The creator of the FTX exchange, Sam Bankman-Fried (SBF), seen as a visionary and a great trader in the cryptocurrency market, could be in serious trouble.

A recent leak on the financial situation of Alameda Research, the crypto hedge fund of SBF, analyzed by the Coindesk portal on Wednesday (2), shows how the entrepreneur’s different companies relate to each other in a business model that makes critics more industry fervents question the financial health of the SBF empire.

The report revealed that Alameda’s balance sheet is dominated by the FTX Token (FTT), the native currency of Bankman-Fried’s brokerage. Of the US$ 14.6 billion in total assets that make up the company’s balance sheet, US$ 5.8 billion are in FTT. There is even a further $292 million in “blocked FTT” among the company’s liabilities.

Because of this, Mike Burgersburg, the pseudonym of the investigator behind Dirty Bubble Media, was the first to ask if Alameda Research is insolvent. And he has a track record for having your questions taken into account: he was one of the first to expose Celsius’ unsustainable operations before it collapsed and brought a number of companies down with it.

In a publication this Friday (4), Burgersburg argues that Alameda Research’s finances appear to be based on a scheme similar to that of Celsius, heavily dependent on a single token controlled by the company itself – the FTT makes up approximately 1/3 of the balance sheet of the company. Alameda — and with little real use in the market.

“Alameda’s biggest asset is a token issued by another SBF company. […] It is almost as if SBF has found a way to hack the financial system, printing billions of dollars out of thin air, against which it has managed to borrow large sums from unknown counterparties. Almost as if he had discovered a perpetual motion financial machine,” criticizes Burgersburg.

steering wheel schematic

The researcher then traces how this was the same model that led to the downfall of Celsius, dubbed by him as the “flywheel schematic”.

How the “steering wheel scheme” works (Source: Dirty Bubble Media)

Illustrated in the graphic above, the structure of this scheme starts with a company creating a token in which it is the primary holder.

Then, the company enters a loop of making the price of that token go up to artificially inflate the company’s cash, attract new investors and reinvest the money to consolidate the brand in the market and keep the price of its token high.

This business model, in which the company is heavily dependent on its own token, is not sustainable in the long term, in Dirty Bubble Media’s view.

“The flywheel scheme is just another unsustainable financial engineering. As you increase the price of the token, it starts to cost more to keep the price high; people who own the token are increasingly incentivized to sell, forcing you to buy more tokens at higher prices. Eventually, you run out of money, own all existing tokens, or stop buying. Which you can’t do, because if you stop, everything falls apart.”

Is FTT the new CEL?

The critic argues that the high figures described in Alameda’s balance sheet in FTT “only generate wealth on paper”, given the lack of liquidity of these assets in the market in a possible event of sale.

This kind of problem was visible in the case of Celsius. Even with the company having large amounts of CEL on its balance sheet, this did not stop it from going bankrupt, as trying to liquidate these tokens to obtain funds would do more harm than good: massive selling would cause the asset’s price to plummet, hurting investors as well as the company itself.

“That’s the danger of controlling more than 90% of the total tokens in circulation when nobody wants to own them in the first place”, says Mike Burgersburg. For him, this is the situation that Alameda finds with FTT in its balance sheet.

The company currently has around $5.8 billion in FTT, which is equivalent to 180% of the total circulating supply of tokens on the market, according to CoinGecko data. On-chain data analyzed by Burgersburg confirms the concentration of FTT supply in a few hands, with just ten addresses holding 93% of the cryptocurrency supply.

Data from blockchain analytics firm Messari shows that there are only about 200 addresses that actively trade FTT.

“The only exception was on August 5, 2022, when suddenly about 10k addresses briefly became active (???). This further demonstrates the very small number of individual FTT holders, as well as the overall low demand for this token,” points out Burgersburg.

The author then compares FTT address activity with the Chainlink cryptocurrency (LINK), which has a similar market cap but is much more widely used.

Active FTT wallet activity (Source: Messari)
Active FTT wallet activity (Source: Messari)
LINK active wallet activity (Source: Messari)
LINK active wallet activity (Source: Messari)

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