largest CEO donor to Biden after Michael Bloomberg, Fortune reported in 2021. He also donated to OpenAI, a research organization that works to ensure artificial intelligence benefits humanity. And he supports animal welfare groups.

A California native, Bankman-Fried believes in effective altruism, a philosophical principle that encourages people to maximize the positive social impact they have. He was inspired, in part, by an aversion to factory farming — he’s been a vegan for a decade, according to Fortune. Ultimately, he plans to give away all his wealth.

FTX ranks No. 2 among Top Derivative Exchanges by Open Interest & Trade Volume on Coingecko, with a $9.7 billion trading volume in 24 hours, second only to Binance. Just six months ago, FTX ranked No. 15 on the same list for spot trades, behind Huobi Global and Coinbase, with $1.8 billion in volume in a 24-hour period, Fortune reported on July 29, 2021.

Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?

Matt Huang, co-founder and managing partner of venture capital firm Paradigm, said he was convinced to invest in FTX because of how quickly Bankman-Fried and his team respond to users. “Someone will complain about something on Twitter or request a feature. And it’s not uncommon that Sam will see that, and it will be added to the platform in the day,” Huang said.

Billionaire hedge fund manager-turned-crypto-enthusiast Mike Novogratz, who predicted that Bitcoin could reach $100,000 by the end of 2021, described FTX in a tweet as “the most innovative exchange out there.”

Critics are quick to point out the risks in the unregulated realm of tokenized stocks. Traditional stock investors are protected by “infrastructure that’s designed to make sure the system functions; that it doesn’t have any type of catastrophic incident,” said Lee Reiners, executive director of the Global Financial Markets Center at Duke Law School. 

“With broker-dealers in the U.S., they’re subject to the Securities Investor Protection Corporation; there’s a public backstop,” Reiners added. “That same backstop does not exist in the world of tokenized stocks.”

Image credit: monsitj / iStock

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