FTX with Sam Bankman-Fried & Mario Gabriele (Extended Cut)

1. 0:00 – 0:38

   Intro

   1. MGMario Gabriele0:00

      I don't know if it matters, FYI, but, um, I just checked, and technically, the number that's, uh, of employees when I wrote the piece was 82.

   2. BGBen Gilbert0:09

      Eighty?

   3. MGMario Gabriele0:09

      I said 75. I mean, it's kind of like whatever, but-

   4. BGBen Gilbert0:12

      When you started your research, it was probably 75.

   5. MGMario Gabriele0:14

      Exactly.

   6. BGBen Gilbert0:14

      Yeah. [chuckles]

   7. MGMario Gabriele0:15

      [chuckles] They hired seven between publication one and two.

   8. BGBen Gilbert0:18

      [chuckles] I believe that.

   9. SPSpeaker0:21

      Who got the truth? [upbeat music] Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down, say it straight. Another story on the way. Who got the truth?

2. 0:38 – 6:52

   FTX’s meteoric growth, brand splash, and why this story matters

   1. BGBen Gilbert0:38

      Welcome to season nine, episode seven of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs, and our venture fund, PSL Ventures.

   2. DRDavid Rosenthal0:52

      And I'm David Rosenthal, and I am an angel investor based in San Francisco.

   3. BGBen Gilbert0:59

      And we are your hosts. Today, we are telling the story of the crypto trading exchange, FTX, started just two and a half years ago, and today, worth over $25 billion. They're by far the fastest-growing crypto exchange. In the research, I found that they grew an astonishing 10X by volume in the year 2020. I went to look if they repeated that unbelievable feat in 2021 and found out that they actually 10X'd just in the first half of 2021. [chuckles]

   4. DRDavid Rosenthal1:29

      So the answer is no, they didn't. They doubled it. [chuckles]

   5. BGBen Gilbert1:32

      [chuckles] Unbelievable! So the pace is accelerating for FTX. We're still waiting on end-of-year numbers, but this company is, is just astonishing. So FTX is now the sponsor of the Miami Heat's basketball arena, FTX Arena, and you can see their logo on every Major League Baseball umpire's uniform. You can see Tom Brady and Gisele in FTX commercials. It's wild. So what is going on here, and how did they get so big, so fast? W- and what's with these huge brand deals? Today, we're gonna tell the story with the CEO and founder, Sam Bankman-Fried. Sam is a genius, an effective altruist, and he's also the wealthiest person under 30 in the world, with an estimated net worth of nearly $9 billion. And we are trying something new at Acquired. We have a guest host here with us today. We've brought in Mario Gabriele from The Generalist to team up for this episode. Welcome, Mario.

   6. MGMario Gabriele2:28

      Thank you guys so much for having me. I'm, uh, quite honored to get to be the first.

   7. BGBen Gilbert2:32

      [chuckles] You bet. Listeners, if you haven't read it yet, Mario did a three-part epic series on FTX over at The Generalist, and I, I think it's safe to say, Mario, you are truly a world expert on this company after writing, I think, 36,000 words.

   8. MGMario Gabriele2:49

      Yeah, it was a, it was a long one, or, or a long series. Brevity is never really my strong suit, but, uh, I really let myself sort of fly on this one, and as you sort of said, there's just so much to talk about, uh, that, uh, it always leaves you wanting to do a little bit more on it.

   9. BGBen Gilbert3:06

      I think that's why, uh, us, and you, and Packy get along so well. [chuckles]

   10. DRDavid Rosenthal3:10

       We are all birds of a feather.

   11. MGMario Gabriele3:11

       Yes, that's right. [chuckles]

   12. BGBen Gilbert3:12

       [chuckles]

   13. MGMario Gabriele3:12

       All go along.

   14. BGBen Gilbert3:14

       So before we get in, is it right to say, Mario, do you know, this- is this company only 200 employees, and I think maybe started the year at, like, a f- a few dozen employees?

   15. MGMario Gabriele3:24

       Yeah, that's right. Um, I think it is, you know, just pushing 200, and when I sort of wrote my pieces in, in summer, uh, it was closer to, I wanna say, 70, 75. Um, so they're growing extremely fast, but still, when you look at the output, uh, the leverage on each individual person is, is astonishing.

   16. DRDavid Rosenthal3:47

       All right, well, before we dive in, I would like to welcome our presenting sponsor for all of Season 9, Pilot.com. Pilot is the backbone of the modern financial stack for startups. They themselves are backed by all-star investors like Sequoia, Index, Bezos Expeditions, and Stripe, and they are truly the gold standard for startup bookkeeping. Now over to our conversation with Pilot co-founders, Waseem Daher and Jessica McKellar. All right, so we've talked a lot now about how Pilot works technically, and the combination of humans, and software, and Iron Man suits for your finance professionals. What does your actual tech stack look like, and what types of technical talent are you looking to recruit to come join the team at Pilot?

   17. SPSpeaker4:32

       Pilot has a really stacked engineering team, and that's because what we're doing is quite difficult. So how do you build the right systems to scalably deliver high-quality books and other financial services to a wide range of customers in a wide range of circumstances? That's actually a really nuanced set of systems design and technical challenges that require a lot of finesse from people who are very, very good at what they do. So as a consequence, we've really assembled quite the team to pursue this. I've spent basically my entire adult life quite rooted in the Python community, and that's served us well [chuckles] for bringing together a great team with that expertise and that ecosystem. But I think the thing I would emphasize is the sophisticated systems that we're building, sort of the workflow and systems design, is where there's a lot of finesse, and we've really built the right team to do that.

   18. DRDavid Rosenthal5:31

       You can learn more about Pilot, and whether they can help your company eliminate the pain of tax prep and bookkeeping by going to pilot.com/acquired. And thanks to Waseem and Jessica, all Acquired listeners, if you use that link, you will get 20% off your first six months of service. Thank you, Waseem and Jessica, and everybody at Pilot.

   19. BGBen Gilbert5:51

       ... Thanks, Pilot. All right, listeners, we're gonna dive in here. Please know, and, and maybe even more than usually when we tell you this, but this is not investment advice. We, we may have investments in the things, the, the projects, the tokens, the companies that we discuss. Uh, this show is for informational and entertainment purposes only. Mario, I think, uh, we wanna make sure that, that we say this and, and cover you as well, that you may, uh, you may have interests in things discussed, and, uh, do your own research. With that, on to our interview with Sam Bankman-Fried. Sam Bankman-Fried, welcome to Acquired.

   20. SBSam Bankman-Fried6:28

       Thanks for having me!

   21. BGBen Gilbert6:30

       Well, it is, uh, it is our pleasure and our privilege to really, uh, get to have you tell the story of FTX today, of Alameda Research, how this whole crazy thing came to be, and, and really help us analyze the, um, the crypto assets ecosystem today.

   22. SBSam Bankman-Fried6:49

       It's, it's a crazy world.

   23. BGBen Gilbert6:51

       [laughs]

3. 6:52 – 11:02

   SBF’s first crypto insight: spotting massive arbitrage spreads in 2017

   1. BGBen Gilbert6:52

      Well, the first question I have for you is, how, how did this all get started? Like, take us to the moment where you became crypto-curious, uh, for, for lack of a better term, or maybe a tongue-in-cheek term, and, uh, and how you started digging in on all this.

   2. SBSam Bankman-Fried7:07

      Yeah, so the first thing I did-- I can actually step-by-step go through it, 'cause it's a pretty simple process. Um, I went to coinmarketcap.com. Um, I clicked on Bitcoin, and then I clicked on Markets. That was my first investigation, and, you know, and I guess I'll, I'll do that right now to see what it, what it shows today, 'cause I think it's gonna be an interesting contrast. So, so if you do that t-today, right, it's gonna show you a bunch of markets for Bitcoin. And just sort of looking across the prices here, um, I... It's not-- the data here is not perfect. Like, they don't understand Tether's pricing extremely well. But sort of the range of numbers that I'm seeing, with a few exceptions that we can get to, is, um, you know, 48,280 at the low end, and 48,320 at the high end. Um, and so that's like a, you know what, a 10-basis-point difference, I think, between sort of like the low end and high end of pricing of a Bitcoin across major cryptocurrency exchanges. Um, and that's, like, about typical today. You know, if you're thinking, like, "Is there an arbitrage in Bitcoin?" The answer is, like, uh, maybe, sort of. I mean, it's 10 basis... You're gonna be paying a few basis points fees on both sides, right? So a-a-and, and this data, it's, like, it's not perfect. It isn't perfectly synchronized. They're not pricing Tether quite right. So, so, so really the answer is, like, eh, you know, kind of borderline, right? Whether there, there's an arbitra- and if so, it's a couple basis points.

   3. BGBen Gilbert8:38

      And when you went to CoinMarketCap way back when and, and looked, was your intention, "Hey, is there an arbitrage here? Does there- is there a large spread?"

   4. SBSam Bankman-Fried8:45

      Yeah, it's basically what I was looking for. Um, and, and basically, like, there's just an incredibly simple calculation you can do to get some sense of maybe kind of, sort of what one could maybe do, if for some reason everything was easy and all the data was right. And it's sweeping a lot under the rug, but, but it gives you an upper bound on how much you could make doing arbitrage, right? And, and what is that bound? Well, you take the, the difference in pricing between major exchanges, right? That's, like, the amount maybe you could make on each trade. Um, you multiply it by the daily trading volume across those exchanges, and then you say, I don't know, maybe it'll be a percent of volume. You know? I don't know, sort of making that up. Again, this isn't meant to be precise. It's just meant to be like, y-you know, let, let, let's, like, ballpark what we could be looking at here. And back then... So daily trading volume was only, like, a few billion dollars, I think.

   5. BGBen Gilbert9:37

      And what year is this?

   6. SBSam Bankman-Fried9:38

      This is late 2017. Um, so it's a lot less than today. Um, um, the spread between the exchanges was about 5% to 10%-

   7. BGBen Gilbert9:48

      Wow!

   8. SBSam Bankman-Fried9:49

      ... was what you saw. So it, it was about 1,000 times bigger than the spread today.

   9. BGBen Gilbert9:53

      [laughs]

   10. SBSam Bankman-Fried9:54

       Um, that's a big difference.

   11. DRDavid Rosenthal9:55

       And was that even across major exchanges, not even going esoteric?

   12. SBSam Bankman-Fried9:59

       Coinbase to Bitstamp was usually, like, 1% or 2%. And, and that's not even looking at, like, Bitfinex or anything based on Tether or Japan or Korea or anything like that, right, which would sometimes get in the 20s of percents. Um, so, so, okay, what's this number say, right? You have, like, some number of percent, I don't know, let's say 2% maybe you could make, times a few billion, times, uh, 1% of volume, right? So 1% of volume is 20 million, I don't know, dollars of volume or something like that. Make 2% on that, um, I think that's, like, 200 grand. Is it... And, and, and so okay, that's an estimate for how much money maybe you could make per day doing arbitrage. Um, and that's a lot of money to make each day, you know? Like, like, I sort of saw that and was like, "Oh, wow!" Like, I, I mean, again, I don't know, right? This, this all might be fake, but, but if, if, if it's not fake, that's, that's pretty compelling. And that was enough for me to, like, go create some accounts on exchanges and, and try and do it and see what happened.

4. 11:02 – 20:25

   From Jane Street to ‘I have to do this now’: leaving trad-fi for experimentation

   1. DRDavid Rosenthal11:02

      Sam, do you remember where you were when you, like, first looked at that CoinMarketCap page and, like, sort of the sensation of recognizing opportunity there?

