I really do not like this article and the discourse here for several reasons:
1. The entire Coindesk article lacks meaningful substance. For instance, we have zero idea about what those $7.4 billion of “loans” are. It’s really irresponsible to say that they’re insolvent. If you believe, so, you are applying no more rigor to your understanding of the space than the idiots who say HODL YOLO HFSP. If the liabilities are collateralized by assets on their balance sheet, then the financial risk is not to Alameda but the lender!
2. The entire article paints a dire picture based off of their appraisal of the assets. Again, nobody has any idea of what the liabilities truly are, so to speculate that Alameda is insolvent is making an unfounded leap. But the author of the article tries to lead us to believe that it’s an OK leap to make, because their assets are trash! Wrong. It’s lazy, it’s pandering to a certain crowd, and it’s dishonest.
3. Before reflecting on their extremely, extremely short handed analysis, they take their unfounded conclusions further and spin it through a prior framework that they made for Celsius, which is a totally different type of company with a totally different set of liabilities. Alameda does not lend money to retail. The author pulls a sleight of hand by taking one misleading statement, and transforming it before the reader can apply any skepticism to the original misleading statement.
4. Recently there have cropped up a set of anonymous people (otteroooo on Twitter, this guy) who purport themselves as insiders only to reveal themselves to be complete completely ignorant about the topic at hand. A lot of unsavory people have recognized there’s a cottage industry in endlessly pounding the table saying that the world is falling and that everything is a scam based off of extremely little public information and no access to any private sources. They are ambulance chasers.
5. We have a large contingent of people who just read the headline here, and assume, scam! And apply the pre-existing biases to the entire thing, with nothing insightful to add.
Alameda's story has many parallels with Celcius (and 3AC): if something happens that proves Alameda is insolvent, will you return to this analysis and hold the same viewpoint, that it's unhelpful to consider that their solvency may well hinge on value of illiquid nonsense assets? The problem Celcius had was not that they were lending to retail, it's that their entire investment thesis was based on insane bets with capital borrowed from retail investors. Celcius, Hodlnaut etc. were "lending" and "investing" with "credible" players like 3AC (who had a mythology much like Alameda's before they imploded).
Yes, some skepticism is required when considering whether or not Alameda is insolvent (or at risk of becoming insolvent) but the analysis is helpful in highlighting why Alameda might be at risk.
3AC was a prop trading firm flush with cash… until the curtain was lifted and it turns out it was just a big fraud. Alameda is a prop firm flush with cash…
Why do you assume that Alameda isn’t “packed to the gills” with financial gremlins?
If you asked anybody in the space about 3AC or Alameda 12 months ago, you’d have heard the same thing about them: prop trading firms that have been hugely successful investing their own money and thus have billions upon billions of self-generated money to invest. Today, 3AC is gone and we are now discovering Alameda has huge liabilities and (potentially) mostly junk assets.
What’s a bigger leap: Alameda is like 3AC, or that the information we’ve seen so far isn’t representative and actually alameda are doing great?
Good news for crypto world that there are still people like yourself, I suppose. It's quite the strategy to assume everything with Entity X is above board based on the (intentional) lack of information and then when it turns out to be a scam, there's Entity Y where you can place the same assumption of legitimacy based on the same intentional lack of transparency.
"This time is different [even though all the publicly-available evidence thus far indicates it's exactly the same]" is the calling card of the crypto booster who desperately needs the music to keep playing so they're not holding the bag.
That is the craziest proposition that I have heard today. The author posited a hypothesis based on whatever public information they could gather. Either Alameda comes out to refute it, or they don't (they haven't yet, as far as I know), in which case people can draw their own conclusion. The fact that SBF, one of the most outspoken mouthpieces of the crypto boom, has chosen to remain silent, provides some circumstantial evidence at best. But this is not a court of law, it's investigative journalism, which I think is the part you're missing.
A point that is getting missed is that nobody knows what the liabilities are. At one extreme, if the liabilities are all cash, alameda is in a dire place. At the other, if the liabilities are just the tokens on their balance sheet, there's nothing particularly interesting.
Any statement a bout their insolvency is a statement about their liabilities, which is just speculation.
Alameda is helmed by quants from Jane Street etc., they are supposed to do better with regard to risk management, forecasting, bet sizing. Their whole M.O. is that they are smarter and actually do math and that is the source of their success.
Whether that is true or not, I don’t know. But from their tweets and podcasts it does seem they approach things very differently and in a way that makes sense.
> Alameda is helmed by quants from Jane Street etc.,
The CEO worked at Jane Street for less than 18 months and appears to have had a fairly junior role there. I'm sure they are smart folks but there's a limit to how much you can learn in 18 months, in your first job after college.
Huh? Leaving Jane Street to start crypto trading isn't what I would do, but it seems to have worked out well for them. Why does that suggest they didn't choose to leave?
Sorry if my prior message was confusing, but why would a top tier company let go one of their best performers after just a half and a year out fresh of college?
When it's collateralized with crypto it's uncollateralized. 3AC learned this. Like half the exchanges have learned this over the last year. There is no inherent value in any of them, there is no hard floor of assets, as the market continues to tank that 'collateral' becomes/remains worthless. It's turtles all the way down.
The 3AC saga wasn't because crypto collateralisation turned out to be bogus, it was just that lenders gave them un/undercollateralized loans. Their downbringing was taking cash liabilities, on leverage (the un/ndercollateralized part), and using that to make risky bets. They took a ton of leverage to bet that the GBTC/BTC spread would close (but it widened, a friend of mine called this killing them over a year in advance), iirc positions in stETH/ETH spreads, illiquid (but very profitable...) vc investments, as well as just going long crypto.
This is a popular idea, but it's not just wrong, it's both systematically and personally dangerous. I am entitled to come to conclusions based on the partial information I have. If someone doesn't like those conclusions, it's on them to increase my access to information.
