Exec Sum is back with another Sunday deep dive 😤
And this is our deepest dive yet, so strap in.
Today we are going to tell you about FTX, and specifically FTX US. This deep dive covers everything. Japanese bitcoin arbitrage. Meme-based fundraising rounds and insane marketing campaigns. Leveraged crypto futures and a wallstreetbets index.
We will take you through the past, present, and future of one of the world’s biggest crypto exchanges.
As we’ve mentioned before, nothing written here is investment advice. We’re here to talk about crypto, the investment industry, and FTX.
Before we go any further, you can click here to download FTX’s mobile app. If you are using your desktop, make sure to put referral code "litquidity" 🤝
Let’s dive in.
In late 2008, a pseudonymous programmer named Satoshi Nakamoto published his manifesto, Bitcoin: A Peer-to-Peer Electronic Cash System, online. This paper outlined methods of using a peer-to-peer network to generate what was described as "a system for electronic transactions without relying on trust". A few months later, the bitcoin network came into existence when Nakamoto mined the first bitcoin block. This block came inscribed with a cryptic message:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
This novel cryptocurrency’s first adopters frequented remote internet forums. In 2010, one of these adopters, Laszlo Hanyecz, completed the first commercial bitcoin transaction when he bought two Papa John’s pizzas for 10,000 BTC (that would be ~$380,000,000 today, for those keeping score back home).
Bitcoin then gained attention as the primary medium of exchange on the black market site “Silk Road” (RIP), where people would go to buy drugs, weapons, etc. At this point, a single bitcoin was worth between tens and hundreds of dollars.
Fast forward nine years. Despite its questionable roots, bitcoin is now ~$39k / coin (at time of writing) with a $740 BILLION market cap, and it’s held by some of the largest institutional investors in the world.
Bitcoin’s ascension paved the way for other alternative assets. New blockchains like Ethereum and Solana emerged, and from these came the NFT market.
In a single decade, one fringe asset grew to become a trillion-dollar market with millions of investors.
Few of these investors are as well-known as Sam Bankman-Fried.
Sam Bankman-Fried, or SBF, is the CEO and founder of FTX.
SBF was also named to this year’s Litquidity 30 Under 30 🤝
The son of two Stanford Law professors, SBF graduated from MIT with a physics degree and mathematics minor.
As a college student, Sam grew passionate about “effective altruism”. An effective altruist looks to data to decide where and when to donate to a cause, basing the decision on impersonal goals like saving the most lives or creating the most income per dollar donated. One of the most important variables, obviously, is having a lot of money to give away to begin with. Bankman-Fried realized that if he wanted to give away a ton of money, he needed to MAKE a ton of money first.
After graduation, he took a job at proprietary quant trading firm, Jane Street Capital, where he donated a significant amount of his high salary to philanthropic causes.
SBF took little interest in bitcoin during its early days as the de facto black market currency, but everything changed in 2017. Bitcoin was in the middle of an insane six-month melt up from $2,500 to $20,000, and Bankman-Fried noticed that international markets for the cryptocurrency weren’t efficient.
Many crypto enthusiasts are bullish on the asset class because they believe it cures some sort of systematic problem (unlimited money printing, government imposed asset seizures, etc).
SBF didn’t get involved with crypto because of ideology. He started trading crypto because he realized he could get rich af. This quote from a Forbes interview sums it up perfectly:
In 2018, Sam noticed that bitcoin was trading at a 50% premium in the South Korean market compared to the US. He could buy $10,000 in bitcoin in America and sell it for $15,000 in Korea. #ARB
This value dislocation, known as the kimchi premium, existed because demand for emerging assets such as bitcoin was so high in South Korea. However, the Korean Won is a highly regulated currency, meaning it was virtually impossible for traders to convert large amounts of Won back to USD.
SBF explored other foreign markets, and he discovered a similar, but smaller, arbitrage opportunity in Japan.
He quit his job at Jane Street in 2017 to found Alameda Research, a quantitative trading firm, in Berkeley, California. SBF and his team of recent college grads went to work exploiting this arbitrage opportunity.