   2. SBSam Bankman-Fried11:13

      Yeah, I, I, I was in California. Um, I, I moved to California shortly after leaving Jane Street. Um, and I sort of looked through it, and it was... It was very hard for me to do anything but immediately go try to do that. Like, it's one of these things where you see it, and sort of the way I've been trained to think was, it was painful every day you don't do that. Like, you see a great trade in front of you, and you're not doing it, and that should be painful. Like, there should be a negative feedback there somewhere, which is like, "Why are you not doing that thing right now," right? "Why are you missing this opportunity?" And, and, and so it's just like, I just need to fucking do this right now. [laughs]

   3. DRDavid Rosenthal11:49

      [laughs] To set some context, you, you said Jane Street. You, you were a trader at Jane Street Capital-

   4. SBSam Bankman-Fried11:54

      Yep

   5. DRDavid Rosenthal11:54

      ... which is one of the top quantitative hedge funds in the world. The-... so that, that two hundred thousand dollar a day potential arbitrage opportunity in Bitcoin, how did that compare to the best trades you saw in traditional markets at, at Jane Street?

   6. SBSam Bankman-Fried12:10

      So it's interesting, and without going into, you know, detail about IP-sensitive things here, I guess what I'll say is like, first of all, how much volume did Jane Street trade per day? I don't know if there's a public number here, but I can tell you that, like, equity markets trade some number of hundreds of billions of dollars per day, maybe a trillion per day, depending on how you count, right? And, like, Jane Street's one of the big players in it. It's not... I, I would guess it's not the biggest by volume, generally like a, a true HFT firm would be. But okay, so that can get you a sense of, like, the volume numbers that you'd be talking about there would be way bigger, right, than the volume numbers that we're seeing. I mean, maybe if you traded a hundred percent of crypto volume, but, but you're not gonna do that, right? Um, on the other hand, if you can make one basis point on a trade in traditional finance, that's a good trade. No, no firm would be like, "Ugh, you're only making a bip on it? Why bother?" Uh, if you're doing-- if you can get it done in a day or something, right? Like, if this isn't, like, a, you know, year-long holding position, right? If, if, if you could just, like, say, like, "Yeah, here's, like, a shorter timescale trade, and you're gonna make a basis point," like, yeah, go do that trade. That sounds great. You know, if you can do it big, do it big. That sounds pretty good. We're happy with that. Maybe you could make two basis points. That'd be even better. Three? Wow! You know, ten basis points, come talk to us if it's big, because we wanna make sure you're not missing something about it. That's a lot of basis points to make on a trade.

   7. DRDavid Rosenthal13:30

      And you're looking at ten to twenty percent here. [chuckles]

   8. SBSam Bankman-Fried13:32

      Right. It, it just blew it out of the water. And so it's... You know, I don't wanna say this would have made, like, a lot of money compared to the total amount of money that a top trading firm would make. Like, that, that would be i, I, I- I would not believe that statement. But I do think that, like, in terms of percentages, I'd never seen anything like it before. It's just like one percent. I don't know that I'd ever done a trade good by one percent before in my life- [chuckles] ... on anything. You know, I think like maybe I had in some weird, tiny illiquid shit, which I was like: "Holy shit, guys, this trade is good by one percent!" They're like: "Yeah, it's thirty-eight dollars. Congrats, Sam." [chuckles]

   9. DRDavid Rosenthal14:07

      [chuckles]

   10. SBSam Bankman-Fried14:07

       Um, so yeah, the, the, the, the side- the, like, spreads here were just, like, unheard of, if true. But of course, maybe they weren't true. You know, maybe it's all fake data, I don't know, or at least I didn't know then.

   11. BGBen Gilbert14:19

       So you had, you had left Jane Street, and you went to California. W- was, was it like the classic, "I don't wanna be a trader. I'm leaving this world. I'm thinking about what I'm doing next," but you got pulled back in because the opportunity was just so unignorable?

   12. SBSam Bankman-Fried14:34

       Only sort of. Um, I really, really loved my job at Jane Street. I really enjoyed it. It was a good fit for me, and they were also just really good to me there, and to most of their employees. Like, it was a good place to be. And it suffered from basically none of the problems that you generally hear about on Wall Street. I think many places do suffer from those problems. It mostly didn't. Um, so I was, I was super happy there. Um, it was more that I, I sort of sat down and thought about what I want to do with my life and felt like, I don't know what the answer is, but, uh, there are a lot of things I have to try before I die. Like, there are a lot of things that I want to, to give a shot at, right? And see, like... I, I just think they're extremely high upside. I don't know how good they'll be, but, like, I just listed ten, I'm like, "Oh, boy, there are ten compelling things. Probably one of them's gonna be great."

   13. DRDavid Rosenthal15:26

       What was on that list?

   14. SBSam Bankman-Fried15:28

       So it was a pretty diverse list, and, like, examples of things on that list: politics, like, going into politics is one of them. Becoming a journalist was one of them. Uh, working at a nonprofit was one of them. Just bumming around the Bay Area and seeing what happened was one of them. Trying to found some startup, I don't know what, was one of them. Um, and I-- like, I really didn't... Like, fundraising for nonprofits was one of them. Like, I, I didn't feel very confident about which direction to go in, so I, I kind of felt compelled in a lot of different, conflicting ways.

   15. DRDavid Rosenthal16:02

       So it's kind of impossible from the outside, uh, looking at you and this story, not to make the analogy to thirty years earlier, [chuckles] Jeff Bezos, and Mario made that analogy in his great pieces. Um, were you thinking about that story? Like, uh, how does that resonate to you? And of course, you know, Jeff leaving D. E. Shaw, you know, quantitative trading hedge fund to-- 'cause he saw the huge opportunity of the Internet, and was like: "I don't know what I'm gonna do on the Internet, but I'm gonna do something." Wrote the business plan on the way out to Cal- uh, uh, to Seattle, ultimately.

   16. SBSam Bankman-Fried16:31

       So I didn't know that story at the time. I think it probably would have resonated with me, had I known it. Um, but all of those stories are things that I didn't dig into until more recently. Um, but I, I, I think there are a lot of parallels there.

   17. BGBen Gilbert16:45

       At the time that you looked at CoinMarketCap, like, how much knowledge did you have about Bitcoin in general? Like, had you been introduced to the white paper? Were your some of your friends, you know, talking about it?

   18. SBSam Bankman-Fried16:58

       I'm trying to decide whether nothing is the right answer. It might be. I'm not sure if it's quite the right answer. I'm not sure it's not the right answer, but it's pretty close to that. Like, if you asked me: "What is a Bitcoin?" I would not have been able to give you an answer, other than a thing that trades on some exchanges and decentralization.

   19. BGBen Gilbert17:17

       [chuckles]

   20. SBSam Bankman-Fried17:17

       I, I don't know. Like, right, like, it, I-

   21. BGBen Gilbert17:18

       It's kind of better than everyone else at the moment, a lot of the time. [chuckles]

   22. SBSam Bankman-Fried17:22

       Maybe, right? I got one word further. But [chuckles] I, I, I couldn't have described a blockchain, I guess, because, uh, like, you know, they, they chain the blocks with the transactions in them, you know? I didn't realize who "they" was. I don't know, the blockchain does it. Like, like, I, I really didn't know what, what, what crypto was when I first jumped in.

   23. BGBen Gilbert17:40

       It's a fascinating way to come to it, 'cause there's so many other folks... I mean, I can remember in 2012 or 2013, seeing Brian Armstrong at, uh, South by Southwest and getting obsessed with the notion of decentralization, but totally coming from the product manager, developer side, never having experience in finance. And the fact that it was a tradable asset was the part that was the completely foreign thing to me all these years later. So, uh, uh, it's, it's fascinating to me how technologists see the core technology, people from the finance world see the core, uh, change in the financial asset, and this crazy soup that we're in is because those two things are merging.

   24. SBSam Bankman-Fried18:18

       ... I think that's right, and one thing which we really try to maintain as a company is that people understand both of those sides. I mean, I did not before. I do now understand what a blockchain is. Um, but, you know, we want our business development team to understand what a blockchain is and how it works, and we want our developer team to understand what a trade is and how it works. And I think it's really hard to make good decisions if you don't know that. There are so many times when, like-- I'll give you an example, right? Like, we wanna list a new asset, and we have to think about, like, risk parameters for it, right? And we have to think about, like, is there some interplay between blockchain confirmation times and initial margin, right? And it's just, like, to even know whether there is interplay between those, whether that is a thing you have to think about, you have to have some instinct on both sides, right? You have to be able to tell me it takes about five minutes to send something on a blockchain, and that number could get up to five hours during congested periods, is like a fact you need to be able to, like, just have, like, at your disposal. And you also have to know, like, we care about movements on the order of a few percent for risk purposes, and we don't credit people for margin purposes until it lands. So we're not usually pre-crediting, but maybe for some blockchains we want to, right? And we have to, to some extent, right? Like, I say we don't pre-credit, but how many confirmations do we require for Bitcoin? It's not infinity. And, and, and so anyway, I think the answer is mostly there isn't a lot of interplay between those two things, but I think it's really hard to know there isn't inter- interplay unless you can sort of go through that thought process on both sides, and, like, at least kinda, like, be able to know what to think about and how to ballpark it.

   25. BGBen Gilbert20:07

       Well, I wanna take us back chronologically. Y- you talked about looking-- you know, you pull up CoinMarketCap, you think maybe there's an opportunity to make two hundred thousand dollars a day. Y- you end up finding a trade that makes about twenty million dollars a day. H- how did that transformation happen, and how long was that opportunity available?

5. 20:25 – 24:46

   Building Alameda Research: the Japan (and Korea) arbitrage and early scrappiness

   1. SBSam Bankman-Fried20:25

      Basically, the biggest trade we found, the best trade we found was the Japan arb. Um, so Korean Bitcoins were trading ten to fifty percent above American Bitcoins, and lots of people said: "Well, why don't you buy American Bitcoins and sell them in Korea?" And the answer is, the Korean won is a restricted currency. You can't get the Korean won out of Korea. You can't sell it for dollars easily. So you could buy, you know, a ten-thousand-dollar Bitcoin, sell it for thirteen thousand dollars in Korea of Korean won. Now, you have Korean won on a Korean exchange, and the only thing you can do with it is buy a Bitcoin back for thirteen thousand dollars. [chuckles] Right? I'm, I'm being a little bit glib. Like, there's some things maybe you can do, but, like, you couldn't fundamentally just do that trade. Um, nearby, though, uh, Japanese Bitcoins were trading five to twenty percent higher than American Bitcoins. Still quite a bit, and the Japanese yen is-- it's not a restricted currency. Um, in theory, you could buy an American Bitcoin, send it to Japan, sell it twenty percent higher, turn the yen back into dollars, wire it back to America, and you've just made a bunch of percent. Um, and, uh, and so anyway, we tried to get set up to do that, and it was incredibly logistically complex to do so, uh, but around the start of twenty eighteen, we finally were able to turn it on.

   2. SPSpeaker21:43

      Sam, when you say we, who, who's in the room there at this point?

   3. SBSam Bankman-Fried21:47

      Twenty-ish people who we, like, cobbled together at the last moment. Um, myself, some high school and college friends of mine, some people from the Effective Altruism community, some people who are friends of friends of friends. Like, it-- we, I mean, we'd only existed for, like, a month or two and, you know, had been sort of frantically trying to put together something that looked like a team. So it was, it was very sort of ad hoc.

   4. SPSpeaker22:10

      And this is all ba-- uh, out in the Bay Area, right?

   5. SBSam Bankman-Fried22:12

      Yeah, that's right. And what was the scale of it? Well, in theory, if one had infinite capital, one could have made ten percent on a few hundred million dollars a day, maybe. So I think twenty million was the size of this trade. Now, we did not have a few hundred million dollars of capital at the time, which is very frustrating. [laughing]

   6. SPSpeaker22:32

      [laughing]

   7. SBSam Bankman-Fried22:32

      We still made, like, a million dollars a day from it during that period, so it was still a fantastic trade. Like, it was amazing. But, uh, meantime, we were doing everything we could do to scale up our capital base because we were just like, "Look, we can just, like, print insane..." Like, what's the APY of this? It's a number that doesn't even sound real. Like, I don't even wanna say it because it- it's like, it's, uh, like, you hear that number, you're like: "Oh, yeah, Ponzi scheme. That's what you said, right?" Um, so I, I... And unfortunately, we basically scaled up capital base the day that the arb went away. Um, and so we failed to really ever get to the, to the point where we could have gotten with it, but it's still an amazing trade for the three or four weeks that both, like, we were active and it was alive.

