FTX Explained: What Is It And Why Did It Collapse?

Before his cryptocurrency exchange was even a thought in Sam Bankman-Fried’s calculations, he was trading what is known as the Kimchi swap. In 2017, he became aware of the fact that different exchanges posted their own spread rates on Bitcoin and other crypto assets. These unique rates were sometimes as far off as around 60% across different exchanges, with those located in South Korea showcasing a particular discrepancy in the value of a cryptocurrency (hence the nickname).

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The act of arbitrage trading wasn’t difficult, but it took a keen eye for pricing gulfs and a good bit of legwork. Bankman-Fried turned out to be a natural at the task, though, and launched Alameda Research to further the project after only a month. The firm tasked itself with creating processes to streamline these trades, and his team reportedly hit $1 million in earnings per day quite often. Alameda was formed in late 2017. However, over time, margins became slimmer in the arbitrage game, and the business relied on leverage that stemmed from crypto loans and other forms of fiat investment into the brand.

By 2019, Sam Bankman-Fried ostensibly settled on a new means of funding his trading venture: A crypto exchange that his business could rely on as a constantly willing lender. FTX was born, tethered indiscriminately to the Alameda name as two sides of the same coin, unbeknownst to personal investors who bought into the new exchange.

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