In January 2018, they were making $25 million EACH DAY through arbitrage trades.
While he was printing money, SBF was bothered by the poor quality of existing crypto exchanges. They were functional for buying and selling a few bitcoins, but they were not well-equipped to handle large traders moving millions or billions of dollars per trade.
Frustration with existing exchanges ultimately led Bankman-Fried to found FTX.
Sam Bankman-Fried realized that there was a need for an exchange that supported larger orders and more complex derivative strategies, so he decided to build his own solution (hence FTX’s motto: “built by traders, for traders”).
In 2019, he used some of Alameda’s profits and $8M in seed funding to get FTX off the ground. At the time, the Asian markets had both clear-cut regulations and a massive community of crypto traders. So Bankman-Fried set up shop in Hong Kong.
He soon found a niche catering to more sophisticated investors looking to trade derivatives such as bitcoin options and ethereum futures. While crypto maximalists were more likely to buy and hold for longer periods, professionals traded frequently and heavily.
This customer base of professional traders greatly benefited FTX. Active trading and larger positions generated higher fee revenues.
Business was booming in Hong Kong, as East Asia was a hotbed for crypto traders in 2018 and 2019. However, last September, SBF tweeted that FTX would be setting up a new headquarters in the Bahamas.
Clearer crypto regulations, less restrictive covid guidelines, and proximity to the United States made the move a no-brainer.
FTX was founded less than three years ago in May 2019. Going into 2021, they had yet to break 1M users or raise a single venture capital dollar. In the last year, the crypto exchange has tripled its headcount, acquired 5M users, and raised capital at a $32B valuation (!!!)
Adding an average of $10B per year to your valuation in the first three years of operation is probably some sort of record.
FTX kicked 2021 off with record trading volume increases across the board. By the end of February, more volume had been traded on FTX in 2021 than in their entire history before that (404B vs 401B). By May, their 30-day volume had also eclipsed that number. FTX ended the year with ~11.5x more volume than 2019-2020 combined 🤯
From May 2020 to May 2021, FTX was the only major exchange (outside of Binance) to gain market share across every major product category.
According to Forbes, FTX handled some 10% of the $3.4 trillion face value of derivatives traded by crypto investors each month last year. FTX pockets 0.02% of each of those trades on average, good for around $750M in nearly risk-free revenue—and $350M in profit—over the 12 month period ending in October 2021.
How did FTX fare vs. their competitors in 2021? Check out this relative volume growth graph from their 2021 annual report:
FTX is the blue line destroying everything in its path.
The exchange’s average daily volume in 2021 was $12.5B, up more than 1100% from 2020. A big reason for FTX’s volume growth is their diverse product list. The crypto exchange offers:
As a result, FTX became the fastest-growing crypto exchange in the world, serving customers from pretty much everywhere, except for… Europe and the United States.
However, just last week, FTX announced their European expansion. This comes almost two years after the crypto exchange set up shop in the US.
Let’s take a deeper look at FTX US.
Unless otherwise specified, we will be focusing on FTX US for the rest of this article.
FTX was first headquartered in Hong Kong because of well-defined regulations and close proximity to professional traders. However, as his company grew, Bankman-Fried set his sights on the US market.
The CFTC and US officials have stricter securities regulations than many foreign markets, so FTX formed a separate entity to address this new market: FTX US.
In May 2020, FTX US opened for trading in Chicago. They initially offered spot trading for six coins - bitcoin (BTC), ether (ETH), bitcoin cash (BCH), litecoin (LTC), Paxos gold (PAXG) token and Tether (USDT) stablecoin.
This US branch grew quickly as more Americans took interest in crypto, and SBF needed someone who could independently run FTX US.
One year after FTX US went live, SBF hired his former coworker, Brett Harrison, to take over as President of the domestic branch.
Harrison and Bankman-Fried had previously worked together at Jane Street Capital in New York. After his stint at Jane Street, Harrison served as the head of ETF Technology at Citadel Securities for two years.
His previous two roles made him the perfect fit to head FTX’s US expansion. Like Bankman-Fried, Harrison was a trader by trade (pun intended). He had a thorough understanding of markets from both the client and market maker perspective.
