Sam Bankman-Fried, the world’s richest Millennial, is on a mission to save crypto

Mispriced opportunities

In decades past, someone like Bankman-Fried might have carved out a pretty standard, traditional career in the world of tech or finance. Graduating from MIT with a physics degree, he joined Jane Street Capital, a US trading firm which specialises in high-frequency trading and would come to spot what traders refer to as “arbitrage opportunities” in crypto’s emerging markets.

Put simply, the recent graduate could see the wide gaps in the prices at which some crypto products would be offered in the United States compared with markets in Japan and Korea. He was one of the very first to see what would later be called “the kimchi premium”.

He quit his job and, with a few friends, set up Alameda Research, working out of rented office space in Berkeley, California. In just one year, Alameda Research had reportedly made more than $US1 billion exploiting mispriced assets. That career arc – the geek who quits their job to game the system – has played out many times in the past few years in crypto.

While the music has not stopped, Bankman-Fried concedes it is slowing down. “There is still arbitrage that exists, but it’s just not nearly as big,” he says of the trades that made him and his young friends rich. “It exists and, well, you know, it’s one to five basis points. It’s one hundredth of a per cent, or a twentieth of a per cent … you no longer see arbitrages that are multiple per cent wide. They’re there if you look hard enough, but the scale has gone down a lot in percentage terms, although the volume has gone up.”

By 2019, Bankman-Fried sought to put himself at the centre of the crypto markets. He co-founded FTX, now one of the world’s biggest exchanges which lets users buy and sell different crypto assets and derivatives. Last year, he moved the still-private company to the Bahamas, taking up office space for his relatively small staff, directing the flow of transactions for crypto investors from the tropical island.

Critics of the newly minted crypto millionaire and billionaire class point to the likes of Bankman-Fried as an example of someone dodging taxes by setting up residence and headquarters where regulations are weakest. Legions of investors have spent the past several years of the crypto boom buying up property in places such as the Bahamas, Puerto Rico or in low-tax states in the United States.

In April this year, Bankman-Fried hosted what some viewed as a launch party for FTX, positioning the company as the most legitimate firm in the crypto industry. Scores of big names from old and new finance attended the Nassau conference, which the prime minister of the Bahamas officially opened.

Bankman-Fried, dressed in below-the-knee athletic shorts and old sneakers, was the main event, taking the stage to talk about the opportunities of crypto and blockchain technologies alongside former US president Bill Clinton and former British prime minister Tony Blair.

Then came the crypto crash. Steadily rising inflation led central banks around the world to yank the reins on monetary policy, lifting the rates of borrowing. The prices of bitcoin and ethereum, long talked of by crypto obsessives as safe havens from inflation, fell dramatically. Both continue to languish more than 70 per cent off earlier highs. Investors now talk of a “crypto winter” that has descended over the industry.

Once-exuberant retail holders have watched as mountains of gains have vanished from their apps and trading accounts. A stablecoin known as terraUSD, designed to stay pegged to the US dollar, spectacularly collapsed in June, and $US40 billion of value evaporated.

It has also been brutal for big crypto companies that had taken deposits from investors. Shares in Coinbase, a competing exchange that went public last year, have lost three-quarters of their value. Companies that had borrowed against assets to pay interest to their investors collapsed. Bankman-Fried and his investment company have stepped in to stop the contagion.

He set up a $US250 million line of credit to BlockFi in July, which gave FTX the right to buy the struggling crypto lender down the road. Next was half a billion dollars to lender Voyager Digital, which FTX would later swallow up after winning a bankruptcy auction.

He has acquired crypto exchanges in the United States, Canada and Japan and has reportedly been approached by dozens of businesses in need of bail-outs. In deciding which to buy, Bankman-Fried says the goal has been to be a buttress for the crypto ecosystem to get through the meltdown which, across all cryptocurrencies and crypto assets, has wiped out an estimated $US2 trillion.

How much money has the young billionaire deployed in recent months? Is it as much as has been reported by The Wall Street Journal – a billion dollars? “There’s sort of lines of credit versus investments versus other things. But yeah, it’s somewhere in the nine figures. It’s not fully over yet … and we’ll see, you know. It’s mostly focused on trying to stabilise more than anything else.”

Of course, all of this may also prove hugely lucrative for him in the long run. BlockFi was valued at $US4.75 billion last year. Picking it up for $US250 million could be a bargain if crypto markets settle down, and brings to mind Buffett buying $US5 billion of Goldman Sachs shares in the depths of the 2008 financial crisis.

In time, that investment paid off handsomely, although the benefit was felt by many. A few weeks after buying in, Buffett put his mouth where his money was and penned an op-ed in The New York Times titled: “Buy American. I am.”

The comparison with Buffet sits awkwardly with Bankman-Fried, particularly as the 92-year-old has been the biggest name in finance to criticise crypto, calling it a delusion, a mirage and “probably rat poison squared”. Asked about the “Millennial Buffett” tag, Bankman-Fried replies: “I mean, I’m honoured. I think it’s probably saying too much. I don’t think I deserve that exactly.

“A lot of this is being in the right place at the right time. Being in a position where I was able to act and take decisive action, you know. I’m glad that I was able to. I think that was valuable and important. But at the end of the day, I’m just fortunate that it was even an option for me.”

Asked if he’s spoken to Buffett about the comparison, Bankman-Fried replies with a grin: “I have not. And I mean I know he’s not a huge fan.”

‘Does Sam really have $US3b?’

In late September, it was revealed that Bankman-Fried had sensed another opportunity. In the legal dispute between Musk and Twitter, a cache of text messages from the phone of the Tesla founder were made public.