   8. BGBen Gilbert23:16

      And so the we at this point is Alameda Research. This all predates FTX.

   9. SBSam Bankman-Fried23:21

      That's right. That's right.

   10. SPSpeaker23:23

       And are you thinking you guys are gonna build a crypto quantitative trading firm at this point? Or, or are you not even thinking, you're just like, "I wanna take advantage of this opportunity?"

   11. SBSam Bankman-Fried23:35

       We were thinking that. And, you know, while doing that trade, we were doing a lot of other trades, much smaller. And our vision was, look, this probably won't be the last good trade ever. We should build, uh, you know, a firm here, right? What- whatever that means, right? We want to be scaling up so that we can continue to take, uh, you know, basically continue to... Like, like, what was fundamentally happening here? Incredible amounts of customer excitement about crypto, right? Huge, huge buying and selling pressure, usually buying pressure, but some of each, in, in different exchanges and jurisdictions and tokens all over the place, and v- very little liquidity. None of the institutional liquidity providers were in this space. So, like, yeah, when Japan was buying four hundred million dollars a day of crypto-... there was no firm set up to, like, be able to provide that liquidity. And so there's this, like, giant mismatch of liquidity demanded, liquidity supplied, that was creating gigantic spreads. Um, customers were getting terrible prices, and there was a pretty big opportunity to come in and provide on both sides of that. And this, you know, the Japan arb was just one example of that.

6. 24:46 – 29:35

   Capital constraints, fundraising friction, and competing with the ICO era’s ‘returns’

   1. MGMario Gabriele24:46

      Before you guys r- ramped up on the LP side, were you guys just running your own money into this?

   2. SBSam Bankman-Fried24:53

      Yeah, it's a good question, and, um, basically, yeah. So it was, you know, money we cobbled together, like, I don't know, I had a little left over. I mean, you know, we, we cobbled together a few million dollars. Um, and, um, and, and then, you know, sort of like iterated on that capital base over time, although without ever taking external, like, e- equity or anything like that.

   3. BGBen Gilbert25:21

      Without naming names, 'cause I'm sure you can't, do you have any fun meetings of what it was like to walk into a, [chuckles] a, a pitch? Like, any m- memory that sticks in your mind, where you're trying to raise capital and you're describing the trade that you're making? [chuckles]

   4. SBSam Bankman-Fried25:33

      Yeah, so people were really excited hearing it, but they're also like- they had all these questions, right? And, and like, the question just keep coming of like, "How do you handle A, and B, and C, and D, and E, and like, risk, and custody, and things like that?" And, I mean, we're trying to answer them, right? We're trying to be like, "Well, you know, we like-- Here's what..." But, but, like, what's the honest answer, right? Where, where are we really actually coming from? Is like, I don't know, we just fucking started this company two months ago, and we're trying to scale up extremely quickly. Like, I-- we don't have great answers to some of your questions, right? Like, we-- you know, what's your policy on X? We haven't written a policy on X. We've been around for two months, and we've been desperately [chuckles] trying to get a bank account the whole time.

   5. BGBen Gilbert26:19

      [chuckles]

   6. SBSam Bankman-Fried26:19

      Um, so, like, definitely there are a lot of people who are like, "I'm super excited, um, to this. Can you show me your audits?" [laughing] And we're like, "Literally, no crypto company has ever gotten audited before, of any type, and we've been around for two months. Obviously, we don't have an audit."

   7. MGMario Gabriele26:34

      Yeah.

   8. SBSam Bankman-Fried26:34

      Like, we talked to some auditors, they told us to go fuck our ourselves, right? So, like, we can't audit you. Are you insane?

   9. MGMario Gabriele26:39

      [chuckles]

   10. SBSam Bankman-Fried26:40

       So, i- i- like, that, that was, that was a lot of the, the pain of doing it, was just like, people were like, "You know, provide us some reasonable assurances that every other investment we've ever made has been able to provide us." And we're like: Oh, boy, that sounds hard. And so that was definitely, like, some of what was going on there. Um, and then I think that, like, you know, other things that were going on, you know, basically, were, uh, well... you know, we're trying to do what we can to kind of like, you know, optimize this opportunity. But this was a period in crypto when a lot of people made a lot of money, right? We weren't the only ones who thought that we had a pretty good opportunity. So how do you compare a quantitative trading firm to, for instance, um, someone who had just issued a token, and then it went up a lot, right? And they're like, "Well, our returns are three trillion, billion percent," right? And it's, like, a little bit of a silly comparison, but it's not, like, completely, obviously, a stupid comparison. Like, it- it's a little bit complicated to think about what the right way to think about that is. And, you know, the real honest answer, i- was, you know, this stuff's all complicated. Like, no-- there's no clear right answer sometimes. And, uh, and so we're simultaneously, like, fighting for capital versus a lot of firms like that. And, you know, frankly, people who invested in tokens made a lot of money in... Well, sometimes, and it depends when you mark to and from. But those are probably the two biggest things that I think, like, came up during our conversations.

   11. BGBen Gilbert28:14

       And you're referring to the fact that you're doing all this, like, just after the ICO boom. So there was a lot of people that were sort of inventing securities, not securities, out of nothing, and then those would go up rapidly. It could also go down rapidly.

   12. SBSam Bankman-Fried28:28

       Yeah, that's right. Um, and it was really just a- after as-- It was sort of at the tail end of the ICO boom. The ICO boom had not actually quite ended yet, as of then.

   13. MGMario Gabriele28:42

       And, and LPs are essentially looking at it as, like, just high-risk capital, and so, you know, the opportunity to earn a tr- a trillion, billion percent versus ten percent, like, you know, they're sort of trying to weigh those two things in a category that they think, "Ah, what the hell? It's high risk anyway."

   14. SBSam Bankman-Fried28:59

       Uh, yeah, that's sort of right. And we fell in a little bit of an awkward in-between, frankly, where, like, on the one hand, we were high risk in that, like, who the fuck are these people?

   15. BGBen Gilbert29:12

       And it has the word crypto in it, so it's-

   16. SBSam Bankman-Fried29:13

       And it has the word crypto in it. But we're also like, "Well, we're low risk. We're doing arbitrage," you know? And those are in a firm exactly for extremely risky, low-risk investments that make a fair bit of return, but less than extremely risky ones do. Like, it's sort of like... it, it was trying to appeal to a non-existent niche, and that definitely made it harder.

7. 29:35 – 34:31

   Why start FTX: exchanges printing money, and a futures market run by ‘shit shows’

   1. BGBen Gilbert29:35

      Okay, so why start FTX? Y- you've got this quant crypto trading firm, it's going well with Alameda. You're finally landing some, some, um, some big institutional capital to, you know, have, have real AUM here that you can, uh, make interesting money with, uh, so you decide to start a futures exchange?

   2. SBSam Bankman-Fried29:56

      Right. So I guess there are a few things going on there. And the first is, frankly, um, when you do the math, like, in order to really scale up to where it needed to go, um, Alameda would have needed, and it did eventually succeed in this, but to actually get a substantially bigger capital base than it had. Um, if you look at, I mean, the amount that we're paying on capital, combined with, like, just a bunch of other sort of difficulties there. Um, the bigger thing, though, was-... I mean, one cool thing about crypto is it's very transparent from some perspectives. It's very easy to see how much are the exchanges making, as an example, right? That is basically public. Um, and I-- it's basically public, and it's also big. Like, really big. [chuckles] Um, and, you know, to give some sort of, like, sense of what that means, like, how big is big, um, well, again, it's all public. You can do, you can do the math. This is circa late twenty-eighteen. Um, well, they were transacting how much per day? You know, globally, five to ten billion dollars. What were their fees? They were making, like, four basis points on average on that, right? Um, and, uh, all right, you can sort of do the math there, actually, right? Like, that's a few million dollars a day that they're making. It's a billion dollars a year of revenue. Um, it's a lot of revenue, and the core business model of an exchange from some sort of, like, really simplistic perspective is very simple. Um, now, I want to note this is really a reductionist perspective that I did not ultimately think w- really reflected reality, but the core business model is you have a matching engine, right? And you let people submit bids and offers to it, and that, that, that's, that's, that's the model.

   3. DRDavid Rosenthal32:05

      That, call it billion-dollar run rate revenue for the industry, which obviously was growing super fast, too. Very har-- high margin revenue. That's software revenue.

   4. SBSam Bankman-Fried32:16

      High margin revenue, and we kinda pretty deeply understood what product one would need to make, right? If you wanna do this, what you need to do, the answer is like: Oh, no, actually, we-- that's pretty straightforward. We could do that.

   5. BGBen Gilbert32:27

      And for all of our listeners out there who are not familiar with, like, the trading world, I'm gonna make a way oversimplified, uh, [chuckles] comparison here. But imagine running, uh, Airbnb or Uber, but you don't actually have the hard part of any humans or any cars or any Airbnbs. Y- you just have pure matching of supply to demand of a purely digital asset. So your costs are, you know, your variable costs are near zero? Zero?

   6. SBSam Bankman-Fried32:55

      Yeah. I mean, it's sort of very near zero. W- It's a definitional issue, right? Like, maker rebates, is that a variable cost, or that just decreases your revenue? Whatever, but it's basically near zero. Um, and, um, and, and so we sort of felt like, Look, we've been using these products. We understand it. It's a big business, but okay, fine, whatever. I understand Amazon, sort of. It's making a lot of money. I'm not like, obviously, we'll be... I'm just starting Amazon 2.0 tomorrow.

   7. DRDavid Rosenthal33:20

      [laughing]

   8. SBSam Bankman-Fried33:20

      We're gonna sell socks. Bet they haven't thought of that one. [laughing]

   9. BGBen Gilbert33:24

      [laughing]

   10. SBSam Bankman-Fried33:24

       Right? Like, so there-- what was the other thing? The other thing was that, in theory, I think an exchange is a much more complex business than what I described. In practice, exchanges circa twenty eighteen were not, and they-- there's a lot of other things you might think you would have to do as an exchange, and you'd mostly be right that you have to do them, but they-- that doesn't mean people did do them. [chuckles]

   11. DRDavid Rosenthal33:51

       We're not that far removed from the Mt. Gox era at this point, right?

   12. SBSam Bankman-Fried33:55

       We're not, and you think back to that, and you're like: Well, okay, obviously, you can beat Mt. Gox by just not losing everyone's money. [laughing]

   13. BGBen Gilbert34:01

       [laughing]

   14. DRDavid Rosenthal34:01

       It's a killer feature.

   15. SBSam Bankman-Fried34:03

       It really is, right? Like, and, and, and okay, that's being a little-- but, but what were the killer features back in twenty eighteen? They weren't like... I mean, in some senses, they weren't that much harder than just don't lose everyone's money. Um, and, i- i- like, okay, how much-- the, the biggest exchange at the time was bleeding each day, um, about, uh, a million dollars of customer assets to a risk engine that didn't work.

8. 34:31 – 41:10

   The liquidation/risk-engine failure that punished winners (and why it was unacceptable)

   1. BGBen Gilbert34:31

      Whoa! Can you explain what that means?