Brett is very active on Twitter, regularly sharing updates and insights about his company:
Launched in May 2020, FTX US is less than two years old. Remarkably, the young company has followed its parent’s rocket ship trajectory by quickly establishing itself as one of the biggest crypto exchanges in the US.
According to FTX’s recent annual report, their US arm grew its total user base by 12,100% in 2021. Meanwhile, a single day in December saw registrations exceed 745% of the entire user base as of Jan 1st 2021. They have also increased their headcount from single digits to 75 employees in the last year.
By July 2021, FTX US sported the deepest liquidity of all US crypto exchanges, having increased from <$1M/day in mid-2020 to a peak of nearly $1B/day.
FTX US’s average daily trade volume increased by 608% year over year, hitting an all-time high $812M trade volume in one 24 hour period last November, and in their first full year of operation, FTX US traded $67B in spot crypto.
To demonstrate how quickly FTX US has scaled its operations, Karl put together this proprietary chart:
You can contribute to this meteoric growth by downloading the app here and using code "litquidity" at sign up.
One of FTX’s keys to maintaining this growth has been working with regulators instead of skirting around regulation.
Crypto regulations worldwide largely fall into one of three categories:
Strict regulation is simple: “Here is a precise set of rules. Get these certifications and receive approval from these organizations to operate.”
Minimal regulation is also simple, because anything goes.
Gray regulation is where the problems emerge. Imagine that an exchange lists a token in the US that “isn’t a security” by CFTC standards, but the regulatory language is ambiguous. One day, the price of this token begins fluctuating wildly, and investors are making and losing millions. Regulators take notice, and the SEC comes in and says, “Actually this is now considered a security. We’re fining you $100M for misconduct.”
Gray regulation is an existential threat to companies in young, dynamic industries, because regulators struggle to keep up with markets. What was “legal” yesterday could be outlawed tomorrow, leaving companies operating in a permanent state of Schrödinger’s business model.
FTX isn’t leaving legality up to chance. As the company has expanded to the US and other new markets, they have taken proactive steps to remain compliant with regulators every step of the way.
Working with regulators has helped FTX ensure that it can continue to grow, but what catalysts have driven that growth?
Strong acquisitions, excellent marketing campaigns, and efficient product roll out.
FTX US faced two problems at launch: minimal retail investor presence and regulatory hurdles for complex derivatives. They solved both issues through key acquisitions.
In Episode 73 of the FTX Podcast, Brett Harrison spoke in detail about their desire to tap into the retail market. While FTX’s first class platform and derivatives products pleased professional traders, they intimidated retail investors. Look at this screenshot of their trading dashboard…
And compare it to Robinhood’s crypto mobile interface:
To resolve this issue, FTX bought the best portfolio tracker on the market. In August 2020, FTX made waves by acquiring Blockfolio for $150M.
FTX wanted to roll out a retail trading version of their platform to all of their customers worldwide, and Brett knew that US retail traders represented a huge growth opportunity for FTX US.
Blockfolio, with its intuitive UX, 6M users, and 150M+ monthly impressions, was the perfect acquisition to help FTX achieve these goals.
FTX CEO Sam Bankman-Fried told CoinDesk that they weren’t “just acquiring the intellectual property. It’s an ‘acquire for the synergy and scale up’ sort of deal.”
A much cleaner interface, no?
The Blockfolio acquisition helped FTX US leverage the retail market, but they still faced regulatory hurdles for more complex products in the US. Without CFTC clearance, FTX couldn’t list options, swaps, and more complex derivatives products on the US markets.
FTX US resolved this issue when they acquired LedgerX in October 2021.
LedgerX was a digital currency futures and options exchange and clearinghouse regulated by the CFTC. This purchase gave FTX US a designated contract market (DCM), swap execution facility (SEF) and a derivatives clearing organization (DCO).
