As the FTX story gets weirder, wilder and worse for somewhere between 1 million and 1.5 million account holders who will never see their funds again, the emergence of another bizarre set of narratives has caught my eye. These are the fanciful stories being told in the shriller corners of social media, which now claims to have identified the dark forces behind this entire meltdown, which is now likely to emerge as the biggest fraud in history. 

Conspiracy theorists, often a misinformed but determined lot, and always impervious to the logic of Occam’s Razor have always been there, of course. But social media has provided them with an efficient new weapon. And they seem to be able to seed doubt everywhere, especially where there is a public demanding “the truth”.

Here then is the simple version, my version. We’ll get to the conspiracists shortly.

Sometime in early 2018, a young guy – smart, ambitious and technologically sophisticated – notices that there is a price differential between crypto prices on a US exchange and a Japanese exchange. So, he buys on one exchange and sells a moment later on the other exchange, bagging a few percent of risk-free profit. A few percent per trade, if you can trade multiple times a day, can accumulate into a nice pile very quickly.

If you leverage up, borrowing money to make your trades, it can, and did, produce billions for Sam Bankman-Fried in a very short time. Just a couple of years.

This is an age-old strategy called arbitrage, a dark art practised by the most sophisticated of traders. It usually produces returns in the tiny fractions of a percent per trade, and only for limited time periods until the opportunity vanishes.

This leads to two obvious questions. Why was the arbitrage spread so wide? And why weren’t Goldman Sachs and their ilk gorging on it?

The answer to both questions lies in the fact that in 2018 those crypto markets were both small enough to have been totally ignored by the big players. Also, the trading on the different new and immature markets had not yet normalised to a dependable global price. So, arbitrage was easy to spot, if you were looking relentlessly and continuously. And Sam Bankman-Fried – SBF as he is known – was not only doing that, but he also had the wind at his back. It was the years of a massive bull market. Not only did he win on the price difference, but he also saw his holdings rocket in value. In short order, he was worth tens of billions.

Nothing wrong or illegal or conspiratorial here. I assume that many readers wish they had been that smart.

And then the following set of events occurred.

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Firstly, SBF decided to build an exchange called FTX, launched in 2019, a sister company to the trading company that had made him rich, which was called Alameda. SBF had become quite famous for his Midas touch at this point, and people rushed to open accounts at his exchange.

Secondly, SBF brought in a small cadre of college friends to manage his growing kingdom. MIT grad and sometime girlfriend Caroline Ellison was tapped to be CEO of Alameda while SBF concentrated on FTX. They all hung out, lived together. There was sex and polyamory, there were drugs, there was, er, unorthodox risk management back at the office. Nothing really obviously illegal going on, at least in 2020/2021. They were simply having a never-ending frat party fuelled by unlimited money pouring in everywhere.

Thirdly, SBF and Ellison were connected, via family relationships, to multiple Democratic and liberal causes. Their parents were well known in these circles; they are top-drawer academics or respected social activists. So SBF/Ellison donated money to numerous liberal causes in which his creed believed. They also contributed to the coffers of their favourite politicians.

Nothing illegal or even particularly noteworthy there either. It happens on the right wing of politics as well. Rich people of every political persuasion spend money to advance their world-views.

Fourthly (and this is the big one), in early 2022, a series of calamities in other corners of the cryptoverse – (Terra Luna, Celsius, Three Arrows Capital and others) – caused prices to crater all over the cryptomarket. Suddenly, Alameda and FTX were staring into the maw of something that they had never seen.

A bear market.

Which meant that loans and other financial entanglements with many connected institutions started sinking under water, endangering the entire SBF empire (which was more than 100 companies). So, quite simply, SBF started “borrowing” money from his FTX account holders to prop up increasing losses at Alameda.

Stealing, in other words.

He continued spreading cash around, hobnobbing with politicians and celebrities and regulators, even as he must have known it was all unwinding. And here is the nub – no one knew he had been stealing until it was uncovered a few weeks ago. It went unnoticed for a long time, perhaps as much as a year. The projects and politicians that were being supported had continued to accept his money, being none the wiser about the source of funds.  

Here is where the conspiracists come to life, like a Frankenstein’s monster. Soros, Pelosi, Biden, Zelensky, Zuckerberg, Mossad, Gensler, the Deep State, the Democratic National Committee, the banking-industrial complex. All of these have starring parts in various conspiracy theories. They must have known, don’t you see? Reading the conspiracies presented with such smug certainty on social media is like a lesson in the temptations of misinformation and unchallenged logic.

It is much more exciting to believe in cabals plotting the subjugation of the rest of us from their covens in the Hamptons and the gilded boardrooms of Wall Street than to settle for the much more boring tale of simple mismanagement and theft.

I have got into several spats over this with friends over the past week. I am accused of being naïve and worse. But no. The chronology above is the most likely, the simplest and the most obvious. To contemplate some of the theories being bandied about is to imagine the collaboration and silence of perhaps hundreds of conspirators. Conspiracies do not work well with more than a few players, as was clear from Watergate, where even a president couldn’t control the leaks from just a handful of people.

As always (thank you King Occam), the shortest route to an explanation is usually the right one. DM