FTX (with Sam BankmanFried & Mario Gabriele)

Summary Notes


In this episode of Acquired, hosts Ben Gilbert and David Rosenthal, alongside guest host Mario Gabriele from The Generalist, engage with FTX CEO and founder Sam Bankman-Fried. They explore the meteoric rise of FTX, a crypto trading exchange that has achieved a staggering valuation of over $25 billion within two and a half years, driven by an astonishing tenfold increase in trading volume in both 2020 and the first half of 2021. The conversation delves into the strategies behind FTX's success, including their focus on power users, the importance of product quality, and their expansion into the U.S. market with FTX US. Bankman-Fried discusses the challenges of navigating regulatory environments, the company's innovative approach to branding and customer acquisition, and FTX's future ambitions beyond the crypto exchange space.

Summary Notes

Acknowledgment of FTX's Collapse and Episode Context

  • Speaker A and Speaker B provide context for the episode, noting the recent news about FTX's collapse.
  • They mention that the episode was recorded a year ago and decide to keep it up for posterity.
  • They also recommend listening to their Enron episode for additional context on the FTX conversation.

"Hey, acquired listeners. David and I are recording this in November of 2022. While lots of news is coming out about FTX's collapse in real time, we recorded this episode about a year ago, and we wanted to acknowledge there's been lots of accusations and lots of very apparent wrongdoing by FTX and potentially Alameda."

The quote acknowledges the recent events surrounding FTX's collapse and sets the timeframe for the episode's recording, which predates the company's issues.

Introduction to Acquired and Episode Theme

  • Speaker E introduces the show and its focus on technology companies and their stories.
  • The episode will cover the story of FTX, a rapidly growing crypto trading exchange.
  • FTX's growth and brand deals, including sponsoring a basketball arena and featuring celebrities in commercials, are highlighted.

"Welcome to season nine, episode seven of Acquired, the podcast about great technology companies and the stories and playbooks behind them."

This quote serves as an introduction to the podcast and its thematic focus on technology companies and their success stories.

FTX's Growth and Market Impact

  • FTX's valuation and rapid growth are discussed, emphasizing its tenfold volume increase in 2020 and again in the first half of 2021.
  • The company's branding efforts, including sports sponsorships and celebrity endorsements, are highlighted.
  • The CEO and founder, Sam Bankman-Fried, is introduced as a genius and effective altruist with a significant net worth.

"Today we are telling the story of the crypto trading exchange FTX started just two and a half years ago and today, worth over $25 billion, they're by far the fastest growing crypto exchange."

The quote summarizes FTX's rapid growth and market position, setting the stage for the episode's deeper exploration of the company's story and strategies.

Guest Host Introduction: Mario Gabrielle

  • Speaker E introduces Mario Gabrielle as the guest host and acknowledges his extensive research on FTX.
  • Mario's detailed series on FTX at the generalist is mentioned, indicating his expertise on the company.

"We've brought in Mario Gabrielle from the generalist to team up for this episode. Welcome, Mario."

The quote introduces Mario Gabrielle as a guest host, emphasizing his knowledge and research contributions to the understanding of FTX.

FTX's Operational Efficiency and Employee Leverage

  • Speaker E inquires about FTX's small team size relative to its output.
  • Mario confirms the rapid growth of the company's team and the high leverage per employee.
  • The discussion points to the exceptional efficiency and productivity of FTX's workforce.

"So before we get in, is it right to say, Mario, is this company only 200 employees and I think maybe started the year at a few dozen employees?"

This quote raises a question about FTX's operational efficiency, highlighting the small team size and the company's significant achievements.

  • Speakers discuss Pilot, a company offering accounting, tax, and bookkeeping services for startups and growth companies.
  • Pilot's growth and reputation are mentioned, along with their ability to handle a wide range of financial services.
  • The importance of outsourcing non-core activities like accounting is emphasized for startups.