In layman’s terms, FTX could now offer complex derivatives and futures contracts to its US clients. At the time of acquisition, the CFTC had already approved bitcoin and ether derivatives at the Chicago Mercantile Exchange (CME) Group. Through the LedgerX acquisition, FTX US now offers BTC futures, BTC options, and ETH options on its FTX US Derivatives platform. ETH futures will be launched soon.
More on FTX US’s plans with LedgerX later.
Acquisitions increased the size of FTX US’s addressable market, but none of that matters if the market doesn’t know that it is being addressed. FTX created top-tier ad campaigns, personable social media content, and powerful sports partnerships to build the most recognizable brand in crypto.
If you watched this year’s Super Bowl, you likely saw FTX’s “Don’t Miss Out” ad featuring comedy legend Larry David. Voted the most comical commercial by USA Today, the video was watched live by tens of millions, and the YouTube recording has since been seen 43M+ times.
Some people hated it, some people loved it, and a lot of people were wondering why the hell Larry David was advertising crypto. But everyone was talking about it.
How about Tom Brady’s “Are you in?” and “I want a trade” ads?
Or maybe Steph Curry’s self-made advertisement that was an advertisement within an advertisement?
This video interview by Nuseir Yassin highlighting SBF garnered millions of views on Twitter.
The world was able to see that the 29-year-old crypto billionaire was a relatable, kind-hearted guy who lived with his friends at the beach and drove a Corolla.
Every single video advertisement produced by FTX has been phenomenal. Don’t kid yourself, A+ advertising played a huge role in FTX and FTX US hitting 5M and 1M users respectively last year.
When SBF testified in front of Congress, a meme of his shoes went viral...
Telegram with the high quality SBF content
— Zack Seward (@zackseward)
Dec 8, 2021
So Sam and FTX took the opportunity and ran with it.
Corolla is gassed up, shoes sorta tied, time to work
— FTX (@FTX_Official)
Jan 31, 2022
FTX’s personable engagement didn’t stop with witty tweets. They turned social media trends into tradable markets. When Reddit and Twitter were going berserk during the GameStop craze in 2021, FTX captured the moment by creating an equal-weighted wallstreetsbets index and offered futures contracts for the new product. Why not make a basket index for betting on GameStop and AMC?
They even turned last fall’s capital raise into a meme.
Last October, FTX raised a $420M ($420,690,000 to be exact) Series B-1… from 69 investors. Could the company have raised a flat $400M from 70 investors? Easily. But no one would care about that headline.
Good tweets capture attention. Timely product releases serve as a funnel to attract new users to the platform. A $420.69M capital raise turned a PR afterthought into a front-page article.
Leaning into the zeitgeist of meme culture turned a free non-event into a successful marketing campaign.
The FTX team understands better than most that culture and brand presence are the most cost-effective marketing tools in the world.
Have you ever seen a Tesla advertisement? No. Do you know why? Because their CEO is a better advertisement than anything that money can buy.
Musk’s Twitter following would be the 20th largest country in the world by population. Every Tesla update. Every shitpost. Every meme is free brand exposure.
Am considering taking Tesla private at $420. Funding secured.
— Elon Musk (@elonmusk)
Aug 7, 2018
How much do you think that tweet was worth? Certainly more than enough to offset any regulatory fines.
Brands that drive strong engagement online can generate millions, or even billions, of dollars in value without ever paying a cent.
The other side of their advertising campaign? Sponsorships. Specifically, sports sponsorships.
As I highlighted above, FTX has signed partnerships with Brady, Curry, and several other celebrities/athletes. However, they have shelled out hundreds of millions to sports organizations as well.
Last summer, FTX paid an incredible $135M for the naming rights to the Miami Heat’s stadium for the next 19 years.
One week later, they signed a sponsorship deal with the MLB where all umpires would wear an FTX patch in every game. And two months after that, they signed a 10-year, $17.5M deal with the Cal Golden Bears (UC Berkeley) for the naming rights to their football field.
FTX also signed a $10M deal with the Golden State Warriors. Besides getting brand placement in the team’s G League and eSports matches, FTX became the exclusive marketplace for Golden State Warriors NFTs.
Golden State was already familiar with the NFT market, having made more than $2M in a digital NFT auction last April (more on the NFT collaboration later).