The alternative means that anyone and everyone can hide anything they like behind partial information, then declare any suspicions baseless and groundless based on their own hiding of information.
I speak only to this. Whether the linked article did a good job of their analysis I don't know. I'm just saying, the idea that people are not entitled to come to conclusions based on partial information is not valid. The conclusions come to should be hedged and made with the understanding that information is partial, but there is no obligation to not come to them. Otherwise you're obligating yourself to walk naked into almost any old scam you can imagine. This idea doesn't scale out into the real world where people happily abuse this.
Don't worry, your critique is fair and square, what you have to understand is that you probably piss a fair amount of people here already by virtue of your username alone! Cue takes on how "affinity scam" somehow doesn't apply & even more contrarian moaning re: crypto bad.
What we are entitled to do, what is polite to do and what we can do for clickthroughs are three different things. Coming to conclusions on partial information may as well be jumping to them in many circumstances. The ideal approach would be to add a disclaimer of where the fact to supposition transitions, and if the conclusion is sensible at least source similar cases.
If it walks like a duck and quacks like a duck it’s probably a duck. Or a duck robot, or my kid running around with my phone again imitating a duck while watching duck YouTube videos.
Whatever the conclusion, state facts but don’t state conclusions as facts.
Except in the real world if people are actually putting their money down based on what those conclusions might be, you have to jump to something.
And the right thing to do is to jump to the most likely one based on the information available to you (adjusted for the consequences if you're wrong).
In this case, the most likely conclusion appears to be based on the info presented that it may be insolvent, and further, acting as if it is insolvent means you lose on limited upside if you're wrong, but avoid significant downside if you're right.
If Alameda is not a fan of this conclusion and if it's gaining traction in the community they can refute whatever might be wrong in the analysis and if nothing is wrong, provide the additional missing information that will correct the conclusion.
This is what CEOs and CFOs for public companies do everyday. Present their company's thesis to the public and refute analysts' theses where they think they're either wrong and/or don't have sufficient information. Why do you think they take so much time out of their schedules to do interviews on Bloomberg, CNBC, etc.
Alameda doesn't need to go down that route, but that doesn't mean independent analysis with conclusions based on incomplete information is a faulty process.
> If the liabilities are collateralized by assets on their balance sheet, then the financial risk is not to Alameda but the lender!
Fair point, but why do you seem to think you are defending Alameda? Collateralizing loans from fools with your own brand of worthless bullshit is the very definition of a Ponzi scheme.
It's not a fair point. If Alameda goes down, then ftx goes down, and if ftx goes down and is clearly wash trading (the most interesting finding in the article imo), then prices will plummet.
It's not just a problem for the bank, it's threatening to the crypto ecosystem. Just as it would be if the binance tether thing ever implodes
The current circulating supply of DAI is slightly above 6B, so what you claimed is literally impossible.
The average case scenario is some of it is ponzi mixed in with other non ponzi, and in my book I'll call even a "10% ponzi", a ponzi scheme. Maybe you have a different bar to calling something a ponzi, so knock yourself out.
Loans are money. Collaterals can be "minted DAI", whatever it is, or anything else that a fool can be convinced is valuable: that is the opportunity for Ponzi schemes.
>If the liabilities are collateralized by assets on their balance sheet, then the financial risk is not to Alameda but the lender!
Ok, this is kind of a fair point, if these loans are collateralized by the assets, then it's the lenders who have a problem. But that does actually mean there's someone out there who is going to get absolutely mugged. It's also a bit of a question who, other than some other SBF entity, would make these loans - who is accepting FTT as collateral? It also means that you need to apply that logic to their assets, meaning their supposed $14.6Bn you probably need to regard around $12Bn minimum to be absolutely worthless.
I would absolutely not say they for sure insolvent, but these numbers do clearly look very worrying.
The guy that wrote it, Dirty Bubble, was big on the Celsius exposé train and he is trying to strike gold again. Idk how accurate any of it is though but that’s Dirty Bubble’s history and backstory. Kind of like FatMan and Luna. They want to stay relevant and get the next “big scoop”.
> 4. Recently they have cropped up a set of anonymous people who purport themselves to be insiders only to reveal complete ignorance about the topic at hand (otteroo on Twitter, for instance).
Can you clarify this? By “they” do you mean this Substack? I didn’t see anything about “otteroo” or Twitter insiders in a quick search of the Substack, but I didn’t exhaustively search the entire backlog.
I mean this guy as well as a bunch of people on Twitter who have been clout chasing ambulance chasers, running over the truth to chase a story.
The formula is this:
1. Create an helpful explainer thread to explain some crisis (ex-post)
2. Start to make vague predictions about relatively easy to predict things (like that Celsius is going to go down, a couple days before it technically goes down).
3. Refer your readers back to your foresightedness
4. Get extremely excited as you receive DMs from people to check out x or y.
5. Lock your eyes on a juicy new company and start to make unfounded claims about said company, referring to a sole rando as a “source” (eg Nexo is insolvent!)
6. Create an expose on your new target, run shoddy analysis based on no actual data, and throw it into a larger conspiratorial framework that starts to implicate other actors.
7. All the while, build a captive audience who doesn’t know the better and eventually use that audience to run ads or to pay for your newsletter.
8. They can run this affinity scam because 1. What they say is not falsifiable, 2. you have an infinite timescale for which to be correct about any one company going bankrupt, 3. there are people out there who are earnestly trying to learn about the market and don’t know who to turn to, and 4. if you’re wrong, you’re not accountable to your actions because there was never any actual money on the line.
There are serious issues in the industry, do not get me wrong. It’s kind of messed up that people who have no connections have to look into the void and decide whether they’re going to trust an internet rando or nobody at all. Disclosures need to be better. But the people writing these sensationalist pieces are part of the problem and not the solution.
"If it wasn't for these damn twitter personalities messing up the plans, they would have gotten away with it."