"Our next sponsor for this episode is one of our favorite companies and longtime acquired partner pilot for startups and growth companies of all kinds."

The quote introduces Pilot as a sponsor and sets the context for their services and relevance to the startup ecosystem.

Disclaimer and Introduction to Interview with Sam Bankman-Fried

  • Speaker E provides a disclaimer that the show is not investment advice and that hosts may have investments in discussed projects.
  • The interview with Sam Bankman-Fried is introduced, aiming to delve into the story of FTX and Alameda Research.

"On to our interview with Sam Bankman-Fried. Sam Bankman-Fried welcome to acquired."

This quote transitions the discussion to the interview segment with Sam Bankman-Fried, setting the stage for an in-depth conversation about FTX and the crypto assets ecosystem.

Sam Bankman-Fried's Background and Entry into Crypto

  • Speaker D (Sam Bankman-Fried) describes his initial steps into cryptocurrency by investigating bitcoin markets on CoinMarketCap.
  • He details the process of identifying arbitrage opportunities and the potential revenue from such trades.
  • Sam's background as a trader at Jane Street Capital is mentioned, providing context for his analytical approach to the crypto market.

"Yeah, so the first thing I did, I can actually step by step go through it because it's a pretty simple process. I went to coinmarketcap.com. I clicked on bitcoin, and then I clicked on markets."

This quote details Sam Bankman-Fried's methodical approach to exploring the cryptocurrency market and his initial steps into identifying trading opportunities.

Vision for Alameda Research and Crypto Trading Opportunities

  • Speaker D discusses the vision for Alameda Research to provide liquidity in the crypto market due to a mismatch in supply and demand.
  • The Japan arbitrage opportunity is explained, highlighting the significant price differences between American and Japanese bitcoin markets.
  • The challenges and successes of scaling up Alameda Research's capital base are discussed.

"Our vision was, look, this probably won't be the last good trade ever. We should build a firm here, whatever that means."

The quote encapsulates the strategic vision for Alameda Research to capitalize on ongoing trading opportunities in the rapidly evolving crypto market.

Handling Startup Challenges and Scaling Up

  • Speaker A discusses the early-stage difficulties faced by their company, including the lack of established policies and procedures.
  • They highlight the challenge of gaining trust from investors without traditional assurances such as audits.
  • The speaker admits to the limitations they have due to the company's recent inception and rapid scaling efforts.

"We just fucking started this company two months ago, and we're trying to scale up extremely quickly."

This quote emphasizes the raw and honest challenge of building a company from scratch, particularly with the pressures of quick scaling and establishing credibility.

"We haven't written a policy on X."

This quote illustrates the lack of established policies due to the company's infancy, which is a common challenge for startups.

"Literally no crypto company has ever gotten audited before of any type. And we've been around for two months. Obviously, we don't have an audit."

The speaker points out the unique challenges in the crypto industry, where traditional business assurances like audits are not yet commonplace, particularly for a company as new as theirs.

Crypto Market Dynamics and Investor Expectations

  • The conversation touches on the comparison of returns between traditional investments and those in the volatile crypto market.
  • Speaker A discusses the difficulty of explaining and justifying their firm's performance relative to other crypto ventures with seemingly astronomical returns.
  • They also mention the struggle to secure capital in a market where investors are attracted to high-risk, high-reward opportunities.

"So how'd you compare a quantitative trading firm to, for instance, someone who had just issued a token, and then it went up a lot, and they're like, well, our returns are 3 trillion billion percent."

This quote reflects the challenge of comparing traditional financial metrics to the hyperbolic returns seen in some crypto ventures.

"There's no clear right answer sometimes."

Speaker A acknowledges the complexity and ambiguity in determining the best approach to evaluating and comparing investment opportunities in the rapidly evolving crypto market.

The ICO Boom and Market Perceptions

  • Speaker E contextualizes the situation by referring to the ICO (Initial Coin Offering) boom, where many new crypto tokens were created and experienced rapid value fluctuations.
  • Speaker D confirms that their company's establishment coincided with the tail end of the ICO boom.