However, FTX’s biggest sports sponsorship wasn’t struck on a gridiron, diamond, or court. It wasn’t in any physical arena at all.
It came from the eSports industry.
FTX paid $210M for the naming rights to sponsor professional esports organization Team SoloMid (TSM) 🤯 The organization, now rebranded as TSM FTX, competes in games such as League of Legends, Dota 2, Apex Legends, Super Smash Bros., Fortnite, and PlayerUnknown's Battlegrounds.
Just last month, they made another investment in the eSports field by partnering with Nerd Street Gamers for future tournaments. Nerd Street is a network of eSports facilities that hosts various tournaments.
Super Bowl advertisements, Brady and Curry deals, naming rights for stadiums and eSports teams. The focus on sports was no accident.
In their 2021 annual report, FTX mentioned that sports and athlete partnerships were their key marketing campaign.
Why would a crypto exchange target the sports industry?
Because they understand the overlap between traders and sports bettors. Like we mentioned in our Ballstreet deep dive a few weeks ago, zero commission trading has blurred the line between investing and speculating, and sweeping legislation reform has introduced millions to the world of sports betting.
Which name are sports bettors going to recognize when they enter financial markets?
FTX’s meteoric growth has helped it quickly raise capital from some of the biggest names in venture capital.
In 2019, Sam Bankman-Fried funded FTX with profits from Alameda Research and a small $8M seed round led by Race Capital. This seed round was followed up by a blockbuster $1B raise in July 2021 featuring A-List venture funds like Sequoia, Ribbit Capital, SoftBank, and Third Point Ventures. They followed the billion-dollar capital raise with the $420.69M “meme round” featuring prominent names like Tiger Global. The crypto exchange most recently raised a $400M Series C at a $32B valuation in January, featuring many of the same investors as the last two rounds.
Independent of its parent, FTX US also raised a $400M Series A at an $8B valuation in January 2022, led by SoftBank and crypto venture fund Paradigm.
Okay, that was 3,000+ words so far. Let’s dive into the functionality of FTX US’s platform. So what can you do on FTX US? A better question might be “what can’t you do?”
Here are the current products offered by FTX US:
Here are definite, probable, and possible future products for the exchange:
Let’s start at the top. Spot contracts were the first products offered by FTX’s domestic arm. The initial product list of six assets has now expanded to include dozens of crypto and foreign currencies, and qualified users have access to 10x leverage on their spot products, such as BTC/USD or ETH/EUR.
Thanks to their LedgerX acquisition, FTX now offers both futures and options contracts as well. Now branded as FTX US Derivatives, they list Bitcoin options and futures contracts and ETH options, with ETH futures coming soon. Popular with institutional and professional traders, the inclusion of futures contracts accelerated large client acquisition.
The LedgerX acquisition sets the stage for one of FTX’s biggest market opportunities: real-time margin updates.
Crypto markets trade 24/7. Most futures markets, like WTI crude, wheat, S&P 500 minis, don’t trade on weekends.
This might not seem like a huge deal at first. But what happens if one Friday afternoon… Russia invades Ukraine? Oil supply lines are disrupted? International trade routes are remapped? And market prices can’t adjust to these environmental changes until Sunday afternoon?
If you’re on the wrong side of the trade, good luck.
As soon as futures markets open, there will be a massive volume spike to trade this new information, which creates volatile, whipsaw price fluctuations. Spiking prices forces leveraged short positions to cover, which increases buying pressure, which squeezes more shorts. Not very healthy price action.
FTX US wants to solve this problem.
Crypto markets are open 24/7, and FTX’s international platform offers real-time margin to its customers. Margins levels and collateral can be adjusted with price movements at any time, even on weekends. This creates a smoother, less erratic market that benefits traders. No more waiting 48 hours to trade and praying that you won’t be liquidated.
Right now, FTX US’s DCO license requires full collateralization on its derivatives, meaning they can’t offer margin on crypto derivatives. However, the company is working with US regulators to remove this full collateralization requirement to enable margin trading.