Among the throng of tech investors and venture capitalists who offered to help Musk fund the takeover of the social media platform was William MacAskill, an adviser at Bankman-Fried’s philanthropic organisation. MacAskill told Musk that Bankman-Fried had “for a while been potentially interested in purchasing” the company and “then making it better for the world”.

In the messages that have turned up in court documents, MacAskill told Musk that Bankman-Fried would be in to invest $US1 billion to $US3 billion but “could do” up to $US8 billion. In a message to his then-girlfriend Grimes, Musk questioned whether Bankman-Fried would be good for the investment: “Does Sam really have $US3 billion liquid?”

According to a report, the duo never came to an agreement for Bankman-Fried to contribute to financing. But the exchange shows the world’s richest man being courted from a distance by the world’s youngest richest.

“I think that [Musk] has captured a lot of the public’s imagination in a way that no one really had before,” Bankman-Fried says. “Obviously, there’s the manufacturing perspective and also the investing perspective.”

Both men have played a part pushing tech and crypto deeper into mainstream culture. Bankman-Fried has sought big-name sponsorship and naming rights deals for FTX, signing up celebrities and models to be the faces for the crypto exchange. As for Musk, no one better embodies the recent mania.

A starring role on Saturday Night Live last year was perhaps the high point. After talking honestly about his Asperger’s syndrome to millions at home, Musk appeared in a sketch about joke cryptocurrency dogecoin, which he light-heartedly called “a hustle”. (The price of dogecoin plummeted after the TV appearance, never to recover.)

If Mark Zuckerberg and The Social Network and his mantra of “move fast and break things” defined the last tech cycle, Musk and crypto and “going to the moon” with rocket emojis may be at the centre of this one. “I think Musk embodies the internet culture in a way that we’re not used to people from industry doing,” Bankman-Fried says.

“That has gotten him a much bigger following than people were anticipating. It has meant that what he did moved markets, it moved everything. If he tweeted, that mattered in a way that no one else did. That’s because he’s connected with players from industry, institutions and everyone … that’s a pretty powerful factor.”

If SBF seems enamoured by Musk, one way he’s cutting his own path is through his commitment to giving away his vast wealth. He has wrapped himself in modern ideas that could result in him becoming his generation’s Bill Gates, whose Bill and Melinda Gates Foundation is the second-largest charity in the world. Bankman-Fried is a high-profile adherent of Effective Altruism, referred to by followers as EA, which explores the most efficient way to give to charity.

It sprang from a group of young thinkers at Oxford University more than a decade ago. MacAskill and Australian philosopher Toby Ord are considered the movement’s founders, setting up Giving What We Can in 2009. It asks people to pledge 10 per cent of their income each year to charities delivering tangible results.

EA speaks to the high-earning people of new finance and tech perhaps because it obsesses over efficiency and results – traits that chime with the likes of Bankman-Fried. Followers of Effective Altruism believe cutting a cheque to a well-funded university endowment is bad, while donating millions to buy mosquito bed nets in Africa is good. When you factor in the cost per bed net, and the number of deaths from malaria, it’s one of the most cost-effective ways to save lives.

Ideas around the movement are hardly new. Those in the EA community have built on previous thinkers such as Australian ethicist Peter Singer, founder of the animal rights movement. Like many in EA, Bankman-Fried is vegan. Some grapple with the impact of having children. On that question Bankman-Fried is more obtuse, saying only that he doesn’t have time. There are other more radical ideas attached to the philosophy, such as voluntarily donating a kidney to someone in need.

Regardless, Bankman-Fried has become the mainstream mascot for the movement. He says he fell into EA after considering his early career choices while at university, briefly working for a charity committed to it. “I was young in college and trying to figure out what I could do with my life to have as much positive impact as I could,” he says. “I basically just went to a bunch of charities that I really respected and said, ‘hey, like, if I could do anything to help you guys out, what should I do?’.”

He says he will give more than $200 million this year to charities, political causes and philanthropic organisations, but that could be a conservative estimate. Another idea that has become central to the movement is “earning to give”. Making as much money as possible, it’s argued, is the best, most efficient way for some individuals to make the biggest difference to society. That may seem like a controversial idea to those who worry about inequality, but for Bankman-Fried and those within EA, it’s a model that helps provide peace with having acquired astronomical wealth.

“You’re trying to do what you can to help out, you know, as many causes as possible,” he says. “The most important thing is to start giving. You don’t have to start with the biggest piece, but start with something and dig into ways to give, make it a habit.

“Think critically about it, you know. Try hard to avoid things that don’t really change anything at the end of the day. But I do think there are things that have impact. The fact that many things aren’t super effective shouldn’t hold you back from finding the things that are.”

If Bankman-Fried is to succeed on his various missions, he’ll need to get himself and the new tech and finance industry through the current turbulence. Observers say one reason he has deployed so much capital this year to shore up the industry is to make sure institutions – and therefore retail investors – who lost money trading (many of them young) don’t give up on crypto and never come back. Bankman-Fried remains positive about the future of cryptocurrencies, but he is also remarkably honest.

Asked whether crypto has had a net positive impact on the world, he says most of the industry’s history to date has been “pre-use case”. He doesn’t think the technology has really had “a massive impact in either direction [positive or negative] given the amount of attention given to it”.

Sure, cross-border payments, remittances, the structure of financial markets and social media platforms are possible “sophisticated-use cases” that can ultimately become embedded in society.

But for now, the industry’s most recognisable face believes the great promises are “pending” and there’s a lot of work to be done. “I think that there have been a lot of use-cases on the horizon for a while. It’s important, you know, as an industry that we actually get there, and that we start exploring those. I’m optimistic that that’s gonna start soon.”

The November issue of AFR Magazine, including the Young Rich List, is out on Friday, October 28 inside The Australian Financial Review. Follow AFR Mag on Twitter and Instagram.