You sound like a Scooby Doo villain. If these companies are not run well, they can be brought down by mere twitter personalities. This is a stress test. Those who are run well, will survive this.
Another analogy: If you build a house out of straw (because you cut corners) should you blame the big bad wolf who can just blow it down?
Sure you can say this is a stress test - I’m just saying it’s misinformation. I am annoyed by people who spread misinformation for clout. Applies to both the bullish credit and the bearish crowd.
You cannot complain something is misinformation without offering information to counter it. That never works, will never work. The only reason an article like this, speculative or not, has wind to it's sails because crypto is not regulated like equity and companies like Alameda does not have to publish regular financial reports that classic market participants moving billions of "dollars" have to publish.
What if I saw military helicopters flying above and told others “war has broken out!” I see how you can say that’s not misinformation, but wild speculation. For me, it’s both.
> if you’re wrong, you’re not accountable to your actions because there was never any actual money on the line.
I mean, that's the risk you run right?
Either you're a regulated system where you can avoid this kind of thing, or you're an unregulated system where you go 'screw the man', but you don't get the protections that are associated with the traditional financial system.
There's some deep irony about complaining about it; isn't the 'good' thing about crypto?
>> if you’re wrong, you’re not accountable to your actions because there was never any actual money on the line.
> I mean, that's the risk you run right?
> Either you're a regulated system where you can avoid this kind of thing, or you're an unregulated system where you go 'screw the man', but you don't get the protections that are associated with the traditional financial system.
He does not mean companies operating in the unregulated crypto space. He means the author of articles like this one.
"In the event that the borrower does default, the lender can seize the collateral and sell it, applying the money it gets to the unpaid portion of the loan. The lender can choose to pursue legal action against the borrower to recoup any balance remaining."
I think OP is assuming things work the way US mortgages work, where you can walk away from the house. I think OP is labouring under a misapprehension here.
>1. The entire Coindesk article lacks meaningful substance. For instance, we have zero idea about what those $7.4 billion of “loans” are. It’s really irresponsible to say that they’re insolvent. If you believe, so, you are applying no more rigor to your understanding of the space than the idiots who say HODL YOLO HFSP. If the liabilities are collateralized by assets on their balance sheet, then the financial risk is not to Alameda but the lender!
Doesn't take a genius to figure out why a hedge fund needs 7B in loans. They aren't a tech giant expanding in a new direction or acquiring competitors. It's pretty clear why a hedge fund needs a massive cash infusion. Also interesting that they collateralize the loans with Tokens majority owned by Alameda and FTX so it's unlikely were they forced to liquidate to pay off their loans that they could get any where near the quoted value of the tokens.
I'm assuming you are implying that alameda is taking loans to cover insolvency?
There are plenty of reasons why a trading firm takes loans (it's also possible the FTT is structured as a long, inflating said number)
1. I want to short X, but don't actually have X. I borrow X and sell it.
2. I want to sell X and buy a derivative paying people who are long the derivative. Goto step 2.
3. I want to trade X but don't know how ahead of time, so i need inventory of X in case I want to sell RIGHT NOW. I don't want to actually have exposure to a ton of X, so I borrow it instead. Very common for a market maker like alameda, although there's no way they actually need billions of collateral for market making purposes.
4. I can borrow X, and put it in a defi yield farm for a better rate than what I borrowed it for.
5. I have a ton of Y, and I don't have any plans to use it soon. I put Y up as collateral to borrow X which I can meaningfully trade. This gets you in a lot of trouble when Y values goes down and X doesn't. Say "Four Bullets Investments" has some BTC, they post BTC as collateral to borrow dollars, and use that to buy more BTC. Then BTC goes down a lot - oops!
Not making value judgements on what risks are and aren't entailed here, just pointing out that there are reasons aside from covering losses. 1-3+5 equally apply in tradfi as well.
The really interesting thing, which you touched upon, is to what extent are they collateralising loans with FTT. COllateralising loans with a coin you hold isn't unusual at all, but what's unusual is that the potential FTT collateral size is monstrous compared to realistic available liquidity minus alameda.
Posting BTC is one thing since there are liquid spot markets trading billions a day, not to mention derivatives. But FTT? Good luck liquidation even 10-20MM without moving markets a lot.
The title of the article is not “Alameda Research is Insolvent!”. Instead it poses the question, “Is Alameda Research Insolvent?”. Depending on the unknown liabilities, it very well could be.
For those not in the know, Alameda is THE trading firm in crypto that everyone always assumes is causing liquidations. For them to be insolvent would be a huge deal.
It’s crazy to watch greed pollute the minds of crypto trading firms like Three Arrows Capital and Alameda. Zhu Su put it best in his own tweet long ago before the greed set in and he needed more and more gains.
“Bad TA (technical analysis) is not just marginally bad--it can mean being net down trading an asset that has gone 1,500x and is still 250x from start date.”
“For much of 2017, Buy and Hold was actually the best performing strategy since Jan1 2013 of ALL TA strategies possible. This can easily become the case again if we go on a bull run at some point.”
Crypto gains are so large that there is no need to go crazy with trading and leverage and the crashes every four years are actually a great boon as long as you realize they will never go away.
Am I correct in understanding your argument that "so long as numbers keep going up, all will be fine"? Because there is a possibility that crypto never gains back the hype as late 2020, and Bitcoin never reaches the high of $69K ever again, in which case people who "bought and hold" at that time (including those who were encouraged to be "brave" by Matt Damon in a crypto.com ad) will never see (a portion of) their money again.
If you are anticipating human greed evaporating, then yes, crypto will go to zero. My experiences so far in life have shown that to not be likely.
People holding stocks may never see ATH either, it’s the risk we take for the mental construct we believe in.
History says they probably will, as long as they hold a diverse portfolio.