Assuming they are approved, FTX US will be able to offer margin trading for crypto derivatives similar to that of futures traders on the CME. FTX’s 24/7 markets and real-time margin will reduce volatility and risk for the traders.
FTX US also has their own NFT marketplace that features plenty of “blue chip” NFTs like the Bored Apes Yacht Club. However, their most interesting offerings are unique listings from organizations like Coachella, Tomorrowland, and the Golden State Warriors. Many NFT projects are half-baked at best, and pump-and-dump schemes at worst. FTX wanted to change that by focusing on NFTs with real-world applications.
FTX US offers three different classes of Coachella NFTs. One of the listings, Coachella Keys, gives holders lifetime access to Coachella’s annual concert. FTX also just announced a similar partnership with Tomorrowland, where the exchange is giving away 1500 NFTs at Tomorrowland Winter Festival and auctioning 5000 more on their NFT marketplace. SBF has been outspoken about tickets, experiences, and media being viable NFT applications.
2) Tickets, experiences, and media are three of the things that have always seemed to me like they *should* be NFTs.
We're all extremely excited to work with the Coachella team to move forward and join music, entertainment, festivals, and blockchain tech.
— SBF (@SBF_FTX)
Feb 2, 2022
Their Golden State Warriors championship series has also been a hit. FTX recently launched an exclusive 2974 Collection, auctioning off one NFT for each of Steph Curry’s 2974 three pointers so far. Golden State was a great NBA partner, given that they had already raised $2M in a previous NFT auction.
Unlike other large NFT marketplaces, FTX is custodial. Transactions such as bidding, buying, selling, and listing take place “off chain”, so no gas fees are required. Custodial exchanges can also identify and prevent wash trading, a problem in the NFT market today.
Given the price of gas lately (both Ethereum and automobile), FTX’s gas-free transactions are a huge benefit to traders.
In collaboration with Visa, FTX offers crypto debit cards as well. Through their debit card, users can spend crypto at eligible merchants without having to link their bank accounts. Seamless integration between your FTX account and your purchases is an awesome feature.
The only thing cooler than paying with crypto is being paid in crypto. Check this out:
1/ With FTX Pay, you can enable your site to accept payment in any crypto or fiat currency supported by FTX US.
You can also set up monthly subscriptions with FTX Pay! This allows you to implement your own version of e.g. @Patreon/@SubstackInc/@Medium, but with much lower fees.
— Brett Harrison (@Brett_FTXUS)
Feb 8, 2022
Brett’s tweet thread breaks down the process better than I ever could, but basically you can set your own payment structure on your website however you would like using FTX Pay.
Your audience wants to pay in fiat (dollars, euros, etc.) and you want to receive in fiat? No problem.
Your audience wants to pay in crypto (BTC, ETH, etc.) and you want to receive in crypto? No problem.
Your audience to pay in fiat, and you want to receive in crypto (or vice versa)? Once again, no problem.
FTX Pay has created a fiat onramp for defi applications that want to attract a larger audience base.
FTX US also offers its platform as a white label product to companies. Functionally, this means that companies operate their own platforms on top of FTX infrastructure, and their users only see the end result. Social finance company Stocktwits just signed a white label deal for crypto trading with FTX US this month.
But FTX US’s most interesting development? Becoming a gaming company.
Just last month, Brett said that gaming would be a big part of the exchange's 2022 plans.
Of all the awesome things on this thread, this one’s worth highlighting: FTX and gaming in 2022.
Excited for the tech challenges this will bring for us - integrating NFT, crypto trading, and wallet tech directly into in-game economies at massive scale. twitter.com/JasonYeFTX/sta…
— Brett Harrison (@Brett_FTXUS)
Dec 29, 2021
Two weeks ago, the news broke: Crypto Exchange FTX US Is Launching a Gaming Business.
The initial offering from the new gaming unit will reportedly be a “crypto as a service” platform through which game publishers can launch tokens and have support for in-game NFTs. Some gamers have been wary of NFT adoption affecting the gaming industry, as many ‘NFT-based’ games have yielded poor experiences for players.
Brett touched a bit on the “anti-NFT” ideology that has overtaken the gaming community lately.
