Reading Infinite Storm: The FTX Scandal, A Misunderstood Genius?

#624

GM,

First, let me announce some good news. Last week, I received a notification from the Ethereum Foundation that I have been selected for the Devcon Scholar Program. This program selects 100 builders from thousands of applications worldwide, providing funding for airfare, accommodation, or tickets, bringing people together for the annual Ethereum Developers Conference (Devcon). This year's event will be held in November in Bangkok, Thailand.

I am fortunate to be selected, and I owe this opportunity to the support of my subscribers, which has allowed me to continue writing, gain international recognition, and bring back first-hand experiences. I am not sure if I am the first Taiwanese to be selected for the Devcon Scholar Program, but since I couldn't find any related experiences shared online, I will not only participate in the event but also document my experiences for those who might want to apply in the future.

Additionally, last week's book giveaway results are out. Congratulations to the following two lucky winners who will receive the book "Read Write Own":

• kj.**************@gmail.com

• eme**********@taiwanmobile.com

I would also like to recommend the special edition NFT generative art card that comes with the book from Books.com.tw—it’s quite a good value. Finally, I invite everyone to vote with their spare change on Giveth to support Blocktrend in securing matching donations. The current matching ratio is 1:121, which means the platform amplifies your donation by 121 times. Now, let’s get to the main topic.

This article discusses the newly released book "Infinite Storm: The Rise and Fall of the FTX Empire," which hit the shelves on August 1st. Let me start by sharing my emotional changes. I consider myself more familiar than most with what happened at the FTX exchange, after all, I was directly involved. So, my first reaction upon seeing this book was, is there really anything I don’t know?

A few days later, I finally opened the manuscript the publisher had sent me. Originally, I thought it might help me sleep, but it had the opposite effect—I couldn’t put it down. I kept reading until 3 a.m., and it almost became the first book I’d ever read in one sitting.

The main culprit behind my sleepless night is the book’s author, Michael Lewis. His storytelling skills are incredibly captivating, which is no surprise considering he’s a globally renowned financial bestselling author. The movie rights were snapped up by Apple for $5 million long before, so it might hit the big screen in the future.

However, since the original version of this book was released in 2023, it has sparked ongoing controversy online. If you search for the English title, Going Infinite, you’ll find that more than half of the reviews are less than positive. Many believe the book is essentially an attempt to whitewash FTX founder SBF, with some even questioning whether Michael Lewis was bribed. Even Michael himself began to have doubts, wondering if he might have been wrong.

Michael Lewis

Michael is a financial writer with a background on Wall Street. After graduating from the London School of Economics in 1984, he joined the investment bank Salomon Brothers as a bond trader. In just three years, Michael went from a financial rookie to a millionaire “success story,” but he chose to resign and write a book that exposed Wall Street's profit equation.

Infinite Storm Author: Michael Lewis / Image Source

Michael’s first book, Liar’s Poker: Rising Through the Wreckage on Wall Street, became an instant global bestseller upon its release and is considered a classic for understanding the financial industry of the 1980s. He then went on to write The Big Short, set against the backdrop of the 2008 global financial crisis, and Flash Boys, which is often referred to as the "bible" for understanding high-frequency trading. Movies like The Blind Side, Moneyball, and The Big Short were also adapted from his works. It’s not an exaggeration to say that Michael is one of the most influential financial writers of our time.

This time, with cryptocurrency as the theme, Michael naturally attracted worldwide attention. However, he wasn’t particularly interested in cryptocurrency himself; his entry into the crypto world was prompted by a request from Brad, the protagonist of Flash Boys.

In September 2021, the crypto market was at the peak of its last bull run. FTX Exchange was the hottest name in the market, with many eager to invest, fearing they might miss out on the next financial revolution. Brad was one of them. Despite his extensive network, no one on Wall Street seemed to know who SBF was. So, Brad asked Michael, known for his keen insights, to find out if SBF was truly reliable.

According to Michael, his first impression of SBF was that of a disheveled nerd who looked like he had just crawled out of a dumpster, and his shorts made it seem like he was ready for a hike at any moment. 😂

After chatting with SBF, Michael felt that his manner of speaking didn’t match his appearance, and he was also curious about how FTX had grown so rapidly. So, Michael asked SBF if he could observe his daily work up close. Initially, Michael just wanted to use this opportunity to learn more about cryptocurrency, but he unexpectedly became part of history. Michael closely observed SBF for an entire year, starting in 2021. He was still in FTX's luxury Bahamas mansion, living under the same roof as SBF, when the company collapsed in 2022. Michael even witnessed SBF signing the legal documents that declared FTX’s bankruptcy.

I believe it’s because of Michael’s unique perspective that he was able to write a work so vastly different from the public’s perception. What impressed me the most was the story of “the money wasn’t lost; it was just missing.” It turns out that there were early signs of FTX's collapse.

Your money is not gone

Imagine you open your phone and find that the price of buying BTC with New Taiwan Dollars (TWD) is 20% higher than buying it with US Dollars (USD). What would you do?