"And you're referring to the fact that you're doing all this just after the ICO boom."

Speaker E highlights the timing and market conditions under which the company was founded, which was during a period of high innovation and speculation in the crypto space.

"It was sort of at the tail end of the ICO boom."

Speaker D confirms the specific market timing, suggesting the influence of the ICO boom on their business strategies and investor expectations.

Risk Perception in High-Risk Capital

  • Speakers discuss the investor's perspective on high-risk capital, comparing the potential for extraordinary returns against more modest but safer investments.
  • Speaker F describes the investor mindset as being willing to take on high risk in the hope of high returns.
  • Speaker D talks about the awkward position their company was in, being high-risk by association with crypto but also lower-risk due to their arbitrage strategies.

"And lps are essentially looking at it as just high risk capital."

Speaker F explains that limited partners (LPs) view investments in the company as high-risk capital, which affects their expectations and investment decisions.

"We're doing arbitrage, and those aren't a firm. Exactly. For extremely risky, low risk investments that make a fair bit of return, but less than extremely risky ones do, it was trying to appeal to a non existent niche, and that definitely made it harder."

Speaker D describes the company's unique position in the market, offering a less risky investment in a sector perceived as high-risk, which complicated their appeal to investors.

Starting FTX and Exchange Dynamics

  • Speaker D explains the decision to start FTX, a futures exchange, after running a successful quant crypto trading firm, Alameda.
  • They discuss the need for a larger capital base and the transparency of crypto exchanges' revenues as motivations for starting FTX.
  • The conversation touches on the simplicity of the exchange business model and the high margins associated with software revenue.

"The bigger thing, though, was one cool thing about crypto is it's very transparent from some perspectives."

Speaker D points out the transparency in the crypto industry, particularly regarding exchange revenues, which influenced their decision to start FTX.

"That's software revenue, high margin revenue."

Speaker B emphasizes the financial attractiveness of the exchange business model, noting the high margins typically associated with software-based revenue streams.

Exchange Market Inefficiencies and Opportunities

  • The speakers discuss the inefficiencies of the existing crypto exchanges and the opportunities for improvement.
  • They highlight the issues with risk management on other platforms and how these inefficiencies presented a business opportunity for FTX.
  • The conversation includes the competitive landscape of the futures market and the potential for FTX to offer better services.

"The biggest exchange at the time was bleeding each day about a million dollars of customer assets to a risk engine that didn't work."

Speaker D exposes the operational weaknesses of the largest crypto exchange at the time, which failed to manage risk effectively and lost customer assets daily.

"So that's what was happening. And that was not good."

Speaker D succinctly sums up the situation, indicating the poor state of risk management in the industry and the need for a better solution, which FTX aimed to provide.

Building an Enduring Company and Long-Term Planning

  • Speaker D discusses the importance of having a long-term plan and communicating it effectively to various stakeholders.
  • They emphasize the need for high service standards to differentiate FTX from competitors and attract users.
  • The conversation shifts to the intentionality required in building an operating company with enduring value.

"And so I think that that's probably the single thing that we've gotten the most, sort of increasingly intentional."

Speaker D reflects on the growing focus on long-term planning and strategic communication as the company matures and seeks to establish itself in the market.

Investor Confidence and Fundraising Success

  • The dialogue covers the successful fundraising for FTX and the factors that contributed to investor confidence.
  • Speakers note the legibility and credibility of FTX's business model compared to the less predictable nature of Alameda's arbitrage opportunities.
  • The conversation touches on the timing of FTX's seed round and the regulatory challenges faced by competitors, which may have opened opportunities for FTX.

"And so, yeah, it just was a more legible product, and it was, from that perspective, sort of a nice one."

Speaker D explains how the clarity and straightforwardness of FTX's business model appealed to investors, making it easier for them to understand and invest in the company.