FTX wants to help game developers at every intersection of gaming and crypto, from providing crypto rails and wallets, to minting and trading NFTs.
Crypto exchange, NFT market, payment system, white label product, and now gaming company. What’s next?
As we mentioned in our previous piece on Titan, there are hundreds of investing apps out there now. There are also countless crypto exchanges. In a call last week, Brett Harrison told us that feedback has been loud and clear from FTX US’s crypto users:
If FTX had stock trading, many would move all their finances to the platform.
Developing a stock trading platform has been a point of focus for the FTX US team in 2022, and users can expect to see this product released soon 👀
However, stocks are only the beginning.
In response to questions about future expansion after LedgerX acquisition, Brett said: “There’s no reason why, down the road, we couldn’t list an equity index or a traditional commodity future, but these are possibilities and not our top priority. We think we have a real opportunity to reshape the futures landscape in the US in a market that is traditionally not very competitive.”
These comments were followed by a later interview with Chicago Inno, where Harrison stated, "We basically want to overtake the Chicago Mercantile Exchange.”
As mentioned earlier, current derivatives markets are very inefficient because they are closed on weekends. Anything that happens on a Friday afternoon won’t be reflected in prices until Sunday afternoon, creating price disconnects and volatility.
FTX’s 24/7 markets and real-time margin would reduce volatility spikes and Sunday afternoon margin calls, benefiting everyone from S&P speculators to farmers hedging soybean prices.
Additionally, in his piece about FTX, Mario Gabriele asked Samuel Bankman-Fried if FTX had considered entering the sports betting market. He casually replied: “Possibly.”
Stocks. Crypto. Derivatives. Commodities. Sports betting. What is going on?
FTX wants to become the go-to exchange for any and every tradable asset.
In a Benzinga interview from December, SBF said, “If you look longer down the road, we would absolutely like to get involved in other asset classes, and to become a global liquidity venue across the board.”
Not a crypto exchange. Not a stock platform. A global liquidity venue.
In the beginning, the inefficient crypto market was the perfect opportunity to build a better platform. But Sam and Brett don’t want to stop at crypto. They want to create a market for anything and everything.
Trading is a market agnostic activity, and any event with quantifiable probabilities is fair game.
As noted in our Ball Street article a few weeks ago, Sporttrade has created a futures exchange for sporting events. Meanwhile, Kalshi now has CFTC-approved live event-betting markets for everything from political elections to covid case counts in different countries.
What is the difference between futures contracts for the price of Tesla, ethereum, or oil in 2023? How about the outcome of the 2024 US presidential election, or next year’s Super Bowl winner?
New legislation and shifting consumer trends forecast that the financialization of everything is inevitable, and FTX wants to lead the charge. Their management understands these shifting markets, and they are skating to where the puck is going.
FTX wants to be the one stop shop for every investment.
The key to multi-asset class trading? Cross-collateral margin.
Before Bankman-Fried created FTX, most crypto exchanges isolated margin and collateral by asset. If you wanted to trade ETH against USD futures, you had to go buy spot ethereum, move it into your ETH- USD futures wallet, and use that as margin to trade your ETH futures.
If you then wanted to trade bitcoin against USD spot, you had to move that ETH out, sell it for USD or bitcoin, move that into your USD- bitcoin spot margin wallet, and use it as collateral there.
You can see how this is problematic.
Traders had dozens of wallets set up to trade different currencies, and they risked liquidation on each of them separately, regardless of collateral in the others. If you were levered long DOGE, BTC, and ETH, a sharp down move could liquidate a $25k DOGE position even if you had $50k sitting in BTC.
FTX offered cross-collateral for crypto traders from day one, meaning that your collateral for all trades was tied together. Other exchanges have since copied this model, as it created a much smoother user experience.
FTX pioneered cross-collateral margin trading in the crypto marketplace, and they want to expand this process to every marketplace.
Margin requirements vary by asset class, so FTX won’t be able to offer cross-collateral margin between crypto and stocks right away. However, shared margin across all asset classes would improve the user experience, and that is a long-term goal for the company.
