How Alameda Lost Money

At a general meeting, Alameda Research CEO Caroline Ellison explained how the company lost its money:

Just over a year ago, FTX began spending largeamounts. Various investment companies were created with the names FTX and Alameda. In addition, the exchange bought luxury apartments in the Bahamas, began building a new, more expensive office, which was supposed to be in the shape of the letter F. The naming rights to stadiums and advertising were also expensive. At this time, FTX did not touch the funds of its users and received funding mainly from Alameda secured by FTT tokens.

Alameda was able to lend so much money to FTXpartly because they really had a lot of available funds, and also because loans at that time were quite easy to attract, which the company took advantage of. Ultimately, this led to a financial hole in the balance sheet.

The problems started about 6 months ago whenTerra (LUNA) fell to 0, which led to the collapse of the cryptocurrency market. In fact, Alameda didn't lose a lot of money directly because of the Terra crash. However, its collapse led to the liquidation of many large companies, the most notable of which was 3 Arrows Capital (3AC). This event led to the so-called "credit crunch". During the credit crisis, many funds suddenly called their loans, just to see who was still liquid. Alameda has lost a lot by lending to firms that have defaulted. As a result, the company was on the hook, as Alameda turned over most of the loan money to FTX and other bankrupt counterparties.

As a result, Sam Bankman-Fried (SBF) stood in front ofthe choice is to let Alameda go bankrupt or use FTX users' money to ensure Alameda's survival. As you already understand, SBF chose the latter option. From that point on it was just a ticking time bomb before the truth was revealed. And the credit crunch just hastened how quickly FTX and Alameda's frivolous spending became exposed.

Largely because of this, Binance abandoned its deal to acquire FTX, citing that the hole in the financial balance of the latter is too big.

What to expect in the near future?

The collapse of FTX is likely to lead to a number of criminal casesand civil lawsuits against the exchange and its leaders (including against the SBF). Already, several state and federal agencies have launched or expanded investigations into the company, including the US Department of Justice, the US Securities and Exchange Commission, the Bahamas Securities Commission and the Bahamas Financial Crime Investigation Unit.

Regulators are very concerned about the number of major bankruptcies in the cryptosphere. Therefore, next year we can expect the adoption of the US Digital Consumer Protection Act.

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