An in-depth analysis of FTX and Alameda's balance sheets

(This article is not based on any inside sources, but conclusions drawn from publicly available sources. Also, SBF has been a reputable player in the crypto space, so please do not be absolutely certain about the following. Given these two Entity's enormous size, this article may not describe the full extent of the situation.)

Let's start by unscrambling FTX.

The question is, how much cash does FTX have? We can assume that FTX has two main sources of cash. The first is the funds injected/raised, and the second is the profit or loss of the trading income.

According to CBinsights, FTX has raised a total of $1.8 billion - we can probably ignore the February 2020 round (around $15 million if I recall correctly) and angel funding, and round it up, FTX can be considered to have raised $1.9 billion.

In order to determine how much money FTX makes, we can look at their FTT burn - this shows that 1/3 of FTX's revenue will go to token burns. You can find the number and date of FTT burnt at https://ftx.com/ftt .

Matching these dates with the FTT price for that day and summing it up to today gives a figure of $466,507,567. This means that FTX has made approximately $1.4 billion.

Adding these two figures together, we can assume that FTX has at most $3.3 billion in cash reserves. Of course, we need to exclude their expenses, which I don't know.

Next, we look at Alameda. I copied their balance sheet based on information provided in an article .

Why should I record most of their liabilities as cash? That's because Alameda and 3AC are the lender's biggest borrowers

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If and only if Alameda is directional long cryptocurrency, then we have a problem. Because that's what their balance sheet would look like in a downturn. All locked assets will be revalued to zero, and their heavy balance sheets may have to be heavily discounted.

They have proven themselves to be smart market players. So where is the real problem?

Lenders are in deep trouble again... from miners. We know that BlockFi has been hit hard and may be insolvent.

Every lending institution may have exposure to mining companies. After all, miners are the most hungry consumers of credit and need to pay for their expensive upfront capital expenditures (machinery and electricity).

Core Scientific itself blew up a $300 million hole. If I were to calculate, lenders probably have at least a $1 billion shortfall in debt right now.

Let's talk about BlockFi in particular, because FTX saved them. We know that BlockFi has $60 million in exposure to Core Scientific. Overall, I estimate that they currently have a $200 million shortfall if all of their mining exposure defaults.

If so, will FTX back out of the deal? If BlockFi fails, will they get all their loans back?

There are so many moving parts in this story. But to be sure, Alameda's balance sheet has shown some degree of fragility. As the largest borrower, I would be concerned if my lender was also in a seemingly shaky position.

It is likely that net credit in this sector will contract as lenders try to reduce their own risk. Placing FTT as collateral probably won't work.

In my opinion, cryptocurrencies are already in adversity. Three-month US Treasuries are yielding over 4% and the "risk-free yield" of cryptocurrencies is less than 1-2%...if you put it on CEX, you are taking CEX c/p risk. If you put it on DeFi, you take smart contract risk.

Over the past few years, there has been a lot of dollars flowing into cryptocurrencies...because cryptocurrencies are yielding at least 10% and TradfFi is effectively 0%. However, this trend has completely reversed.

So we have two problems: 1. Dollars will flow into the real world; 2. Net credit in the crypto space will shrink.

All of this will create volatility in pricing and affect fragile balance sheets. Especially in illiquid tokens.

Personally, I think FTX would be fine as an exchange given the amount of cash raised (minus payouts and VC checks, etc.), but Alameda's balance sheet is a bit of a concern.

If there are entities running a business that competes with FTX, it's not out of the question that they might maximize the opportunity to take their rivals down when they're weak.

All in all, Alameda's balance sheet is a bit of a concern, as this article shows. Especially since they used FTT as collateral to borrow cryptocurrencies. Lenders could be screwed with their mining exposure. If they call in loans to restore liquidity, Alameda will take a hit.