The crypto market is rife with competition. So is the stock market. And the NFT market. And the sports betting market. And the… you get the idea.
Hundreds of companies are competing for market share across all of these industries.
However, FTX has three competitive advantages:
It’s no secret that crypto and web3 are the Wild, Wild West.
Most crypto exchanges have experienced at least one hacking incident since inception. *Knock on wood* FTX has yet to have any significant security outages.
SBF has been outspoken about the need for stricter regulations due to the sheer volume of scams in this space, and FTX’s only real involvement in any security breakdowns was when it provided $120M in debt funding to Japanese exchange “Liquid” after the latter suffered a hacker attack. FTX proceeded to acquire Liquid last month.
But security breakdowns are not the only dangers in financial markets. Occasionally, market infrastructure itself can be hit by stress tests, creating execution risk for your trades.
Recall the GameStop short squeeze of 2021. You may remember that Robinhood and several other exchanges briefly halted buy orders of GameStop and other “meme stocks”, infuriating countless traders. All sorts of conspiracy theories ensued, namely that exchanges were bailing out hedge funds.
However, the truth is less nefarious, but just as ridiculous: the exchanges were running out of money to cover these positions. Why?
On most US exchanges, stock trades are settled using the T+2 method. Basically, the trade isn’t “completed” until two days after it’s placed (hence, time +2). To the user, trades look instantaneous: if you buy GME, you instantly have GME in your portfolio. However, the trade hasn’t been closed yet on the broker’s side. They essentially “credit” you the stock while waiting for it to process through a clearinghouse. Functionally, that stock is an account receivable for two days.
In January 2021, billions of shares of GME were traded in a single day, meaning the same shares were changing hands multiple times. Robinhood and other brokers had to have collateral to cover these trades, but the volume spike and two-day settlement meant they needed collateral to cover individual shares several times over. This created a massive stress-test, and trading halts were needed to alleviate the liquidity crunch.
A similar squeeze in crypto markets could be disastrous for exchanges.
To mitigate this risk, FTX joined Copper’s off-exchange instant settlement network: ClearLoop. Copper is the only digital asset custodian that minimizes counterparty risk by enabling asset managers to trade their balance on-exchange, while storing their assets securely offline and off-exchange.
In Race Capital’s deal memo for FTX’s seed round, they highlighted that Sam Bankman-Fried loves trading:
Creating the world’s best exchange is as much chasing passion as it is a professional goal for SBF, and passion is one hell of a competitive advantage.
Bankman-Fried and Harrison have operated on both the trader and market maker side of investing, giving them a thorough understanding of what it takes to build efficient exchanges.
Do you really want to bet against the guys that built $32B and $8B companies in just three years?
One platform, one hundred different assets. That’s the goal of FTX US. If you can trade stocks, crypto, and derivatives on one platform, why would you ever use anything else? Humans are lazy, which makes all-in-one platforms powerful. Amazon and Apple have created trillion-dollar empires by building all-in-one solutions.
Once traders join what Mario Gabriele called “The Everything Exchange”, why would they leave?
This was the longest piece that we’ve ever written, sitting at ~6,800 words, and it still hardly scratched the surface. By focusing on FTX US, we weren’t able to discuss other cool stuff, such as FTX’s venture capital fund or their move into the fashion world:
Exciting life update! I'm thrilled to announce I have joined @FTX_Official and the visionary @SBF_FTX as Head of Fashion & Luxury Partnerships leading FTX's next chapter into the 300 billion dollar luxury market. markets.businessinsider.com/news/currencie… via @MktsInsider
— Lauren Remington Platt (@laurenremington)
Feb 23, 2022
However, we wanted to focus on what Brett and team are doing in the domestic markets.
FTX is one of the fastest growing companies of all time, and they won’t slow down until every tradable market in the world runs through them. Stocks, crypto, commodities, it doesn’t matter. FTX wants it all, and we are excited to watch them grow in real time.
If you enjoyed this piece and want to start trading on FTX US, click here to check out their mobile app. If you are using a desktop, make sure to use referral code "litquidity" 🤝
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