Unfortunately crypto has become just a leveraged bet on the stock market and has lost much of its uncorrelated asset status. If the stock market recovers, crypto recovers even harder. Ethereum price is like a higher leverage TQQQ if you check the charts. I liked it better when it was uncorrelated.
> If you are anticipating human greed evaporating, then yes, crypto will go to zero.
Your assumption does not only rely on human greed but also on an upper limit on human creativity.
You are also making a (strong, imo) assumption that humans will not find a new and more creative outlet for their greed (aka pump and dump schemes) that is not crypto. Crypto is already associated in the public minds with many grifts and scams, and it may be much simpler at some point to create a new scheme rather than recycling old ones.
Well, everyone wants to diversify, so everyone is willing to pay a premium for assets that are uncorrelated to the market, thus depressing their expected return. That's one of the basic insights of the CAPM. But that effect should not affect the correlation.
Your response reads the same as "the solution to global warming is stopping fossil fuel use". Sure, you aren't technically wrong, but there are billion dollar corporations out there whose sole existence relies on your "solution" not catching on.
As someone in the industry, it's almost certainly not.
First very simple point, to become insolvent you have to actually take a loss somewhere. They may have a lot of junk tokens on their balance sheet, and these tokens may be overmarked, but Alameda's cost basis (most of them were from seed rounds) is still way below their current value.
With Three Arrows it was very obvious where the loss was from, they were hyper-bullish and doubling down on BTC all the way from $69,000 to $18,000 using leverage. By contrast Alameda is notorious for being dollar maxis, constantly taking money off the table, and very rarely having any sort of long-term major beta exposure. (A big reason they have a reputation as mercenaries in the space.)
The second point is that the bulk of their liabilities are in the same tokens on their balance sheet. This is particularly true for the FTT token, almost certainly the FTT on their balance sheet is simply a loan from FTX (which is essentially the same org) to Alameda to make a market on FTT on FTX. Regardless if FTT collapses, it wouldn't matter cause insolvency both the asset and liability side of the balance sheet would go down.
Most likely this is true for much of the rest of their liabilities. Crypto trading firms like Alameda make a huge proportion of their revenue from being "paid market makers" for specific token projects. It's very hard for new tokens to bootstrap liquidity. So the typical arrangement is a token project will "lend" Alameda something like 5% of the supply, which Alameda will use to be a market maker in that token at all of the major venues. Most of the liabilities on their balance sheet are probably these token deals, rather than loans made in hard currency.
> First very simple point, to become insolvent you have to actually take a loss somewhere.
This has absolutely NOTHING to do with being insolvent.
"Insolvency
In accounting, insolvency is the state of being unable to pay the debts, by a person or company, at maturity; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency. "
Insolvency deals with the inability to repay your debts (insufficient cash flow is the most common).
I'd argue balance sheet insolvency is really the most colloquial definition insolvency. You can always sell assets (at a haircut of course) to evade cash flow insolvency (arguably that's closer to illiquidity really), but you can't do anything to get out of balance sheet insolvency except restructure your liabilities.
Alameda being in balance sheet insolvency would depend on their assets taking enough of a hit to wipe out the equity buffer.
To Doug's point the junk tokens are likely at book value on their balance sheet
>You can always sell assets (at a haircut of course) to evade cash flow insolvency
If the assets in question are marketable securities (stocks and bonds), traded commodities, or real estate, then that's generally true. If the asset is some shitcoin for which no real market exists, not so much.
> can always sell assets (at a haircut of course) to evade cash flow insolvency (arguably that's closer to illiquidity really)
For financial institutions, particularly those with short-term liabilities, illiquidity is insolvency. The initial liquidity depresses prices which marks down the balance sheet.
> To Doug's point the junk tokens are likely at book value on their balance sheet
The linked article in turn links to coin desk which writes
>> Also, token values may be low. In a footnote, Alameda says “locked tokens conservatively treated at 50% of fair value marked to FTX/USD order book.”
That suggests to me the unlocked coins are on the balance sheet at market value and the locked at a 50% haircut.
I graduated with a degree in finance from Wharton, worked as a quant at Citadel Securities, and have been a high-frequency trader for more than a decade. But I'm more than sure that your credentials at finance or trading are more qualified. :)
You should ask the money back from Wharton. One of the respondents below explains what insolvency means (correction: pretty much all of the comments below).
In conventional markets, market makers need the ability to sell that which they make a market in. This can be done by actually owning the asset, by having a credit relationship enabling sales without owning the asset, by naked shorting, etc.
If you can’t naked short, and if sales settle effectively immediately (cryptocurrency confirmation may well be slow, but you can’t usefully sell something and buy it back using the sale proceeds without confirming or at least generating and signing the transactions), then you need access to the actual token so you can sell it.
In contrast, one can make a market in EUR/USD without actually sitting on a big pile of EUR and USD. In fact, market makers are likely to target an average position of zero in every currency except their home currency unless they are also trying to make some sort of long term bet. Similarly, I doubt you’ll find that most market makers in, say, grain futures have warehouses full of grain. (Grain wants to be eaten, not hoarded for the life of a business. Also, making commodity markets is an entirely different business than growing, storing, transporting, and using commodities.)
(This is not trading or market advice, obviously.)
Given the assumption that their balance sheet is liquid enough or they have the cash flow to pay the debts, it's reasonable to say that they have take losses as a trading firm to be potentially insolvent.
In fact you could turn your argument around to critize the article too, as they are based on the assumption that some of the assets should marked to zero, rather than examining empirically whether those assets could be either collateral or be used to pay the debt.
Alice is a trading firm. Alice borrows $1 billion, Alice then uses $1 billion to go out and buy $1 billion of assets. To become insolvent, the value of Alice's assets has to fall below the value of her liabilities. Otherwise, Alice can simply liquidate her assets to repay her debts.