   2. SBSam Bankman-Fried34:34

      So let's say that you have futures on a platform, as one does, right? Um, and, you know, so people are taking leverage positions on these futures, and, I... you know, someone-- they, they put on a leverage position, and it doesn't go so well. They kinda start losing to it, right? Um, okay, so far, nothing sort of, like, all that exciting has happened. Um, markets start moving against their position. They're three X long, and they put on a five hundred million dollar position, 'cause people do that sometimes, right? Um, and then markets go down fifty percent. Now, all of a sudden, their account is worth how much? They lost two hundred and fifty million dollars, and their beginning account equity was, uh, uh, like, a, a hundred, what, like, a hundred and seventy million dollars or something. So, like, negative eighty million dollars of account value right now. Who-- what does that mean for them to have a negative account?

   3. DRDavid Rosenthal35:36

      [chuckles] Who holds that bag, right?

   4. SBSam Bankman-Fried35:39

      Right, exactly. You can call them up and ask for eighty million dollars, and they'll say, "Ha, ha, no."

   5. BGBen Gilbert35:43

      So are they basically not liquidating people's positions fast enough when the market starts to turn against the leverage bet they're making?

   6. SBSam Bankman-Fried35:51

      That's exactly right. That is exactly what they were messing up, and they were messing this up extremely consistently. Like, it wasn't just like, Oh, yeah, you know, something weird happened that day, and they didn't quite get their liquidations done in time. That's sad. It was like: Yeah, it's Tuesday. I guess they lost eight hundred and twenty-three thousand dollars today. Oh, that wasn't so bad. Wednesday was worse.

   7. BGBen Gilbert36:15

      And this is okay because they're making so much money, so, like, if this were purely what was happening to their cash flow, then th- they would be out of business immediately. But they're making so much money that, like, they're just running super inefficiently because they have this problem, right?

   8. SBSam Bankman-Fried36:28

      That's basically right. And so they were-- Well, okay, it's actually worse than that.... So sorry, you, you, you made an assumption there. Can you, can you walk through that assumption? I don't know if you realize you made an assumption there.

   9. BGBen Gilbert36:40

      My assumption is if they're taking three to four basis points of everybody's trade, then they have this nice fat revenue stream that they can afford to make these screw-ups and not liquidate people out of their positions fast enough.

   10. SBSam Bankman-Fried36:50

       You're making a more fundamental assumption.

   11. MGMario Gabriele36:52

       Is the assumption that Ben's making that the exchanges are covering the losses?

   12. SBSam Bankman-Fried36:57

       Yeah, that was the assumption. [laughing]

   13. MGMario Gabriele36:59

       'Cause they're not, right?

   14. SBSam Bankman-Fried37:01

       They're, they're not. So okay, but that's weird because, again, the person's not gonna pay up. So what's going on then, right? Like, who is covering the losses? The answer is the customers.

   15. MGMario Gabriele37:15

       Hmm.

   16. SBSam Bankman-Fried37:16

       So-

   17. MGMario Gabriele37:17

       Hmm

   18. SBSam Bankman-Fried37:17

       ... each week, they would email the customers and be like, "Congrats! You got eighty-three percent of your P&L this week. The other seventeen percent went to bail out people who are underwater."

   19. BGBen Gilbert37:29

       Whoa. [laughing] Oh.

   20. MGMario Gabriele37:30

       [laughing] Oh.

   21. SBSam Bankman-Fried37:30

       And that was just happening every week.

   22. BGBen Gilbert37:32

       Wow.

   23. SBSam Bankman-Fried37:32

       It's like, yeah, you know, you'd average whatever, some, some eighty something percent of your positive P&L. Um, if you lost money, of course, you'd owe all of that, right? Unless you lost more than all of your money, in which case you couldn't owe more than all of that.

   24. MGMario Gabriele37:44

       You got bailed out. [chuckles]

   25. SBSam Bankman-Fried37:45

       Right. So that's what was happening, and that was not good.

   26. BGBen Gilbert37:49

       And since Alameda was a customer of these other exchanges, you were, like, getting these emails, and you're like, "Wait a minute."

   27. SBSam Bankman-Fried37:54

       Oh, yeah. I mean, we saw this firsthand. Like, we just saw it happening in real time, and it was not-- it wasn't fun. That's not how I would describe it.

   28. BGBen Gilbert38:03

       [laughing]

   29. MGMario Gabriele38:04

       And at this point, Sam, like, it feels like if I'm, if I'm not wrong, the futures market is particularly uncompetitive. Like, I remember talking to Chris McCann at Raise Capital and talking through how they thought about investing in FTX's seed round as like spot and futures are almost equivalent in market size, but there are much less competitive, uh, players and much less robust exchanges when it comes to futures. Was that something that you guys thought about at the time?

   30. SBSam Bankman-Fried38:35

       Absolutely. There's, like, basically just a, a couple players who are the entire futures ecosystem.
9. 41:10 – 46:35

   Crypto’s simplified market structure: why the exchange layer mattered most

   1. SBSam Bankman-Fried41:10

      but I-- but it's just an incredibly important part of the sector, which was not done well. And I think that's maybe another thing worth emphasizing. Why in exchange, right? Like, I started by, like, like, sort of just implicit, without saying why to all of this, is that, like, the thing we were looking at was an exchange. Why an exchange, right? Why not, like, a custody firm or, like, a, I don't know, broker-dealer or-

   2. BGBen Gilbert41:35

      Right, there's lots of other players in this potential value chain here.

   3. SBSam Bankman-Fried41:38

      Right. And, and so why exchange? The answer, I think, basically, which I think is sort of interesting, is that there actually weren't a lot of other players in this value chain. Um, and that's one of the bigger differences, um, between, you know, what we see in crypto and I think what we see in, in most financial ecosystems, where usually, um, you know, by the time, like, from start to finish, um, how many people are involved in an average equities trade? Um, it's, it's a, it's a, it's a pretty big number, in fact.

   4. MGMario Gabriele42:23

      As we learned with the whole Robinhood, [chuckles] you know, situation.

   5. SBSam Bankman-Fried42:27

      As we learned with that thing, right? Like, what actually happened in the Robinhood situation, if you sort of trace it through well, they-... they're, they're, they're a broker-dealer, I guess. They have a mobile app that then goes to some PFOF firms. Separately, there's, like, the clearing, the settlement of that, then they go to an ATS, which goes to another PFOF firm.

   6. BGBen Gilbert42:46

      Yeah.

   7. SBSam Bankman-Fried42:46

      Stock loan. Yeah, I guess there's a third-party stock loan desk involved somewhere here, probably, right? Um, you start going through this and you're like, "Oh, wow, there are twelve firms," right? Because you have buy side and sell side. And then someone's like: Well, okay, was this trade fully funded? W-what do you mean this trade? Technically, there were twelve trades involved in the one trade, right? Like, i-it wasn't like... It's just like, isn't actually the case that, like, one trade is even really the right way to think about it.

   8. BGBen Gilbert43:17

      So is the thought that if you're starting the exchange, then you can sort of take on more and more players on each side and basically turn it all into one transaction, instead of this gigantic mess?

   9. SBSam Bankman-Fried43:27

      And in fact, that is how most crypto exchanges work. How they worked then and how they work today, is if you look at the traditional crypto exchange, right, um, who is actually involved in it from start to finish? Well, there's the buyer, there's the seller, there's the exchange. That's actually it.

   10. BGBen Gilbert43:48

       Oh, I see. So the point you're making is, because this is a whole brand-new system, there's actually not all this cruft of all the players involved in every transaction, so you kind of can't be anything but an exchange.

   11. SBSam Bankman-Fried43:58

       That's right, and that, that sort of is how-- I mean, crypto happens to evolve that, that way. I'm not necessarily saying it needs to have, but it did.

   12. BGBen Gilbert44:09

       Well, it certainly seems like the more-- the purest form of making a market.

   13. SBSam Bankman-Fried44:13

       I think that's right. I think it's probably the right way to have evolved, um, is like my honest guess. Like, I think there's just like, uh, yeah, there are a lot of advantages of that system, you know? And, and, a-and, you know, I think you start to ask, like, which of the intermediaries in the traditional system were providing large value? And you come out saying like, "Oh, ooh!"

   14. BGBen Gilbert44:32

       [laughing]

   15. SBSam Bankman-Fried44:32

       You know? Like, maybe, maybe one of them was. It's not, not totally clear. Maybe zero, I don't know. So, so I, I think it makes a lot of sense as a system. Um, and, uh, and I don't think it's a coincidence that, that ended up there, but because it did, the exchange is the important piece. It's just like, there's no ambiguity about that. Um, and so if you're gonna, you know, if you're going to do something in crypto, you were gonna do it at the exchange level, on the infrastructure side. That's just like, you know, that's where the, the value was.

   16. BGBen Gilbert45:08

       And, of course, at this point in time, if I have my history right, I think the whole even idea of a DEX, of a decentralized exchange, didn't even exist yet, right?

   17. SBSam Bankman-Fried45:18

       That's, like, basically right. I mean, I think it did technically exist, but it, it just wasn't really much of a developed thing.

   18. BGBen Gilbert45:26

       Certainly, Serum wasn't around, 'cause that would be years later by you guys. Uniswap hadn't started yet in V1. Yeah.

   19. SBSam Bankman-Fried45:33

       Yeah, that's exactly right.

   20. BGBen Gilbert45:35

       All right, listeners, for our second sponsor of this episode is someone that I used to help prepare for this episode: PitchBook Data. I was reading through, uh, FTX's PitchBook page to look at really, like, these astonishing rounds that have come together, not just because of how fast it's grown in, in valuation and investment raise, but the unbelievable sea of investors, uh, that, that invested in this company. And, um, just wanna say thank you to PitchBook for providing a product that was, as always, super, super helpful in doing the research for what we do here at Acquired for this episode, and very likely what you do in your job as well. Whether you're raising money as a founder, whether you're a venture capitalist, whether you're in PE, whether you're in M&A, it's pretty likely that if you're listening to this show, um, you may now, currently or at some point in the future, have use for PitchBook and their three point one million companies in their database. Uh, I'm a satisfied customer, and, uh, I know, I know David and, uh, uh, and Mario have both used and, and enjoyed

10. 46:35 – 55:41

    Fundraising for FTX: a more legible business and a perfect market opening

    1. BGBen Gilbert46:35

       the platform as well. So, um, if you wanna check it out, you can click the link in the show notes, pitchbook.com/acquired. Thank you so much to PitchBook. Going back to the story here a little bit, so I've got a list in front of me of, that I, I pulled up from PitchBook, of the original investors in FTX, and this is a nutso list. I mean, BlackRock, IVP, Sequoia Capital, uh, who else here? SoftBank, uh, Race Capital... You just have, like, an unbelievable list here. E- uh, Binance. Like, there's, I don't know, thirty firms, and all of them, it's like the who's who. So your fundraise, once you decide, "Oh, we're starting a company called FTX, and it's an exchange for crypto derivative products," this seems to go ve- very well, very quickly, as opposed to Alameda, which seemed like kind of a grind to get off the ground.

    2. SBSam Bankman-Fried47:29

       Why is that? So I think there are a lot of things that went into it. I think, eventually, the story that convinced us that FTX would be exciting convinced a lot of people. I think that, like, it, it just, it passed diligence. Like, the more diligence you did on it, the more it seemed like: Oh, that kinda checks out. Like, we're kinda like: Look, the existing exchanges have serious issues, and people looked into it like: Yeah, okay. We've talked to a lot of people who use them, we kind of agree. Um, like, I think we have compelling reasons to be able to do better at things. I think that there's maybe a more general thing going on here of like, you know, uh... Like, it's not like they messed up a few specific things, but were great otherwise. They were sort of indicative of, like, you know, execution ability. Um, a-a-and I think that, like, um, I think some people also just made a lot of money and peaced out. You know, they're like, "Yeah, we're not gonna-- Why would we try hard now, you know?" Um, I, I, I think that, that, that's maybe a piece of it, too, but, um, I-- w-which, which helped. I think the other things were that it's a much more legible company, right? Like, when you talk about, like, recurring revenue, like, there sort of, like, doesn't exist a clearer example.... of that, than like, you know, I don't know, we have volume each day, and we charge a transaction fee on it, right? It's incredibly clean, right? People are like: "Is this revenue real?" Yeah, it's like, I don't know. It's all public.