"It's not like they messed up a few specific things but were great otherwise. They were sort of indicative of execution ability."

Speaker D suggests that the issues with existing exchanges were symptomatic of broader execution problems, reinforcing the opportunity for FTX to do better.

The Evolution of Crypto Exchanges and Market Infrastructure

  • The discussion explores the evolution of crypto exchanges and their role as key market infrastructure.
  • Speakers compare the traditional financial ecosystem with the crypto market, noting the reduced number of intermediaries in crypto transactions.
  • They highlight the unique opportunity for exchanges in the crypto space due to the lack of alternative players in the value chain.

"And so if you're going to do something in crypto, you were going to do it at the exchange level, on the infrastructure side, that's where the value was."

Speaker D points out the centrality of exchanges in the crypto industry and their importance as infrastructure providers within the market ecosystem.

"That's right. And that sort of is how crypto happens to evolve that way. I'm not necessarily saying it needs to have, but it did."

Speaker D acknowledges the specific path of evolution that the crypto market has taken, which has led to exchanges being the primary players in the space.

Sponsorship Mention

  • The transcript concludes with a sponsorship mention for Statsig, a feature management and experimentation platform.
  • Speakers A and C provide background on the company and its services, including its use by various notable tech companies.

"Our sponsor for this episode is a brand new one for us, Statsig."

This quote introduces the sponsorship segment, where the speakers discuss the sponsor's services and relevance to the tech industry.

"Statsig is a feature management and experimentation platform that helps product teams ship faster, automate a b testing, and see the impact every feature is having on the core business metrics."

Speaker A describes the core functions of Statsig, highlighting its value proposition for product teams looking to enhance their development processes.

Amazon AWS First Best Customer Principle

  • The principle suggests that a product is likely to be successful if the creators themselves are in need of it.
  • Alameda, a trading firm, was in need of a better exchange which led to the creation of the exchange in question.
  • The product was not hypothetical but had immediate demand due to the creators' own needs.

"Yeah, I think that having a built in example of like, we are quite confident that this is going to be a product with demand because we've wanted this product for a while."

The quote emphasizes the creators' own demand for the product they were building, which gave them confidence in its market potential.

Key Features and Advantages of the Exchange

  • The new exchange aimed to provide closer to 100% of profits to its users, compared to other platforms.
  • The exchange planned to have a proper compliance department and engage with regulators productively.
  • The platform promised reliable deposits, withdrawals, and banking services.
  • Innovation and new product development were key aspects, both in the US and internationally.

"So that was the most compelling thing at the time... That has to change. There's no way that that's how the world is going to remain."

This quote reflects the speaker's belief that the standard of retaining only 83% of profits on existing platforms was unacceptable and due for change.

Realization of International Opportunities

  • The international market was identified as an addressable opportunity for the new exchange.
  • The company structure was adapted to pursue international opportunities effectively.
  • The speaker's views on US opportunities evolved over time, becoming more nuanced.

"I guess I should also just explicitly flag that my thoughts on this have to some extent changed over time."

The quote indicates the speaker's evolving perspective on the potential of the US market after initially focusing on international opportunities.

Testimony before Congress

  • Speaker D testified before Congress, which indicates involvement in regulatory discussions and the significance of the exchange in the financial ecosystem.

"Thank you for being with us, because you testified in front of Congress yesterday, so we really appreciate, a, your testimony, and b, you being here with us."

The quote acknowledges Speaker D's recent testimony before Congress, highlighting the importance of their role and the exchange's impact.

Strategic Decisions and Personal Commitment

  • Speaker D moved to Hong Kong to launch the product, demonstrating personal commitment to the company's success.
  • The decision to change one's life for the company's growth was seen as necessary and not really a choice but the right thing to do.

"It never felt like, I don't even know that choice is exactly the word I would use to describe how it felt. It just felt like. It's more like, yeah, that's the thing I'll do here."