The only way this can happen is if the value of Alice's assets falls below the cost basis in which she purchased those assets (plus some relatively minor short-term secured interested rate). For a trading firm engaged in mark-to-market accounting that condition represents a loss in the income statement. This isn't strange voodoo, this is just simple accounting identities.
To put it bluntly: Alice becomes legally and technically insolvent if the market value of the acquired assets falls below $1 billion: the value of the assets is no longer sufficient to pay off the $1 billion loan.
So you agree with me? For Alice to become insolvent the price of her assets has to fall below her cost basis.
Alameda's cost basis on Solana is the seed round at approximately ten cents, and it's currently trading at $30. Similar story for all the Solana protocol tokens. I don't know what Alameda's cost basis is on FTT (if it's even holding a significant amount financed with hard currency), but we can almost certainly say it's close to the seed round price because the founder of Alameda is literally the founder of FTX.
To make this story make sense Alameda at one point must have bought some asset that has fallen significantly from its cost basis. What exactly is this supposed asset? Because Alameda certainly isn't known for going out and taken levered long exposure on BTC, ETH or other post-seed liquid tokens.
Solana is only worth $33 right now at the current spot rate, but at the volume that would need to be liquidated to pay off Alameda's debts, the price would crash to pennies because the amount would represent over half of the daily trading volume in Solana for the past month. (For comparison, in the stock market, selling the equivalent a single-digit % of the daily volume of a stock can tank the stock.)
Similarly, Alameda owns 80% of FTT, which has a 24h trading volume of less than 20% of Alameda's debts, and fewer than 250 active daily traders. It would be literally worthless if Alameda tried to liquidate enough to pay off its debts. And as the linked blog points out, FTT is just a shitcoin exchanged between two related entities on their accounting books, meaning that at least $5.8 billion of the value of FTT, i.e., 80% of the putative value, is purely made-up.
OTOH, as the Voyager debt was collateralized entirely with shitcoins, it's possible that the other $7+ billion in Alameda debt was also collateralized in shitcoins. If that's the case, than Alameda should be solvent because it appears they actually have about $100m in cash assets. But if not, they are legally insolvent.
Cost basis has nothing to do with insolvency. If a company is mismanaged badly enough, it can easily become insolvent even if its investments are doing fine.
More importantly in some jurisdictions (eg: Germany) insolvency is not just a fun little accounting definition but comes with criminal charges if a company doesn't immediately file for insolvency.
>> First very simple point, to become insolvent you have to actually take a loss somewhere.
> This has absolutely NOTHING to do with being insolvent.
This has everything to do with being insolvent.
If you don’t lose money somewhere - interests costing more than what you win being a loss for exemple - you should be able to pay back what you owe in the end.
You could be temporary insolvent because you have issues with payment delays and are strapped for cash but there are ways to deal with that especially at Alameda size.
> First very simple point, to become insolvent you have to actually take a loss somewhere. They may have a lot of junk tokens on their balance sheet, and these tokens may be overmarked, but Alameda's cost basis (most of them were from seed rounds) is still way below their current value.
Hypothetical scenario: Alice invests $100M in seed rounds for a bunch of tokens. The token values go way up, and the holdings are nominally worth $14B. Alice borrows $7B in real dollars. Alice loses those real dollars on other bets. The nominal value of the tokens is still $14B, but Alice can't actually liquidate them for $7B in real dollars. So Alice is functionally unable to pay back the loans.
So Alice took a loss somewhere (on the other bets) and is effectively insolvent, but you can't assess that just by looking at the cost basis of the tokens that Alice still holds.
(I don't know if this actually describes Alameda; it's entirely possible that Alameda's loans are token-denominated as you're saying, in which case Alameda would be solvent. I'm just pointing out that it's more complicated than just looking at the cost basis.)
Sure, but at some point real dollars enter the financial equation, backed by these coins, none of which are probably priced correctly to serve as collateral.
The ftt coin is shady as hell though. A 40% trading rebate for holding $1m is insane; that's nothing. And it's not open to anybody touching the US - a blatant attempt to prevent US regulations, which would catch this stuff.
It's very weird for exchange owners to get rich overnight. That doesn't happen in real markets, and it seems to only happen in crypto when the exchange is using customer deposits as leverage (Celsius) or trading on their own account, which means against their customers (binance, probably ftx)
Why would it be shady? Traditional exchanges like the CME have "seats" that entitle holders to discounts and are sold at hefty prices. FTT is simply a tokenized version of an exchange membership. It makes perfect sense, and is really no different than a Costco membership where paying up front allows you to buy in bulk at a discount.
If you think someone's leaving money on the table with high fees you should start your own exchange. Of course before you even got off the ground you'd have to register as a MSB, draft a very extensive compliance plan given the "high risk" nature of your industry, find a banking partner who will even consider accepting you and hopefully won't kick you out after you get too big (you may have to buy a credit union if this step doesn't work out), get a money transmitter license in every state except Montana (which by the way all require a substantial bond, application fees, and delays), find former regulators who are now $1500/hr lawyers who still have some influence at NY DFS in order to get approved in New York, get approved for ACH, spend at least $50k a month on Chainlysis and OFAC screening software in order to placate regulators, and of course you actually have to write the exchange backend too. If you want to offer leverage (you will in order to be competitive with other exchanges) you need to have a pretty sophisticated risk management system because liquidations in crypto don't work like they do anywhere else. And you have to pay a browser fingerprinting vendor $20k/mo too because your halfwit customers will get phished and cause you bad publicity if you don't stop it. You'll also need Onfido or some other identity verification company in order to satisfy 31 CFR § 1020.220. But yes, once it's all set up it's a practically license to print money.
"Most of the liabilities on their balance sheet are probably these token deals, rather than loans made in hard currency."
No... We know that they owe $650m USD to Voyager Digital and they haven't repaid it yet, instead after failing to bail out Voyager, SBF is trying to acquire its assets with a VERY shady scheme through FTX.