    3. DRDavid Rosenthal48:56

       Versus the story of like, "Hey, this arbitrage opportunity exists, and we're gonna keep doing it, and it may or may not be there tomorrow. And if it's not, we'll find others."

    4. BGBen Gilbert49:04

       Right. In theory, that, that actually goes away over time. The, the, the more interesting-- the, the more apparent this opportunity becomes, the less money you can make, whereas in this one, it scales beautifully. The more money you can make, the, the, the bigger you get.

    5. SBSam Bankman-Fried49:17

       Totally. I think I tend to be more-- to find some things more credible than other people do sometimes, um, and, and, and tend to believe a little bit more that, like, you know, things might be great, even if it's not provable or something like that. Um, but I-- but, but whatever. Like, it... You know, for, for whatever reason, that sort of was the case. And so, uh, so y- yeah, it just was a more legible, um, product, and it was, uh, you know, from that perspective, sort of a nice one.

    6. MGMario Gabriele49:54

       And Sam, isn't it, like, almost exactly around the same time as you guys announced your seed round, that Arthur Hayes, CEO of BitMEX, which is, I think, the biggest player at that point, is, like, getting into real trouble with the, the CFTC? So if there's ever a sign that, like, there is an opening here, it really seems to all be happening in mid to early July of twenty nineteen.

    7. SBSam Bankman-Fried50:18

       Yeah. You know, I, I think some of this was coming from the perspective of, you know, "Oh, wow!" Coincidentally, a lot of cool, like, good things happened for us. Who would've thought? I think some of it is also, like, [exhales] a lot of hypotheses about ways that, like, product differentiation would happen in the exchange space, sort of started playing out, right? We're sort of like: "Look, this is a big problem that some people have. We think it's gonna get worse over time." And then, like, I don't know, it sort of started happening. And, and, and I think that, like... An, an important backdrop for this, which I think is worth noting, is like, how, like, how high of a, of, of service standard do we need to hold ourselves to? The answer is incredibly high because we're coming from behind. Like, we don't have a user base, right? We don't have a brand name. Like, we are coming from a perspective of everyone knows our competitors, and no one knows us. And just being about as good is just not worth anything, right? Like, it's just like, you know, whatever. Uh, you know, okay, you're about as good as the other people, like, that, that's not, that's not a, a com-- that's not gonna cause someone to change what they're using.

    8. DRDavid Rosenthal51:35

       [chuckles] Right. They suck, so if you suck, too, [chuckles] I'm gonna keep using the devil I know.

    9. SBSam Bankman-Fried51:41

       I- it's exactly right. And, and so I think that, like, you know, the bar that we need to hold ourselves to was something more like, um, like, like, you know, look, we're actually going to do enough better that, like, people might care about us. And, a- and so I think that, that, that sort of starting to see that differentiation was, like, pretty important.

    10. BGBen Gilbert52:06

        And Sam, what were the things you were really intentional about as you realized: "Okay, we're gonna build a company, an enduring institution here, an operating company with FTX"? 'Cause it seems like the crew that you got together for Alameda, it was like, there's this crazy opportunity. We have to go exploit it. Go, go, go. We'll probably exploit more opportunities in the future. But now, suddenly, you're realizing you're building a company that's gonna become a key piece of infrastructure in this n- next paradigm. So what did you have to be super intentional about?

    11. SBSam Bankman-Fried52:37

        I think maybe splitting this up into two things. One of which is, like, internally, what did we have to be intentional about? And another of which is, like, from a communication perspective, um, what did we have to be intentional about? I think one thing both those trace down to is a long-term plan, right? The plan not just being, "I don't know. We'll do the best thing at every point in time. Ask me in ten seconds, I'll tell you what that is in ten seconds. I can't tell you what that is now, 'cause the world might change," right? Which is honestly, sometimes how we think about things, that the world does change, and you have to adapt. Um, but starting to think about, like, okay, no, let- let's, like... Let's try and understand where this could be going, and what we could do now to prepare for that, and how we can communicate that to our audience, to investors, to regulators, to users, to the company internally. And so I think that, that's probably the single thing that we've gotten, you know, the most sort of increasingly intentional about.

    12. MGMario Gabriele53:39

        You know, one of the things that, uh, Ben pulled up was the sort of analog to Bezos. Uh, it feels like there was also sign of-- kind of a case of the Amazon AWS first best customer principle here, where, you know, you were building this exchange, and you also kinda knew that Alameda could, could really benefit from having something like this in the ecosystem.

    13. SBSam Bankman-Fried54:02

        Yeah, I think that, that having a built-in example of, like, you know... We are quite confident that this is going to be a product with demand because, like, we've wanted this product for a while. Like, this isn't sort of like some hypothetical, like, maybe someone would want it, type thing. This is like a, like, Jesus, is it here yet? type thing.

    14. DRDavid Rosenthal54:27

        And is the killer feature, I'm, I'm assuming, is it literally just as straightforward as like: Look, with the crappy platforms out there today, I get net eighty-three percent of my profits. We're gonna get you much closer to one hundred percent of your profits.

    15. SBSam Bankman-Fried54:43

        So that was the most compelling thing at the time. Um, but there were-- I, I mean, one of them was like, we'll have an actual compliance department.... and we'll engage with regulators in a productive way. Um, one of them is, like, you know, our deposits and withdrawals will hopefully work most of the time. We'll get banking. Um, you know, one of these is, uh, we will innovate, like, we'll build new products, we'll explore other product areas and see if we can integrate it into the system. Um, we'll be able to find a way to, um, you know, build cool things in the United States, as well as outside of it. Um, there, there's sort of eventually a lot of things that end up becoming pretty relevant here, but I think the most legible thing and the most, like, egregious thing at the time, was this sort of like, eighty-three percent of profits thing, where it's just like, okay, like, that, that has- like, that, that will change. That has to change. Like, there's no way that that's how the world's gonna remain.

11. 55:41 – 1:04:05

    Geography and regulation: building outside the US, then creating FTX US

    1. BGBen Gilbert55:41

       It is worth noting, 'cause you just brought up this in the United States and outside the United States, for our half of listeners that are in the US, you'll note that the thing you can use, and I can use, FTX US, i- is not a derivatives platform. It's, it's just to trade the underlying assets, and it's a very, very simplified version of the complex platform that, um, that y'all have built, Sam, at, at FTX. Can you talk a little bit about, like, your realization of th- that early on, that actually, international is kind of the addressable opportunity for now, and how you structured the company to be able to go after that?

    2. SBSam Bankman-Fried56:16

       I, I guess I should also just explicitly flag that my thoughts on this have, to some extent, changed over time. That, that, that I think my thoughts have become, you know, a bit more nuanced, and I think that I was a little too skeptical of the US opportunities when we first started.

    3. DRDavid Rosenthal56:35

       We should also note, too, that we're gonna have to [chuckles] talk about it in a minute. Uh, thank you for being with us, because you testified in front of Congress yesterday. [laughing]

    4. SBSam Bankman-Fried56:42

       [laughing]

    5. DRDavid Rosenthal56:42

       So we really appreciate, A, your testimony, and B, you being here with us.

    6. SBSam Bankman-Fried56:47

       Well, thank you.

    7. BGBen Gilbert56:48

       I wanted you to rock back up in the suit, Sam.

    8. DRDavid Rosenthal56:50

       Yeah. [chuckles]

    9. SBSam Bankman-Fried56:51

       I know, right? No, that one's gone for good.

    10. DRDavid Rosenthal56:53

        [laughing]

    11. SBSam Bankman-Fried56:54

        Um, I thought about-- I actually thought about leaving it... My brother lives in DC, I thought about just leave- like, leaving it at h- his house there. [laughing] Right? And-

    12. BGBen Gilbert57:01

        'Cause you're gonna be back?

    13. SBSam Bankman-Fried57:03

        Right, when's the next time I'm gonna wear it, right?

    14. DRDavid Rosenthal57:04

        [laughing]

    15. SBSam Bankman-Fried57:04

        Like, probably DC. But, um, thinking about this for me, like, you know, this is a limited time opportunity, potentially. Like, what is the fastest way to get something compelling here? If you look at the US crypto ecosystem, um, the product that is relatively clean, at least today, to get off the ground, um, is a spot Bitcoin USD orderable, right? And, uh, the thing about that is that it's, it's clean, but it's, it's not super compelling as a product. Um, it's, uh, uh, like, a lot of people have that product, and it's, i- it's hard- [coughs] innovation is harder with it, because just the, I don't know, the core product sort of is what it is to a, to a, to a greater extent. Um, and, you know, a lot of it is customer acquisition, which we didn't know how to... Like, how- that, that was our, our, our weakest point, right? Was like, we're going from- we're coming from zero on that side. So, you know, w- we were-- that, that was sort of, like, not the most compelling thing to start with. If you want to build something more, right? If you want to build the, the sort of like, products that there is really demand for and where most of the volume was trading at this point, um, those were, those were the derivatives. And it's a really long process to launch those in the United States. It takes probably five years from, from the start. And so, you know, what's the opportunity? The opportunity is, is elsewhere, to start, uh, at least it was, you know, as, as of when we started. And so, you know, we started by not servicing Americans, um, and I, you know, 'cause it just had a really long regulatory, uh, regime.

    16. BGBen Gilbert59:05

        And so you lived in San Francisco, and then at some point, you didn't. W- where did you-- did you have to move to launch that product? Did everyone else have to move? How'd that work?

    17. SBSam Bankman-Fried59:15

        More or less, yeah. And so I moved, uh, right when, you know, when we launched that, I moved to Hong Kong. Um, or I, I moved really when, when we started building it out, I guess. And, uh, so this is late 2018 at this point, and we launched spring 2019. Um, and, uh, and so, you know, we built it out from Hong Kong and, and, uh, at least that's, that's where sort of I was at the time, and, and, and then launched.

    18. BGBen Gilbert59:44

        Do I have it right, you're in the Bahamas now?

    19. SBSam Bankman-Fried59:47

        That's right.

    20. BGBen Gilbert59:48

        Okay.

    21. DRDavid Rosenthal59:49

        What was your mental state [chuckles] like, like, that's a big... You know, and you mentioned in the things that you were ha- gonna have to do, you knew to build this out. You know, regulatory was the first thing you mentioned. Um, you were signing yourse- you, you were signing yourself to, up to completely change your life, right? Like, completely. Uh, that was a big decision. [chuckles]

    22. SBSam Bankman-Fried1:00:07

        Yeah. It, it, it happened sort of iteratively, bit by bit, but it felt like the right thing to do, I guess. And, y- you know, I, I guess in the end, I sort of have felt, and, and continue to feel like this is the most important thing I'm gonna do, and whatever I can do to make this go well is what matters to me. And so it never felt like... I don't even know that choices is exactly the word I would use to describe how it felt. It just felt like the thing that I- It's more like, "Yeah, that's the thing I'll, I'll do here," you know? And, uh, and, and so that's what I did.

    23. BGBen Gilbert1:00:50

        I've heard you say in the past that, you know, you can't take zero risk, and, and I, I always think that's an interesting point because-... Y- everything has some amount of risk associated with it, otherwise, you're just sitting in your chair doing absolutely nothing. And not only is there no economic opportunity, but you're also not gonna live your life or build anything. And so I th- I think it's interesting how y- you've decided to live your life in this way, that y- you're saying, "Look, we don't know the regulations yet, so, like, I- I'm not doing anything currently wrong. I don't know what the future holds. We are doing our absolute best to do all of the know-your-customer and all of the anti-money laundering requirements we possibly can. We're getting as many licenses at as many places as we can, and also, we're brand new and doing something in a brand-new ecosystem." And I think it's a, a-- it's, it's really, uh... As I've been preparing for this episode, it's really sort of, uh, uh, brought me to this perspective of, actually, everything in life is a risk-reward calculation, and you just have to make it a lot more often than, than other people do.