The quote reflects the speaker's commitment to the company, where the decision to make life changes for the company's success felt like the only logical step.

Risk and Regulatory Compliance

  • The company aimed to minimize risk while acknowledging that zero risk is impossible.
  • There was a focus on complying with know-your-customer (KYC) and anti-money laundering (AML) requirements.
  • The company sought to obtain as many licenses as possible in various jurisdictions.

"Nothing is zero risk, but so be it. And that's, in the end, the perspective that I think we've taken and we sort of had to take."

This quote conveys the acceptance of inherent risks in business, especially in a new and evolving ecosystem like crypto, while striving to minimize those risks through compliance and best practices.

Unique Stance on Compliance and Innovation

  • The exchange aimed to balance compliance with functional innovation.
  • Testifying before Congress was seen as part of the effort to advance regulatory discussions while continuing to innovate.

"You can choose to be compliant or you can choose to be functional, and you have to choose which company you're launching."

The quote highlights the company's approach to simultaneously focus on compliance and functionality, suggesting a balanced strategy in a complex regulatory environment.

Customer Acquisition and Growth

  • Initial customer acquisition focused on power users who valued product quality.
  • The exchange's sister company, Alameda, provided initial liquidity, solving the volume-liquidity catch-22.
  • Marketing was minimal at the start, with organic growth among power users being the primary strategy.

"Most of our initial growth came from power users, the people who are spending hours a day in the ecosystem and would try out every new exchange that came and use the ones that they like the most."

The quote explains that the early growth strategy was to target power users who would appreciate and use the high-quality product offered by the exchange.

Present State and Future Outlook of FTX

  • FTX has grown to be the third biggest by volume and second by open interest globally.
  • The US derivatives market is seen as a significant opportunity for FTX US.
  • The acquisition of LedgerX (now FTX US Derivatives) is a strategic move to enter the US derivatives market.

"Today we are the third biggest by volume, we're the second biggest by open interest and actually pretty close to first it just realized."

The quote provides a snapshot of FTX's current market position, indicating significant growth and potential for further expansion, particularly in the US derivatives market.

Branding and Marketing Strategy

  • FTX views partnerships and endorsements as a means of establishing brand identity rather than direct customer acquisition.
  • The goal is to communicate the company's identity in a meaningful and lasting way, beyond just user acquisition.

"We think of it as brand rather than marketing, if that makes sense."

The quote distinguishes between FTX's approach to brand building versus direct marketing, emphasizing the importance of establishing a strong and recognizable brand identity.

Trust and Market Positioning

  • FTX aims to build trust by aligning with entities that have emotional connections with people.
  • The strategy is long-term, focusing on establishing infrastructure of trust rather than immediate customer acquisition.

"It's so easy. So I'm going to keep going back to it. But going back to the Bezos analogy, it's so early."

The quote compares FTX's early market positioning to the early days of the internet, implying that establishing trust is a foundational step for long-term success in a nascent industry.

Execution and Team Management

  • Good execution and a strong, intentionally-sized team are seen as key to the company's success.
  • Avoiding overgrowth of the team is crucial to maintain effective operations.

"I think that we have built a strong team and we've been really intentional about it and in particular about not overgrowing the team."

The quote emphasizes the strategic importance of team management and the deliberate effort to avoid over-expansion, which could hinder the company's agility and effectiveness.

Scale and Network Economies

  • FTX benefits from scale and network economies inherent in the exchange business model.
  • The company's rapid volume growth has created narrow spreads and better prices for users, reinforcing its market position.

"The fact is, you were able to build volume very quickly in a market that was early on."

This quote recognizes FTX's strategic advantage in building volume quickly in a growing market, which contributes to its scale and network economies and positions it for persistent profitability.