We also know that SBF has spent a lot of effort to bail out BlockFi, and I am confident they are one of Alameda's biggest creditor, we know that BlockFi only lends stables, BTC, ETH and a few other bluechip coins, no FTT, MAPS etc...
So everything is indicating that Alameda's liabilities are in USD/BTC/ETH, while their assets are FTT, MAPS, a few SOL and other low liquidity "shitcoins".
Seems like what Alameda was doing is to take out loans to pump some shitcoins and mainly its own (FTT).
No. The Voyager loan was denominated in crypto and at current prices represents only $200 million of liabilities (assuming they haven't already repaid).
We know that on Jun 30th Alameda had $134m in liquid assets, at the same time it came out that they owe the bankrupt Voyager Digital around $650m USD.
On Jul 8th Alameda research tweeted: "happy to return the Voyager loan and get our collateral back whenever works for voyager".
Simple question here, how do they return $650m USD, if they only have $134m in liquid assets (cash) and the rest is in illiquid tokens such as FTT, MAPS and other tokens with fancy names and inflated marketcaps?
He was completely wrong on the situation, how many more views of his do you want? (To the credit of HN, many people thought he was wrong at the time too)
This looks more like a dealer book than a classic MM. If they’re long $5.8bn and short $5.79bn, their net position is fine. That said, they’d be carrying major counterparty risk.
> the bulk of their liabilities are in the same tokens on their balance sheet
Do we have evidence of this?
The article says $292mm are FTT-denominated, with the rest unknown. Absent further information, it’s fair to assume some of that is dollar denominated. With less than 2% cash to cover liabilities, even a small amount of normal borrowing could render Alameda insolvent.
Moreover, if the losses are entirely passed through, whose are they? That’s over $7bn of losses sitting on someone’s balance sheets. Are they distributed? Is it FTX’s?
Alameda has taken loans from Voyager and BlockFi, those are in hard currencies, USD or bluechip crypto such as BTC/ETH.
From Voyager's bankruptcy filing we know Alameda owes them $650m in USD, and hasn't repaid them yet, instead SBF is trying to push forward a shady deal that would allow FTX to take over Voyager's asset.
Deal to which state regulators have filed and objection in bankruptcy court by the way.
I think it is because the comment ranking changes over time, and there is no way (without access to the raw data) to see what comment was ranked where at a given time.
It's so delightful that the finance people are coming out all salty!
The number is going down. If you organize your life around this number going up, and it goes down, everyone is going to laugh.
You chose this life!
There is sometimes some meaning in finance somewhere. Like some VCs can get some meaning from, a biotech investment makes a great drug that helps people.
But what you chose, there is none. There will be many stages of grief, they do not happen in order or one at a time.
> First very simple point, to become insolvent you have to actually take a loss somewhere.
C'mon dude. Listen to yourself. It's over. This isn't peak cringe but it's getting there.
If those loans are no-recourse loans with this FTT token as collateral, then should the token crash the liability just "disappears". The collateral will be sold to cover the loan. If the collateral is now worthless that was the risk the lender agreed to take on when issuing a no-recourse loan.
If they are Defi loans for example, they're pretty much automatically no-recourse loans.
Exactly. It seems like the author has very limited insight in the space. It makes you curious how they could come to such a headline/conclusion, when they spend the entire article, talking about the assets instead of the liabilities!
Should preface all of this by being very, very, clear that we don’t know what the liabilities are so can’t judge too much. It’s fun to assume their liabilities are cash, but if they’ve borrowed 2.5bn of “unspecified crypto” as in the report and still have the same “unspecified crypto” borrow is healthy whether or not the price changes. I this it’s extremely unlikely all their liabilities are cash.
Surprise surprise, who would have guessed that the trading firm running an exchange might have some special relationship?
It’s possible that the FTT is also a liability, loaned from FTX. The book still isn’t great but is much healthier in that case.
It’s also possible that many of the unspecified crypto collateral is directly borrowed, instead of bought with borrowed cash.
It still leaves a few questions:
* Are they taking delta risks with borrowing funds or not? Borrowing to send into defi/basis has a very different risk profile than taking bets on price.
* is tether cash, or “unspecified crypto held”? Is USDC/BUSD crypto held? Is DAI?
* What lender would bother with the whole FTT song-and-dance instead of just admitting they’re giving out effectively uncollateralized loans
* Are lenders in a situation where they know the collateral is no good, but they also know that calling the loans/selling will force the worst case, so they hold on hoping for a way out?
* I doubt any lenders are taking significant maps/oxy/fida collateral. Mega shitcoins from day1
* Is this an arrangement that “made more sense” back in the bull market and now lenders want to call loans and avoid pissing off sbf?
* is sbf so interested in rescuing underwater lenders since he doesn’t want them to potentially liquidate giant ftt holdings?
It’s hard to come to any serious conclusions here without knowing the nature of their liabilities and the assets backing those (if any).
But then again what’s the risk? If you made the coin and basically get to chose the price, why not transmute that into cash? Lending to someone is an implicit OTC bid, and alameda surely gets a better deal in the lending markets than they would selling on exchange. You don’t even get the price impact unless the lenders try to liquidate.
We know from the Voyager Digital CH11 filing that Alameda owes them $650m USD, and has not repaid them so far, instead FTX the exchange affiliated to Alameda is trying to acquire Voyager digital assets.
I presume that a lot is also owed to BlockFi, which explains why SBF is trying to bail them out so that he doesn't have to repay them.
This makes sense to me in the sense that as far as I can tell SBF and Alameda's claims for the origin of their wealth is obviously false: He claims he made billions of dollars on an arbitrage with Korean exchanges and the rest of the world. Price differences existed, but with extremely small volume. If he claimed to have made millions from it I would have been highly skeptical, but billions? And during a major crypto down market to boot-- not a time when any idiot in the space could accidentally make a fortune just by having exposure.