    24. SBSam Bankman-Fried1:01:56

        I, yeah, basically think that's right. And, um, and, you know, as you said, we'll do the best we can. You know, we'll get every license that we can get. And, you know, in the end, that's-- you can't get more licenses than every one you can get, [chuckles] and that's sort of how it is, you know? And, um, I-- it's, it's not zero risk. Nothing is zero risk, but so be it. And, uh, and, and that, that's, sort of, you know, that's, in the end, the perspective that, that I think we've, we've taken, and we've sort of had to take, and I think it's been the right one to take, although not always the easiest one to take. Um, and I think it involves accepting that, uh, that you're gonna have to go out on a limb, and you're gonna have to make judgment calls, um, because there's, there's always judgment calls involved in all these things. And, and again, that- that's just how it is. There's no point in sort of, like, pretending it isn't.

    25. MGMario Gabriele1:02:53

        Which honestly, in some ways, feels like almost a, a fairly singular or unique stance in many respects. Like, you know, there's sort of, uh, the more US-centric exchanges, which I would say, have maybe moved a little bit more slowly but, you know, have been super cautious about regulation. And then there are, you know, maybe more foreign-focused exchanges that move super, super fast, um, and are basically like: "Listen, we're, we're not gonna sweat this too hard." Whereas I think you guys have really managed to sort of thread the needle by saying, "We're gonna innovate, we're gonna push new products forward, but we're also, like, here to push the regulatory side of things forward as well." And, you know, yesterday was obviously an example of that, too.

    26. SBSam Bankman-Fried1:03:38

        I think that's right, and I think that in the end, our sort of-- our sense of this is like, look, this isn't... It's not like, you know, you can choose to be compliant or you can choose to be functional, and, like, you have to choose which company you're, you're, you're launching. I, I think, you know, the way we think about it is, in the same way that you can make, like, informed, reasonable decisions on one front, you can make informed, reasonable decisions on another front.

12. 1:04:05 – 1:10:09

    Early go-to-market: power users, objective product quality, and Alameda as the liquidity bootstrap

    1. BGBen Gilbert1:04:05

       We will come back to some of this in our analysis section, but just to kind of finish out the growth of the company and bring us to today, I mean, now one of the ways that you're acquiring customers is by owning naming rights to arenas and patches on Major League Baseball umpires and all these things, celebrity commercials. I imagine when you launched in January 2019, that wasn't the strategy. So how did you get your early customers, uh, and then, uh, you've been pretty much explosive growth from the get-go, if my understanding is correct.

    2. SBSam Bankman-Fried1:04:35

       In terms of the early customers, right, the ones before we sort of started building out the paradigm that we have now, um, it's a good question, a- and I think the basic answer is, um, you know, well, you, you, you do what you can. And what that meant for us basically was, um, you know, we've got, uh... well, we think we have a good product, right? That's where a lot of this started from. Our strength is our product.

    3. BGBen Gilbert1:05:09

       And to be super clear for people, just, just so that-- 'cause y- Sam, you're not good at bragging. You have an unbelievable rel- unbelievably reliable and fast product with some of the cheapest, uh, uh, transaction fees on the market. So just like, "We, we think we have a good product," translates into that.

    4. SBSam Bankman-Fried1:05:26

       Uh, I, I appreciate that.

    5. MGMario Gabriele1:05:28

       This is a market, uh, where it's easy to objectively measure the quality of product. [chuckles]

    6. SBSam Bankman-Fried1:05:33

       That, that is true. That is an interesting piece of it, is that it is much... And it's transparent, right? For better or for worse, and usually for better. But, um, but that, that means that, yeah, you can often just sort of say, like, "What does a good product mean?" Well, you know, that, that... there's an answer to that. Um, and, and so I, I think that, like, you know, what do you do if you think you have a good product? Like, what's the right place to start? Well, I, I kind of think that the place you start then, um, is, well, let's try to reach out to the people who care the most about the product, right? The people who are gonna be really receptive to, "We have a good product." And those generally are the power users, right? Those are the people who are using it every day, who, who use it deeply and intensely, who explore every angle of it. They're the ones who really care the most, right? And so, you know, we basically started to try and reach out to the people who used crypto exchanges the most and say: "Hey, you know, why don't you try us out, and tell us if you don't like it, you know? And if you don't like it, great! Tell us why, and we'll see what we can do about that."

    7. BGBen Gilbert1:06:50

       "And by the way, we've got a giant amount of volume from our, our sister company, Alameda, on the platform, so there's a, a big counterparty if you wanna trade with us, right?"

    8. SBSam Bankman-Fried1:06:58

       Right. It helped basically solve this sort of, like, problem of like, well, you- you're just starting up an exchange. S- sometimes there's a catch-22, where, like, how do you get volume without liquidity? How do you get liquidity without volume? And, and this, this sort of gave, gave a solution to that. Um, I-... So, um, of, you know, basically starting with liquidity, so that people could come and trade. You know, we took a lot of feedback, we kept iterating. And, you know, in the end, most of our initial growth, um, came from power users, the people who, you know, are spending hours a day in the ecosystem, and would try out every new exchange that came, you know, and, and use the ones that they liked the most. Like, that was the best fit. And we didn't really do marketing per se. Eventually, we, we learned how to tweet. That was about it. [laughing]

    9. BGBen Gilbert1:07:45

       [laughing] Which is very important in crypto.

    10. SBSam Bankman-Fried1:07:47

        It's very important in crypto. Um, but, you know, importantly, um, we didn't need, uh-- like, we, we, we didn't need to, to, to use Facebook ads.

    11. DRDavid Rosenthal1:08:01

        [laughing] Right. Those are not your customers.

    12. SBSam Bankman-Fried1:08:04

        Right. They're just gonna go on CoinMarket and be like, "Oh, there's a new exchange, let me try it," right? They don't need to see Facebook ad. And so that's, that was sort of our, our initial growth.

    13. MGMario Gabriele1:08:11

        But presumably also, Sam, like, m- those initial customers were mostly institutions. Is that right?

    14. SBSam Bankman-Fried1:08:18

        They were about half and half, really. Um, you know, the thing that, that really, you know, set them apart was less being institutions and more being power users. And, I... Some of those were institutions, some of those were individuals. Crypto is somewhat unique in having a large-- there's-- mutual funds don't exist, pension funds don't exist, right? So individuals don't all funnel all of their activity through a few central counterparties in crypto. Um, they actually do it themselves. And so, you know, for, you know, for really high-volume users, a surprising number of them, um, are individuals.

    15. MGMario Gabriele1:09:03

        And also, you at this point, were already kind of the avatar of the trader's trader in crypto. Like, I remember, you know, they were reading interviews from twenty nineteen, people were talking about your arb, uh, people were talking about Alameda. And, and I think Chris McCann, I, I can't remember which product this was on, but weren't you at the top of a leaderboard, um, for, for your trades? [chuckles]

    16. SBSam Bankman-Fried1:09:29

        Yeah. Uh, yeah, Alameda was for, for a little while. It's on, it was on a few leaderboards, um, some of them more, more obvious than others.

    17. MGMario Gabriele1:09:37

        So people knew you were this guy who was sort of, uh, deep in the weeds, and so, uh, you, you had a lot of authenticity when you were talking to a power user because you were a power user.

    18. SBSam Bankman-Fried1:09:48

        Yeah. I, I think the biggest thing that it helped with was, you know, not so much like, you know, convincing people that this was what they should use, and more convincing people that they should think about using this, you know?

    19. MGMario Gabriele1:10:03

        Yeah.

    20. SBSam Bankman-Fried1:10:03

        And, and I think that that was where a lot of sort of our initial growth really came from.

13. 1:10:09 – 1:18:36

    Where FTX is ‘today’: scale metrics, US derivatives ambitions, and brand-building vs marketing

    1. BGBen Gilbert1:10:09

       Well, rather than going through blow by blow over the, the last couple of years from your launch, can you just fast-forward us to today, and what are some of the, the high-level public stats that you can share on FTX as a business right now?

    2. SBSam Bankman-Fried1:10:22

       So yeah, where are we today? I mean, you know, we, we've grown, obviously. We were nothing a few years ago. A year ago, maybe we were, like, I don't know, twelfth or so biggest, um, globally. Today, we are the third biggest by volume. We're the second biggest by open interest, um, and actually pretty close to, to first, I just realized.

    3. BGBen Gilbert1:10:40

       It looks like you're looking at some live stats right now. [chuckles]

    4. SBSam Bankman-Fried1:10:43

       Yeah, yeah. And I... You know, we have fifteen billion dollars of volume globally in the last day. That, that's about typical for us. You know, that- that's typically where we are. And, you know, obviously, there is some volatility in that from day to day. Um, and I-- yeah, I mean, we, uh, I guess we have a few million users. We, we have FTX US as well. So we opened up a US, uh, branch about a year and a half ago, and, you know, today, that's, that's-- I think I can check what it's done, but, you know, today, I guess that's done, you know, a few hundred million dollars of volume. Um, the biggest thing for that is, that we're anticipating, is the launch of derivatives, um, you know, hopefully sometime in the next year, um, that we think could really bring a lot that's been missing to the market. Um, because, again, like, the US players just have not had a sophisticated derivatives suite. Um, and I-- we, we Acquired LedgerX, now FTX US Derivatives, about a year ago. Um, not a year or so, six months ago. Um, and, uh, you know, are excited to work with the CFTC on products through that. I think those are probably, like, the biggest sort of like headline stats about, you know, where we are today.

    5. DRDavid Rosenthal1:11:57

       How about in terms of the, your strategy and how you think about things? I mean, obviously, it makes so much sense in the early days. Like, this is a market where there are strong power users, there's a power law curve to the customers in the market. It's-- you can objectively measure product quality. Of course, you're gonna go after those power users. Maybe you learn to tweet along the way. [laughing] You know, uh, now you're doing all those things, you know, Ben mentioned a minute ago, of buying sports arena, naming rights, and et cetera. Um, that feels very different. Is, is it that now that you've won that initial beachhead market, is it now more about expanding the whole market, or... W- walk us through how you're-- why this huge change?

    6. BGBen Gilbert1:12:39

       It's like a barbell, almost. It seems like you're, you're skipping the middle. You're getting this, like, institutional, multi-billion dollar trader, and then you're trying to get, you know, me in the nosebleeds at a Heat game.

    7. SBSam Bankman-Fried1:12:49

       Right. And so, so what's going on there? Well, may- maybe I'll split it up into a few different pieces, 'cause I, I think the strategy looks meaningfully different from different perspectives. Um, to some extent, it's just keep doing what we're doing. I'm gonna kind of ignore that piece, although it's important. But keep trying to grow it amongst power users, right? Um, ignoring that, what else is it? So, uh, one big thing is, is the US derivatives play, right? Like-... derivatives are two-thirds of global volume in crypto. That's not unusual. That's true in most asset classes. Derivatives are generally more volume than spot. Um, but I- in the United States, derivatives are less than half of volume. And the reason is, well, there's basically no real derivative venue in the US, I guess. Like, it, it just sort of is, is, is a missing segment, um, because you need a CFTC license for it, and basically, none of the, uh, you know, none of the crypto-native exchanges have that. Um, so I-- so yeah, we're, we're really excited to build out that product suite, and I think it could be, like, somewhat transformational for the ecosystem. It's just like, it's a huge thing that doesn't exist today and should. Um, uh, so that's sort of another piece of this. Um, and, and then, you know, putting aside those, and there's sort of Web3 gaming, um, which I think we see as a potentially huge, huge opportunity, and we're, we're sort of working on a lot of partnerships with, and NFTs in general. Um, when you look at sort of the customer acquisition side, I think it's easy to see a lot of the endorsement deals that we've done and think of that as, like, customer acquisition. It's actually not really how we think of it. Um, it's not the most effective way to acquire customers. It- it's gotten us some, not an enormous number. Um, we think of it as brand rather than marketing, if that makes sense. So rather than... Like, what, what sort of the exact-- the diametric opposite of this is a Facebook ad, right? No one sees a Fakebook- Facebook ad and is like: "Oh, wow, that's a cool fucking company."

