Thread by @jonwu_

For those wondering how FTX printed money out of thin air:

You have to understand what "low float, high FDV" means and why playing a market manipulation game with $FTT was key to this whole mess.

👇

SBF tweeted today that FTX has more assets than liabilities: that they're simply illiquid, not insolvent.

That’s the sound of a snake hissing.

Using "total market value of assets/collateral" to mean "realizable value" was the source of this whole fugazi to begin with.

Okay what do I mean by "low float / high FDV?"

Float is just "the amount of shares/tokens circulating"--there are such things as low float stocks in the public markets!

It just means there are a small number of shares in circulation, meaning the market for those shares is "illiquid."

The less liquidity, the easier it is to impact price.

An intuitive way to visualize this is to imagine order depth like a pile of sand, and the trader like a digger trying to dig out.

The digger’s ability to move the price of a given asset is governed by the size of the pile of sand and the size of its bucket.

Not a lot of buy/sell orders = low depth = small pile = easier to "dig out" and move the price.

High depth = bigger pile of sand = harder to dig out = harder to move price.

So "low float" just means "easier to move the price" or if you like, "easier to manipulate the price."

So what's "high FDV?"

Fully diluted value (FDV) is just the current share price multiplied by the number of shares there ultimately *will be* in circulation.

Total supply = shares available to the public + shares that insiders (FTX, Alameda, investors) hold.

The only price that matters therefore is the price of tokens *being traded.*

High market price implies high value for tokens held by insiders.

So when Sam says they've got a lot of asset value still on the books, he's just saying:

(today's price) * (the number of tokens we own)

>

(the hole in our customer deposits)

But he couldn't sell all those tokens even if he wanted to!

So the true realizable value of those assets is far, far lower.

So let's go back to $FTT.

FTX supported $FTT price in 2021 to the tune of ~$300 million / year in purchases.

But in exchange they got Alameda's collateral value of FTT to $5.8 billion (based on the @CoinDesk balance sheet).

So if you treat FTX + Alameda as one entity, then they're roughly paying a 5% cost of capital ($300m against $5.8b in collateral).

Even if you assume a big haircut of 50% or whatever, they're still only paying 10% on capital.

Which sounds like a lot!

Until you look at Alameda's ability to raise capital.

It pursued pretty non traditional counterparties, which included an insanely lenient underwriter in Voyager (who also did 3AC if that’s any indication of their credit standards).

blockworks.co/news/alameda-t…

In other words it’s not like Wall Street was looking at Alameda and going:

"Sure yes, we'll give you a multi billion dollar line of credit to

uhm

farm and dump illiquid shitcoin ponzis"

So looking at the two firms as one entity:

If the prop desk is hard-up for capital, having the sister exchange pay 1/3 of its revenue to secure financing ain't so bad!

That's why defending the $FTT $22 level seems to make sense in retrospect:

Pay a couple hundred mil to defend a multi-billion dollar source of capital.

If Alameda had $5.8 billion of $FTT on Nov 2nd at roughly $26, it controlled 223 million tokens (compared to ~133 million in circulation!).

So every $1 of $FTT price translates to a quarter billion dollars in implied value to borrow against.

But implied value != realizable value.

Anyone who's tried to sell NFTs in a falling market knows how painful it is to try to realize value in an illiquid asset:

The last floor trade was at 3 $ETH, so you try to unload three of your monkey pictures thinking you’ll get 9 $ETH.

You try to dump and the floor falls out on you, because there isn't enough liquidity to support price.

The floor was 3 $ETH a second ago.

Now it's 2, now it's 1, now it's 0.

The price of the last trade is just the price of the last trade.

None of the assets you own have value at the market price until you try to sell them.

What’s wild is Sam (probably?? Not even sure anymore) knows this better than anyone!

And at the end of the day no matter how much fake collateral you made up, you still had to lose $10 billion.

All of it is hardly believable.

Follow me @jonwu_ for more on markets, blockchain tech and a few choice low effort shitposts 🙏🏽