But if that trade wasn't real where did the money come from? One possible answer is that the money never was: maybe it was always just marked up balance sheets holding multiple times the circulating market of illiquid and close traded tokens-- all a great big fake it until you make it.
[Apologies for the throwaway account, but I don't want to risk taking more retaliation from crypto scammers]
I'm continually surprised by how many "major" crypto firms I've never heard of before (being familiar with the space) suddenly are regarded as big names when they go under.
Wake me up when it's Kraken or something, i.e. a company someone may actually have heard of.
I'm not sure if this is sarcasm or not, but just in case it's sincere: Alameda are considered a lynch-pin of the crypto industry, they're holding up pretty much everything... and by extension, FTX is far more important than Kraken. If Alameda implode, it'll be far worse than 3AC's implosion. I don't think it's possible to kill the crypto industry, but Alameda's implosion would be the most likely event to cause it.
I work for another (much smaller) crypto market maker.
Alameda imploding would definitely cause a lot of specific assets to nosedive in the short-term, and a lot of volatility, but I think it'd be impossible for it to destroy crypto (perhaps the Solana blockchain, since they're heavily invested, but even that seems like a stretch).
That volatility would also be a ton of opportunity (for other market makers).
Things that could conceivably destroy crypto are more along the lines of coordinated regulation from an influential, multinational group, like the entirety of the G7
> Things that could conceivably destroy crypto are more along the lines of coordinated regulation from an influential, multinational group, like the entirety of the G7
The whole point of crypto was to be decentralized. For one company to go down and cause the industry to implode means the industry is on the wrong path and needs to be reset.
Bitcoin is still the same as ever, it has survived and recovered from lots of exchange collapses after a few years.
But there are tens of millions of new people (or even more) since the MtGox collapse in 2014 who haven't learned the lesson and ,,chasing yields'' or lending against their crypto tokens / leveraging their positions (the new forms of financializing BTC, aka not holding your own keys).
I personally know somebody who lost all his BTC / ETH by lending against it and buying more when BTC price was over $50k.
A decentralized system can still die if nobody wants to use it anymore. If prices continue to fall as a result of more and more flywheels and ponzi schemes coming to light, and more and more people keep losing their shirts as a result of companies getting hacked/going backrupt/etc., then we may start seeing negative feedback loops as more and more people give up and leave.
Or it could be that the idea that it could actually work that way was just wrong. The creators of bitcoin adopted the delusions of goldbugs, tried to replicate it in a digital form. Adapting 19th century ideas about money to 21st century technology, and expected it to work.
Hard to say, because we can only speculate on the true state of Alameda. Sam Bankman-Fried owns both Alameda and FTX and so while they’re separate entities, they are co-mingled in many ways.
Assuming FTX is a profitable enterprise (a big question in the current market) then any problems Alameda faces could be addressed by SBF leveraging FTX in some way to bail Alameda out… but it’s also plausible that FTX is dependent upon Alameda and that Alameda’s faltering could take down FTX.
My guess is that an Alameda implosion is unlikely because, as far as I can tell, they’re not engaging in fraudulent behaviour, just crypto hubris… and so, worst case, they have to scale back their activity… but if they are reliant on third-party capital, and the current economic trend continues… it seems plausible that could trigger major problems in the crypto world.
The reason that a lot of retail investors may not have heard of Alameda Research is that they are an institutional investor and don't lend directly to customers (afaik?). However, they do pack the monetary heft to make a lot of the interest payouts by companies such as Celsius possible.
It's as if Jane street failed, a company that an normal BofA user may not be familiar with.
Alameda is closely tied to FTX, which is big enough to have an arena in Miami named after it.
> This purported leak of Alameda’s financials demonstrates that the firm’s largest asset is its holdings of “FTX Token (FTT),” issued by none other than SBF’s FTX Exchange.
I consider remembering the names of "crypto firms" and their products an index of contamination: I might not be ignoring them well enough to protect my savings.
Of course my awareness isn't what decides if a firm is a major one, and I did refer to crypto firms in general.
In any case, apparently these guys are a big deal and I hadn't heard of them. Maybe it's European bias, and I'm not a crypto expert or anything, just interested.
Analysis in this thread supports the conclusion that as in the headline, they MIGHT be insolvent; and it is not irrational to believe that they are.
IMO the important thing is that unwinding the specifics to answer this, e.g. guessing what liquidation of their collateralized debt would mean, and running the numbers of what dogfooded assets are actually worth on the market (specifically should they as the dog not be certain to be able to support valuation...), etc ad nauseum,
is itself so murky (and typical of "difi") as to make a more important assertion,
this industry continues to a clown show grift and bad faith, and even well-intended good-faith participants have little to no chance of ever knowing where they stand or having any security.
One of the few satisfactions of the looming economic apocalypse is going to watch this particular wing of the house of cards fold instantly.
I've been in the crypto-sphere for a bit, a majority of projects are scams.
I personally believe in the large projects, and few niche ones.
My buy and hold coins are BTC, ETH, Monero (XMR), MATIC (ETH L2), and Sol. Monero is the truest "crypto-currency" in my view, and I believe there should be a digital cash equivalent if we're moving to a digital world.
ETH has smart contracts and lots of companies are using ETH L2s like Matic to run smart contracts (Instagram is using Matic for NFTs).
Solana looks like a promising ETH alternative, the risk for Sol is that it's tied up to SBF/Alameda, but their chain is very fast (albeit it goes down too frequently, still in beta though)
Please do not take a stranger's advice and do your own research on projects before investing, and don't invest more than you can afford to lose.
I prefer bear markets for crypto, it acts like a forest fire and clears the grift away.
It'd be pretty easy to create a "defi credit union" that's not a scam, it'd just be hard to cut thru all the noise. Give 3% to 5% yields on saving, lend at 8% to 12%. The problem is people see "230% yields" (which are scams) and wouldn't know your legit 5% yield is for real.