The most intuitive reaction would be to avoid buying BTC with TWD in the future and switch to USD to avoid overpaying. However, those with a business mindset would see an arbitrage opportunity behind this price difference. First, you could "import" the cheaper BTC with USD, then sell it at a higher price in TWD. Afterward, you could convert the TWD back to USD, securing a steady 20% profit margin. This was the business model of Alameda Research, the first company SBF founded after leaving Wall Street.

The company’s name sounded professional, but the profit method was quite simple. In December 2017, the South Korean market experienced what was known as the “Kimchi Premium.” As South Koreans rushed to buy cryptocurrencies, the price of BTC in Korean Won (KRW) became 20% higher than in USD. Alameda Research initially intended to capitalize on this arbitrage opportunity, but they soon discovered that South Koreans had to file additional reports if they wanted to sell more than $10,000 worth of KRW. Successful arbitrage depends on the "velocity" of money, but the South Korean government was blocking the flow.

However, Alameda Research quickly discovered that the price difference for Ripple (XRP) was even larger than for BTC. The difference between buying XRP with KRW and USD reached 25%. They devised a way to bypass the South Korean government’s restrictions. The logic was simple: a large profit with a small loss still results in a profit. Alameda Research would first buy XRP with USD, then transfer it to South Korea and exchange it for KRW at a 25% premium. Since the KRW would be blocked by the government, they would then buy BTC at a 20% premium and transfer it back to the US to convert it back to USD. This completed the cycle.

Because the premium on XRP was as high as 25%, even buying BTC later at a 20% premium wouldn’t result in a loss. Although the profit margin was smaller, the entire process didn’t require any reporting to the South Korean government. The whole cycle took just a few seconds, earning a 5% profit each time. As a result, Alameda Research used the hundreds of millions of dollars from investors for arbitrage, even automating the process with bots to "print money" 24 hours, making the company very happy.

But one day, Alameda Research discovered that $4 million was missing from their accounts. The company halted operations for two weeks, trying to figure out where the problem was. What if the money kept disappearing?

However, SBF insisted that the bots only moved assets between two exchanges: one in South Korea and one in the United States. The money wasn’t gone; it was just missing. It was like how after doing laundry, people often find that one sock is missing. You know the sock isn’t gone; it’s just temporarily lost somewhere in the house. Using his rational mind, SBF calculated that there was an 80% chance the money would eventually reappear. Therefore, SBF argued that they should assume the company still held 80% of the funds, or $3.2 million, and urged everyone to get back to work so they wouldn’t waste the opportunity to make money.

At the time, the team members at Alameda Research thought SBF’s explanation was absurd, and many employees left, unwilling to work with someone like him. Investors also pulled back. But in the end, SBF was proven right. The missing $4 million in XRP was indeed stuck in a South Korean exchange; it simply hadn’t been accounted for in FTX’s records. In hindsight, both the investors and the employees who left had wronged SBF. But the money and the people would never return, leaving only the employees who stayed to continue following SBF.

There’s a saying in Taiwanese: "Steal gourds when you're young, steal cattle when you're grown," which aptly describes SBF. The reason FTX collapsed in 2022 was due to the lessons not learned in 2017.

The FTX Scandal

FTX was essentially a magnified version of Alameda Research. Looking back from 2024, the FTX exchange has recovered as much as $16.3 billion in assets, not only enough to fully repay the $11.2 billion owed to creditors but also with excess funds to cover interest payments. Judging by the numbers, I believe it’s highly likely that FTX had the financial resources to handle user withdrawals at the time; they just couldn’t "find the money" immediately and were forced to file for bankruptcy under immense pressure.

But does this mean that FTX was blameless and that SBF should be acquitted? I think not. Ultimately, both incidents were due to poor team management, and there was no proper oversight of the accounts. The first time, when SBF invoked probability theory, the team already wasn’t buying it. The second time, when SBF manipulated user assets, no one was willing to listen to his bizarre mathematical logic. Managing money with the same carelessness as managing socks—it's no surprise things went wrong.

I wonder, after reading this, do you feel that the author of Infinite Storm, Michael Lewis, is trying to whitewash SBF? The book filled in gaps behind the news that I didn’t know before. For example, I didn’t know that when SBF was being interviewed by reporters, he was actually playing video games on his screen. I also didn’t know that his mind was full of probability calculations, and his life philosophy was about seeking the highest expected value, simplifying everything into a probability figure. This is why he could keep pushing forward despite the adversities.

The Trolley Problem / Image Source

Throughout the entire book, I could hardly sense any warmth or empathy from him. The famous philosophical dilemma—the Trolley Problem—highlights that social issues cannot be reduced to mere calculations, or else the trolley would always run over the fewer number of people. After reading the entire book, I gained a more nuanced understanding of SBF. He’s far from being a misunderstood genius; rather, he’s an exchange operator who lacks humanity and is severely deficient in socialization.

Blocktrend is an independent media platform sustained by reader subscription fees. If you find Blocktrend's articles valuable, we welcome you to share this piece. You can also join discussions on our member-created Discord or collect the Writing NFT to include this article in your Web3 records.

Furthermore, please consider recommending Blocktrend to your friends and family. If you successfully refer a friend who subscribes, you'll receive a complimentary one-month extension of your membership. You can find past issues in the article list. As readers often inquire about referral codes, I have compiled them on a dedicated page for your convenience. Feel free to make use of them.