    8. DRDavid Rosenthal1:15:04

       [chuckles]

    9. SBSam Bankman-Fried1:15:04

       Right? They see it and they're like, "Oh!" Like, maybe they accidentally click on it. That's the hope, [chuckles] right? Like-

    10. DRDavid Rosenthal1:15:09

        [chuckles]

    11. SBSam Bankman-Fried1:15:10

        ... it, it's, like, pretty directly just trying to acquire customers. Um, and when we think about, uh, you know, what's the purpose of the, the partnerships and endorsements that we're doing, like, the biggest things we're thinking about are: how do we communicate to people who FTX is in a way which is kind of meaningful and, you know, which, which will hopefully leave a little bit of a mark, I guess? Um, because if no one knows who we are, it's like, it's gonna be really hard to convince them to, like, you know, use our product or anything. Um, if we're just some sort of anonymous, like, uh, you know, random crypto company, I guess, like, that's not a very compelling thing for most people. Um, and so instead, what we're thinking is, like, you know, how do we... Yeah, like, how do we really communicate who we are to people in a way which is gonna be sticky and compelling? And when I say people here, I don't just mean like, you know, potential, like, direct users of FTX the platform. I also mean institutional counterparties. Like, sort of all the way through the spectrum, how do we communicate who we are? Because, like, this is something which, which, yeah, which extends a lot beyond just users of the platforms, all of our partnerships. It's everything. And then the other thing is, how do we establish our brand in such a way that, you know, if we do eventually go down more of just the direct marketing route, that it's gonna mean something to people, you know? And that people will be compelled by it, rather than just saying, "Oh, whatever, another scammy crypto marketing thing. I'm gonna ignore that." Um, and so I, I think that sort of like, is like the more general vision behind the partnerships that we're doing.

    12. BGBen Gilbert1:17:15

        Well, it feels like for crypto, so much of, uh, the battle globally is just the question of trust, and especially maybe coming into a US market as a late mover. I think, you know, you guys have been incredibly savvy about building that trust by aligning yourselves with, you know, entities that are part of people's lives in really meaningful ways, and that they have long-standing emotional connections to.

    13. SBSam Bankman-Fried1:17:44

        That's, that's the hope.

    14. DRDavid Rosenthal1:17:45

        I think you've painted the story here that, like, [chuckles] you know, it's almost like-- [chuckles] it's so easy, so I'm gonna keep going back to it, but going back to the Bezos analogy, like, it's so early in the opportunity here. Like, we're not even at, like... We're in, like, nineteen ninety-two, three? Like, I don't know, relative to the internet. Like, d- you can't trade derivatives in the US. Like, you know, like, that's just, like, that baseline sets, like, [chuckles] the, the biggest part of the market doesn't even exist yet in the biggest financial market in the world. [chuckles] So, like, if you're playing the long game here, like, uh, yeah, there's just-- like, laying the infrastructure of trust is so much more important than acquiring a customer, right? Am I thinking about that right?

    15. SBSam Bankman-Fried1:18:34

        That- that's sort of how we think about it.

14. 1:18:36 – 1:26:01

    Durable advantage and ‘Seven Powers’: execution, liquidity moats, and staying in build mode

    1. BGBen Gilbert1:18:36

       All right. Well, I'm gonna move us here into our analysis section of the show. Th- there's a section that we always do, Sam, called Power, which is based on a, a book by Hamilton Helmer called Seven Powers, which is, uh, an analysis of w- why a business-- what is it about a particular business that enables them to achieve persistent differential returns, sort of long-term, durable profitability? And there's seven of these, as you can imagine. There's counterpositioning, typically versus an incumbent, uh, scale economies, uh, switching costs, network economies between participants in the network, process power, which is usually, we know how to do something that's simply not transferable because it's too complex, uh, branding, and then a cornered resource, we have something that other people don't. And, uh, I, I've been thinking a little bit about-... you know, what applies here, I think a lot of FTX's success to date is because you guys have executed flawlessly, uh, very rapidly, as Mario puts it, uh, speed running the market in, uh, in his piece, uh, when there's just a massively growing pie and huge amounts of opportunity opening up. And I actually haven't given a lot of thought yet to, well, as there becomes more and more players, and more and more competition, therefore, profits get arbitraged away, what is it about FTX that will enable it to be durably profitable as, as competition pours in? And I'm curious how you think about that.

    2. SBSam Bankman-Fried1:20:05

       I don't think the answer to that is obvious. I don't think that it's sort of like: Oh, yeah, obviously, like, we're good at left-clicking. No one else knows how to left-click, right? They always right-click, and it doesn't, doesn't take them where they're trying to go. Um, and I think that part of that is, like, you look at the kind of like breadth and to some extent, frankly, randomness of, of the type of things that we've tried to do, right? It's a little all over the place, which I think is also a sign of, like, i- it's gonna fuck with some narratives. Um, right, and I think, like, maybe, maybe one way to think of it is, like, well, you have Amazon, right? And Amazon is AWS, and they have their store. And I don't know, I challenge you to be compelled by the narrative about what those have in common. [chuckles] You know, I'm not, I'm not compelled by that.

    3. BGBen Gilbert1:20:59

       I'm, I'm actually not of the opinion that it's value creative for them to be under the same corporate umbrella.

    4. SBSam Bankman-Fried1:21:04

       I'm not sure it is. You know, I-- if someone said: "Look, those should obviously just be, like, different brands," like, I don't know, maybe. I, I kind of like-- I, I don't see compelling reasons either way. I, I sort of feel like, yeah, I could be swung either way on whether they should be the same brand. Um, and, uh, but, but the flip side of this is, well, it certainly seems to work for them, right? Or, or at least, like, these both seem like pretty compelling businesses. I, I, I guess, from our perspective, right, like, what do I see as value creative for us or as, like, a persistent something? Like, some of these, I think, just good execution, which is sort of a, a lame thing to say, right? But I, but I think that's the honest answer to part of it. Um, I, I, I, could try and point t- to, to maybe what I think are, like, some things that cause that, I guess. Like, like, what, like, what about us allows us to do that? And, and I guess part of it is like, well, you know, I, I, I guess I think that we, like, have built a strong team, and we've been really intentional about it, and in particular about not overgrowing the team. Um, because I, I, I think if you sort of like-- if you're too aggressive about, like, overgrowing the team, then you get this sort of monstrosity that no one can control anymore, and I think it's sort of like an underestimated factor often. And we see time and time again, this sort of, uh, really fuck with people. Um, and, and, and companies just, like, lose their ability to operate effectively because of it. So I, I think that's, like, sort of a, a piece of it, although again, I think it's like, you know, I don't wanna try and make that sound more compelling than I think it is. I think it's, like, only sort of compelling. Um, I think that, like, some of it really is just, like, the world is messy, you know. There's, like, a lot of things that we try to do better than other people. Maybe we do some of them better than other people. That helps us do well. Um, and, uh, and that's sort of lame, but, but, but true.

    5. BGBen Gilbert1:23:29

       Well, there, there are also very intrinsic things about the business model that you are executing that have very natural scale economies and network economies, where an exchange requires counterparties, it requires liquidity, uh, for the, the spreads to be very narrow, so everyone gets the best price. And the fact is, you were able to build volume very quickly in a market that was early on, and so therefore, y- you'll reap the benefits of being a scale player forever as, as long as you keep executing well, uh, f- from being there at the right place at the right time and doing that.

    6. SBSam Bankman-Fried1:24:04

       I think that's sort of right. I mean, it's sort of, uh, like, it-- there's this interesting thing where also we started coming from behind, though.

    7. DRDavid Rosenthal1:24:13

       Well, you were coming from behind during, uh, you know, Hamilton would call-- You were definitely still in the-- the market was still in the take-off phase. It wasn't like there was a, um-- You weren't coming from behind against FTX today. [chuckles]

    8. SBSam Bankman-Fried1:24:25

       That's right, but, um, but we are coming from behind with respect to s-- today, some of the things we're trying to do, right? Like, some of the segments that we're trying to get at, we don't currently have that much penetration in. And, uh, so, so I, I do think we're still trying to do that, but, but I agree that, like, there's some extent to which you can get liquidity moats and, and just customer moats and things like that, um, and regulatory moats, and whatever. There, there are a lot of moats I think, like, can exist here.

    9. DRDavid Rosenthal1:25:02

       Is it fair to characterize FTX as a whole as, like, you know, you have, you have the exchange business, both spot and, and derivatives as, as the bigger part of it? Um, and that's a great business, and you've built certainly network, uh, economies and switching and, uh, and scale economies power there.... But I think if I'm hearing you right, you're thinking about, like, in the long term, there's a lot more [chuckles] that we can- there's a hu- a lot more opportunity for FTX to serve, build products, and serve here than just beyond that, right? You know, and, uh, gaming being just one of those.

    10. SBSam Bankman-Fried1:25:39

        I think that's right, and I think maybe another-- I don't know if it's another way to say that, a consequence of that, or, or I don't know what, what flows from what exactly, but like maybe a related statement is that I don't think of us as, like, we've built the hard thing, and now we're coasting. Right? Like, I don't think of it as, like, "Great, we have our moat, now, now let's run with it."

15. 1:26:01 – 1:53:31

    Acquisitions, transparency, and hiring for messy, high-velocity decision-making

    1. MGMario Gabriele1:26:01

       You know, you've mentioned in the past how one of the growth strategies you guys might deploy is through acquisitions, and, you know, everyone enjoyed it when you talked about maybe buying Goldman Sachs or, uh, you know, um, [chuckles] what was, what was the other one? One of the major exchanges. Um, Blockfolio seemed like it was a pretty quietly transformational pickup for your US business. Like, I'd love to hear more how you, you think about that in particular, and in general, like, where there's opportunity.

    2. SBSam Bankman-Fried1:26:37

       Yeah, I mean, I think it represented a pretty clear... I don't know if shift in strategy is quite right, but a- at least a pretty clear, like, a strategy that we'd not previously been emphasizing. Um, where I, you know, we're looking beyond the power user, and I think it was sort of the seminal moment of, like, we are now looking at the full spectrum of users. And, um, you know, I think that that is, uh-- yeah, I think it's powerful and is important. I think it represents maybe an example of something I started talking about earlier, where we're coming from behind very much on that front, um, but we're going for it anyway.

    3. MGMario Gabriele1:27:29

       As you think ahead to, you know, future M&A, do you wonder, like, maybe this isn't a binary or a dichotomy? Do you think the play is expand beyond crypto and, you know, find new places for FTX to imbricate itself in users' lives, or is it double down on these other crypto areas where we don't yet have a good base? Like, you know, NFTs is still too new for us. We should be finding a way to make a Blockfolio-style move there. Same for Web3 gaming, et cetera, et cetera. Like, is it a yes and, or, or is there some sense of preference there?

    4. SBSam Bankman-Fried1:28:05

       I think it's closer to a yes and. I think it's like, at least long term, we really want to try hard not to cut off avenues that we think are gonna be valuable. And we'll have prioritization, certainly, but we wanna be pretty mindful of like, um, of keeping the ultimate upside in mind.

    5. BGBen Gilbert1:28:27

       Well, thinking about sort of the playbook, like that you've, you've implemented to run FTX, of course, we've talked about some of these acquisitions. Another one is a remarkable amount of transparency, and of course, you've got these great blog posts that, that describe all the volume that's happened over the course of the year. You're very public tweeting. You also gave Mario access to your entire data room so that he could write his pieces. Like, w- what's the thinking behind this, and why are you doing that when classically, no one in their right mind would do that?