> be pretty easy to create a "defi credit union" that's not a scam, it'd just be hard to cut thru all the noise. Give 3% to 5% yields on saving, lend at 8% to 12%
The title is contradicted by the article itself: if 88% of the firms equity were suddenly worthless (the worst car scenario), that would mean 12% remained. So they're not insolvent...
The definition of insolvency is not being able to pay your debts. Alameda claims $14.6B in assets vs $8B debts, which means they're solvent. If they actually only have 12% of $14.6 = $1.8B, they're way mucho insolvent.
Only the 5.8bn in FTT is being claimed to be worthless. Not the full 14.6bn in assets.
If that's true (and the article itself lists reasons it isn't true!?), that still leaves 8.8bn in other assets, vs 8.0bn in debts.
The article itself says the same when it says 88% of equity. Equity is assets less debts. So as long as they have any equity left at all, they're not insolvent.
You assume that during a firesale they would actually get value approaching what they claim is worth 14.6B. Since FTX and Alamaeda are by far the largest holders of FTT and significant holders of Solana they will destroy the market for both if they had to sell. It's likely the real value of their assets is far lower, as the other commenter suggested.
That really depends. Most buildings are financed with mortgages, so if there is a real estate crash then they can actually have negative values, even after only a small price drop. Even FTT coins can only be worth zero. This is one of the unexpected dangers of "safe" assets: people will lend on safe assets, so fund managers leverage up until they're not safe anymore and you get 2008 type issues.
Ultimately all of this is pretty standard for Hedge/Investment funds. If you want safe, diversified, limited downside investments, get an few index funds. The minute you go to a hedge fund you're asking for risk whether the underlying is questionable crypto or US Treasuries...
So BTC has been wash traded at 20k for several months now. It is very possible because below 15k loans automatically get called in. Which causes a cascade of defaults and then liquidation of assets.
What the argument misses / why FTT is different than Terra
1) Alameda Research owns FTX, one of the largest and arguably most important crypto exchanges.
2) FTX offers fee discounts to FTT-stakers and additional discounts if you pay in FTT. [0]
3) Trading volume on FTX thus creates an organic demand cycle for FTT. The large firms will buy, stake, and then continuously refresh their supply.
4) The vast majority of the volume at FTT will be in margined accounts at FTX. I am uncertain if the volume analysis would capture FTT movements in (3).
Now, there's clearly financial alchemy going (giving away real economic value to boost an asset that you can then get leverage on) but that'd be better for Matt Levine or someone to flesh out.
The problem with Terra was that the stakers got a guaranteed* 20% anual interest in dollars*. You can take a look at all the fine print and implementation details, or be a naysayer like me and read the 20% and claim it will collapse.
I can't find the details about FTT/FTX. How high is the guaranteed* anual interest in dollars*?
* With some mild assumptions, like the coins doesn't crash miserably. Past performance does not guarantee future results. YMMV.
Note: This year with a 7% inflation rate perhaps a 20% is not too unrealistic as in usual years with a 2% inflation.
Why is it so difficult for trading companies to simply keep the money in the reserve and never touch it unless your client wants to liquidate his share?
I know, having that huge pile of cash and not doing anything with it can lead to huuuuuge temptations, but that's what I'm paying the company to do. If I wanted to invest my funds into something I would move my money to a separate investment account that the institution can play with as they please (with some client-defined risk restrictions) and give me a percentage of profits
Because they don't make as much money that way. History has repeatedly shown us that asking companies to voluntarily forgo profit-earning opportunities does not work. Companies exist to make money and this why regulators like the FDIC exist, to ensure that financial institutions are liquid enough when things go south.
This is simply not something that financial institutions are capable of doing themselves.
This doesn't even seem like a financial regulation issue. More like a "I'm paying you to store my stuff so please store my stuff" issue. If I paid for a storage unit and the company running it sold all the stuff in it while promising "don't worry, when you want your stuff back we'll buy it back for you", I'd be pretty peeved.
“Huuuuge temptations” is the answer. At that level, the temptation is too much to bear except enforced by an external hand.
That’s why there are regulations against playing with customer’s deposits in the traditional banking sector, or else greed will make banking executives do similar things as the crypto companies.
1. The entire Coindesk article lacks meaningful substance. For instance, we have zero idea about what those $7.4 billion of “loans” are. It’s really irresponsible to say that they’re insolvent. If you believe, so, you are applying no more rigor to your understanding of the space than the idiots who say HODL YOLO HFSP. If the liabilities are collateralized by assets on their balance sheet, then the financial risk is not to Alameda but the lender!
2. The entire article paints a dire picture based off of their appraisal of the assets. Again, nobody has any idea of what the liabilities truly are, so to speculate that Alameda is insolvent is making an unfounded leap. But the author of the article tries to lead us to believe that it’s an OK leap to make, because their assets are trash! Wrong. It’s lazy, it’s pandering to a certain crowd, and it’s dishonest.
3. Before reflecting on their extremely, extremely short handed analysis, they take their unfounded conclusions further and spin it through a prior framework that they made for Celsius, which is a totally different type of company with a totally different set of liabilities. Alameda does not lend money to retail. The author pulls a sleight of hand by taking one misleading statement, and transforming it before the reader can apply any skepticism to the original misleading statement.
4. Recently there have cropped up a set of anonymous people (otteroooo on Twitter, this guy) who purport themselves as insiders only to reveal themselves to be complete completely ignorant about the topic at hand. A lot of unsavory people have recognized there’s a cottage industry in endlessly pounding the table saying that the world is falling and that everything is a scam based off of extremely little public information and no access to any private sources. They are ambulance chasers.
5. We have a large contingent of people who just read the headline here, and assume, scam! And apply the pre-existing biases to the entire thing, with nothing insightful to add.
*edited some dictation/autocorrect errors