FTX's Market Position and Growth Strategy

  • FTX is recognized for its exchange business, including spot and derivatives trading, which has established network and scale economies.
  • Speaker D acknowledges FTX's current position of coming from behind in certain market segments.
  • FTX aims to expand beyond its established exchange services, considering long-term opportunities in other areas like gaming.
  • Acquisitions are part of FTX's growth strategy, as seen with the acquisition of Blockfolio, signaling a shift to target a broader user base.

"But we are coming from behind with respect to today. Some of the things we're trying to do, some of the segments that we're trying to get at, we don't currently have that much penetration in."

This quote emphasizes FTX's recognition of their weaker market segments and their intention to improve penetration in those areas.

"You've mentioned in the past how one of the growth strategies you guys might deploy is through acquisitions and everyone enjoyed it."

The quote refers to FTX's strategy of growing through acquisitions, which has been publicly discussed and well-received.

Transparency and Company Culture at FTX

  • Speaker D discusses the company's unusual level of transparency, challenging traditional business practices.
  • FTX's transparency is linked to its hiring and training approach, focusing on providing context for employees to make informed decisions.
  • Speaker D questions the status quo and encourages evaluating whether conventional wisdom applies to their situation.
  • Transparency is seen as a way to build a movement and evangelize FTX's mission, aligning with the company's ethos of openness.

"A thing that I think, I think about a lot is, sure, okay, you say people do x. Tell me more. Why do people do x? Do people do x for a good reason?"

This quote illustrates Speaker D's critical approach to conventional business practices and the importance of questioning their validity.

"This is, I think, one of the most clearest examples of a company we've looked at in really, the history of acquired all six plus years of like, you are building a movement, you are evangelizing."

The quote suggests that FTX's transparency is part of a broader strategy to build a movement and gain public support, rather than keeping trade secrets.

Hiring Philosophy and Team Dynamics at FTX

  • Speaker D describes the difficulty of assessing candidates during interviews and emphasizes the importance of adaptability and decision-making in uncertain situations.
  • FTX values flexibility and the ability to handle pressure over experience, suggesting a dynamic and agile company culture.
  • The company seeks individuals who can commit to a path even with limited information and who strive to make the best possible decisions under stress.

"Experience is very much not what we hire for. Right. In fact, sometimes we're almost like, I wouldn't quite say we're anti selecting for it, but we like flexibility."

This quote reflects FTX's hiring focus on adaptability and flexibility rather than traditional experience.

"It's so hard when you interview, frankly, to do this. A lot of this is just something that you have to figure out over time."

Speaker D acknowledges the challenges of the hiring process and the need to assess candidates over time, particularly for their ability to navigate complex situations.

FTX's Future Outlook and Goals

  • Speaker D outlines metrics for FTX's success, including becoming the largest crypto exchange and expanding into retail user markets.
  • FTX aims to grow beyond crypto, potentially trading assets resembling equities.
  • Regulatory relationships and licensure are also key success factors for FTX.
  • The company is open to exploring unknown opportunities and is comfortable with unconventional approaches.

"What are the metrics we're going to judge ourselves by? And one of them is just like, did we become the biggest crypto exchange?"

The quote indicates that becoming the largest crypto exchange is a primary goal for FTX, serving as a benchmark for their success.

"Did we manage to expand beyond crypto is going to be, I think, one of the big metrics."

This quote reveals FTX's ambition to extend its influence beyond the crypto market and into other financial areas.

Social Media's Impact on Society and Markets

  • Speaker D believes social media defines the current era, influencing various aspects of life, including investing, news cycles, and the creation of parallel worlds.
  • The speed and nature of information dissemination have changed with social media, and memes have gained significant cultural and financial influence.
  • Speaker D predicts that we are only at the beginning of understanding the full impact of social media on society.

"I think the defining property of today probably is social media."

This quote highlights Speaker D's view that social media is the most significant factor shaping contemporary society.

"News cycles are no longer controlled by editorial cycles. Right. It's tweet cycles now, and that just iterates much more quickly."

The quote points out the accelerated pace of news cycles due to the immediacy of social media, particularly Twitter.

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