    6. SBSam Bankman-Fried1:28:56

       A thing that I think I think about a lot is, sure, okay, like, you say people do X. Like, tell me more. Why do people do X? You know, do people do X for a good reason? Like, convince me that X is the right thing for people to do here. And I think often I sort of come away feeling like I was not convinced, you know? They said, "Do X," and we looked into it, and I, I don't see a reason why. Um, and, you know, you should always update on the fact people think you should do something. Often, there's a good reason for that, right? And, and I don't wanna, I don't wanna dismiss that. Um, but sometimes there isn't, and, like, when you think something is dumb, it's a good flag to look into it and see whether you're dumb or it's dumb. Sometimes it's one, sometimes the other-- it's the other. Um, and, um, a- and so I think this is sort of a, a case maybe of like, I don't know, this thing's basically gonna be public anyway, like, no matter what we do, like, I don't know, everyone's gonna see this stuff. Like, this is- w- there, there's a number of people you can show something to, after which it's, it's not meaningfully private, and I think that's sort of, like, part of how I felt about it.

    7. MGMario Gabriele1:30:15

       It feels like that sort of ties back in a way to how you guys think about hiring and training your employees, which is like, no, you have to know both the technical side of things and the sort of crypto-native side of things, as well as the financial side of things. I remember in our conversation, you really said that it's very hard for you to [chuckles] know whether to trust someone's opinion because they don't have context. And so I think one of the things you do really well, both, uh, internally, it sounds like, but also externally, is, like, give people all the context they need so that they can actually, hopefully sense-make, uh, from, from the data. Uh, and then you can decide sort of, you know, whether to agree with it internally or, or, or how to sort of, uh, communicate with it externally.

    8. SBSam Bankman-Fried1:31:04

       Yeah, I think that's basically right. I think it's basically right.

    9. BGBen Gilbert1:31:08

       And just updating your mental models. Like, everybody believes a thing because of some underlying set of fundamentals, and those fundamentals change, but oftentimes, people still give out the same advice, even though the world's changed. And, like, "Don't share your private company data," m- made sense in a certain time, in a certain market, and may just not make as much sense for your particular scenario now.

    10. SBSam Bankman-Fried1:31:28

        ... I think it's basically right. I mean, I think it makes sense in a lot of times, in a lot of contexts, but not literally all times in all contexts. And I think that, like, I- yeah, this might be one where it doesn't. And, and, and we're, we're pretty comfortable in general being like, "Fuck it," you know? Yeah, this is kinda weird, but, like, I don't know. Like, I, I don't, I don't actually see the harm in doing it. I see the benefits. Yeah, let's do it.

    11. DRDavid Rosenthal1:31:51

        This is what I think one of the most clearest examples of a company we've looked at in, really, the history of Acquired, uh, all six-plus years, of, like, [chuckles] you are building a movement. Like, you are evangelizing. That is what [chuckles] FTX and SBF are doing. If that is the case, you want as many people to understand as much about [chuckles] what you're doing as possible. You're not trying to keep anything secret. It's th- you're no longer in the world where, like, you've got some arb, [chuckles] and you wanna exploit it before anybody else does.

    12. SBSam Bankman-Fried1:32:22

        Yeah. I mean, I think that's right, I think it's basically right.

    13. BGBen Gilbert1:32:26

        All right, listeners, for our final sponsor of this episode, we wanna thank our friends at NordVPN. In fact, I think, if I'm, if I'm remembering right, I t- I told you on the last episode that I recently used NordVPN. Uh, uh, you know, I've, I've, uh, I've actually used it a few times since, but it was especially important to use when I was on public Wi-Fi over, uh, at a conference, at the Solana event, when I was over in Lisbon, and I was like, "You know what? I probably should have, uh, a VPN on right now, especially at this, this crypto conference." So, uh, I had, um, Nord installed, and it's a fantastic user experience. I think you should check it out if you're looking for a VPN. We wanna say a huge thank you to Acquired community member Tom Okman, who is the, uh, the founder and CEO, who started NordVPN with four childhood friends back in 2012. Awesome story of a, a Lithuanian startup that's now used by, I think, over 15 million people. They have 1,000 employees worldwide. The thing's totally bootstrapped. Just a really cool entrepreneurial success story. So if you're looking for a VPN service, look no further. Go to nordvpn.com/acquired, or click the link in the show notes.

    14. MGMario Gabriele1:33:35

        Sam, you know, we talked a little bit earlier about over-hiring and, and the risk of that. Something that I've always been curious about, [chuckles] given the amount of leverage you guys seem to have managed to extract from a very small team, is, like, what do you look for when you are hiring folks? Like, you personally, or, or the team, are there certain things that just stand out to you as, like, this is someone that I think can sort of hang at the velocity that we operate at?

    15. SBSam Bankman-Fried1:34:06

        [exhales] It's so hard when you interview, frankly, to do this. Like, a lot of this is just something that you have to figure out over time. But, like, I think a lot of this is, like, you put someone in an uncertain, messy situation, where there's no obvious right answer. There's no like, "Well, yeah, you do this, and it's gonna go well," type thing, right? And, and you kinda see how that goes, right? And, and you just, like, frankly, continue to stress the situation a bit, right? Make the situation messier and messier, and, and see if they, like, just continue to roll with it and be like, "All right. Yeah, it got a bit messier, whatever," you know? "I'll, I'll make another informed decision here." And like, you know, "This is, this is a new situation. I'll do the best I can, and it's not gonna be perfect," or whether eventually they, they just sort of, like, shut down and are like, "This is too messy. Like, I can't... There's just no good answers here." And, and what you have to say is, like, "Okay, then choose a bad one." You know, you say there's no good answers here, that doesn't mean there's not a best answer.

    16. MGMario Gabriele1:35:08

        So it sounds like one of the selections, then, uh, is people comfortable with limited changing information and that are happy to, in absence of certainty, commit to some path.

    17. SBSam Bankman-Fried1:35:20

        Yeah, I think that that's basically right, and, and, and, and, you know, to do the best they can, given that. And, you know, obviously, you always want to... You always wanna do the best you can, sure. Um, that's sort of a, a little bit of a, a, just a vacuous statement. But, but I, I think it's actually kind of, kind of meaningful in the end. I, I, I, I think that, that in, in practice, that just, like, isn't things- something that people always do. I think often people kinda get flustered and end up doing nothing close to the best they can, you know, because they're, they're, they're just like, "Oh, geez, this is, like, so... I- like, I don't even know what to do here. There's, there's no good decisions." And so, yeah, I agree.

    18. DRDavid Rosenthal1:36:08

        It's interesting, the um... Mario, you wrote about this in your, in your great pieces a little bit, but, uh, I think that that v- cultural value actually is quite different from Web2 and traditional Silicon Valley companies and hiring. [chuckles] Um, which mostly, as this is a gross generalization, and obviously not every company fits this, but mostly, I think, has over the past 10, 15 years, been hiring for experience. "You scaled Google? Come to Facebook. [chuckles] You scaled Facebook? Come to Snapchat." Uh, you know, et cetera, et cetera, and on and on. Uh, and that's really very different than what you're saying. [chuckles]

    19. SBSam Bankman-Fried1:36:49

        Yeah, experience is very much not what we hire for, right? In fact, sometimes we're, we're almost like, you know... I, I wouldn't quite say we're anti-selecting for it, but, like, we, like, we, we like flexibility, and we like, you know, uh, much, much more than- like, I don't know, we can teach things. Like, if there's something you don't know, that, that, that, you can overcome that. Um, it's much harder to overcome, mm, like, you can't teach someone necessarily how to, like, stay cool under pressure or something like that.

    20. BGBen Gilbert1:37:23

        All right, I'm gonna move us to our, our grading section here, and-... Sam, on our classic episodes, when one company would buy another, we'd grade how good of a use of capital was it for big co to buy startup. And, uh, you know, classically, Instagram's your A plus. Uh, they turned a billion dollars into, like, half a trillion, and, you know, other lots of examples of ones that are way worse. For these guest episodes, where we're like, the story's being written in real time, we tend to try and do it on a future-looking basis and say, like: "Okay, well, FTX has a set of resources right now. It has human capital, it has w- uh, financial capital, lots of it, and it's got time." And so if we look out, I don't know, let's call it five years from now, what's the scenario where you would reflect back five years and say, "With all the resources we had, that was an A-plus outcome?" Like, what are the things that you can achieve where that would be the case? And then paint me the other side, where you're like, "That was a failing grade based on what we had," or, or potentially more interesting, what, what's, like, the C?

    21. SBSam Bankman-Fried1:38:22

        Yeah. So, I mean, what are the metrics we're gonna judge ourselves by? And one of them is just-

    22. BGBen Gilbert1:38:26

        Yeah

    23. SBSam Bankman-Fried1:38:26

        ... like, you know, did we become the biggest crypto exchange? I mean, I think that, that's clearly gonna be one of the kind of core metrics here. Um, I, I think thinking about, like, you know, did we ever succeed at getting retail users, right, at penetrating that market, is gonna be one of the things that I think we're gonna grade ourselves on. Which I think I'm, I'm sort of cautiously optimistic about, but I- but we haven't proven that, right? Like, we've never really gone big in that segment before. And so I think that, like, um, uh, that, that's gonna be one of the big things here. And then I, I think, like, you know, did we manage to expand beyond crypto, is gonna be, I think, one of the big metrics.

    24. BGBen Gilbert1:39:16

        'Cause in other jurisdictions, like, you can trade equities at nine PM on a Saturday, or at least assets that look like equities on your exchange. Like, I can go buy Tesla stock-ish.

    25. SBSam Bankman-Fried1:39:28

        That's right, and that's... I think that's something that we think is important. Um, I think we think it's, like, really important that we continue to move in that direction over time. Um, and, uh, uh, so, so I think that, that, that, that sort of is another key piece of this. Um, and I guess, like, you know, what else do I think is gonna be important? Like, I- did we manage to... Ob- obviously, regulatory things, right? Really important. Like, did we manage to get licensure where we wanted to do it? You know, did we manage to continue to maintain good relationships there? Um, that, that's gonna be one of the things we're looking at. Um, but some of this, I- I mean, there's a huge variety of things we're gonna be looking at, and I, and I think some of this really is, like, we don't even know what some of them are yet, and that's okay.

    26. BGBen Gilbert1:40:22

        Yeah. What about the C? W- what's the scenario where-- 'Cause the F's easy. Like, everyone can be like, "Oh, we went out of business or something," but what's-- or, or, you know, something catastrophic. What, what's the plausible C?

    27. SBSam Bankman-Fried1:40:33

        I think the plausible C is we just kinda don't really grow, you know? Like, you kind of look back at us, like, you know, in a year, and you're like, "Where is F..." In, or in five years, you know, "Where is FTX now?" And the answer is like, you know, "They're, like, you know, one of the bigger, but not, like, the biggest, crypto exchange," right? "They're like, you know, number two. They sort of, like, dabbled in other shit. It didn't really go that far. They, like, grown the, the, the retail user base a little bit, but, like, come on, that- that's not really what they have." Like, you know, I, I, I think those are kind of the things that you would say in the, in the C case.

    28. MGMario Gabriele1:41:03

        [chuckles] I'm smiling so much. I, uh, I totally agree with you. I love that. [chuckles] It's so awesome that you're saying, like, "Man, it would suck. I'd give ourselves a C if we're the second-biggest crypto exchange- [laughing] ... in the world in five years." [laughing] That's so great.

    29. SBSam Bankman-Fried1:41:17

        [laughing] You know, it's how it is.

    30. BGBen Gilbert1:41:21

        All right, so, uh, we're, we're moving out of grading. Normally, we'd go to carve-outs or something, but we've got Mario here, so the- Mario, the, the philosophical fox, give me your... Like, take us somewhere interesting.

Episode duration: 1:53:31