The Rise of Hong Kong-based Crypto Derivatives Exchange FTX

The rise of FTX exchange has been one of the major headlines since the start of the year. Since its launch in May 2019, the Hong Kong-based exchange now places in the top five crypto derivatives exchanges by traded volume. 

In an exclusive interview with Crypto Briefing, FTX’s CEO, Sam Bankman-Fried, explains some of the reasons why the platform has enjoyed such quick popularity. 

[Crypto Briefing]: While I was doing my research into the exchange, I stumbled upon your profile on the Effective Altruism (EA) Site, 80,000 hours.com. 

It indicates that after graduation from MIT, you became a quantitative trader with the ambition of “earning to give.” 

Would you say that these ambitions are still a part of your mission at FTX exchange?

[Sam Bankman-Fried]: Yeah, absolutely. It’s the central reason that I founded FTX, to find a way to donate as much as I can.

[CB]: It also indicates on the site that you and your team contribute quite a bit to charity. What were the names of those charities?

[Sam]: There’s a pretty wide array of them. But I think at the core there is a bunch of Effective Altruism-related charities devoted to global poverty, animal welfare, to far-future concerns, and to building the EA movement. You can find all of these on the FTX site. 

[CB]: Prior to FTX and Alameda Research, you began as a quantitative trader at Jane Street Capital before moving over to crypto. 

What sort of advantages has a background like that given you?

[Sam]: I think it’s super helpful. It meant that I had a good idea of how to do a certain style of trading. 

I knew how to think decently about things like arbitrage and general quantitative trading strategies. And that meant I could hit the ground running without having to reinvent the wheel each time. 

There is nonetheless a ton of work to do understanding the nature of the market and the operational details of it.

[CB]: And when you say “the nature of the market,” do you mean the nature of the crypto market?

[Sam]: Yeah, that’s right.

[CB]: What were your first surprises or notes about how the crypto market operated compared to traditional finance?

[Sam]: I think, still to some extent to this date, but especially a few years ago when I started, the market overall is fairly inefficient. 

There’s a lot of pretty obvious ways that things are trading out of line, and pretty clear trades to do, based on that. There is a fair number of arbitrage opportunities. 

The operational task of doing them, however, can be quite intense.

It often involves setting up bank accounts in multiple countries, entities in multiple countries, putting a ton of work to get high rate limits and withdrawal limits on the relevant platforms. 

It also means understanding the nuances of each site, knowing exactly when withdrawals work and don’t work, and understanding the nature of the data feeds and how delayed they are, and when you can trust them and when you can’t. 

After that, it’s important to form relationships with relevant parties to make sure that you have good customer support.

That whole set of things can be actually quite an intense process, and take a ton of work to get to a point where you can actually do the trades that you see.

[CB]: Sure. I’m also trying to understand the connection between Alameda Research and FTX. Alameda is sort of a service provider of trading strategies and OTC, whereas FTX seems like a product of that?

[Sam]: So, Alameda is a trading firm. It trades with its own capital and it does arbitrage, quantitative trading, OTC, and liquidity providing across the crypto ecosystem. 

And then FTX is an exchange. It’s a customer-facing service business, which provides the technological infrastructure to execute trades. It’s a pretty different business than Alameda. 

There’s a lot less focus on quantitative modeling or anything like that, and a lot more on building products that people want. 

To the extent there’s a relationship between them, Alameda is one of the many liquidity providers on FTX.

[CB]: Who else draws from the liquidity services of Alameda beyond FTX?

[Sam]: Most exchanges. Alameda is on 50 or so exchanges. It’s doing 5% of global volume across the board. Pretty much anywhere that there’s significant crypto volume, you’ll see Alameda playing a part in the liquidity.

[CB]: What has been the feedback from heads of exchange since using Alameda?

[Sam]: So, I think we can rephrase this slightly. 

There are certainly some exchanges that will formally reach out to Alameda and Alameda will promise to maintain liquidity as much as they can.

But in a lot of cases, it’s not so much that they’re contracting out to Alameda in a formal way insofar as it’s a product that anyone can use. What ends up happening is that this liquidity is sometimes somewhat invisible to the exchanges themselves, and not solicited by them. 

Although increasingly this solicitation is a thing that does sometimes happen.

[CB]: How does Alameda guarantee liquidity?

[Sam]: Guarantee is a strong word, and there are different levels of that depending on certain variables. 

But Alameda’s core business is understanding what assets are worth at any point in time, making markets around that, and understanding the global crypto markets.

In some sense, if Alameda is used wide enough, it can provide liquidity anywhere. It’s willing to do 10% wide markets on Bitcoin. It can always show them. 

But it just depends on how much liquidity is desired there, how tight the spread is, and things like that which determine how difficult that is.

In most cases Alameda doesn’t guarantee liquidity, it just empirically provides liquidity in many cases when it sees itself able to. But with a lot more effort it can get to the point of providing way more liquidity consistently. It just takes a lot of work.

[CB]: And returning to the customer-facing FTX exchange, I think one of the more interesting products is the leveraged tokens.

Could you walk me through a little bit of the ideation for developing these products?

[Sam]: The core thing that it does is it takes a leveraged futures position and it tokenizes it. It creates an ERC20 token that represents that position. This offers two things. 

First of all, it now means you can trade a leveraged position as if it were a spot token. And it also means you can move around the blockchain. And so the coolest thing about this is that you can then get it listed on other exchanges.

And that’s super powerful, and really expands our potential reach. It also allows customers to, in a simple, intuitive spot-like manner, take on a leveraged position without having to manage the merchant or collateral themselves.

[CB]: It basically renders leveraged trading simpler for certain users.

[Sam]: Yeah, that’s right.

[CB]: Do you know which of these leveraged tokens has reported the highest volumes so far?

[Sam]: Generally, I think we’re seeing the highest volumes in the Bitcoin and Ether plus and minus 3X tokens, called BULL, BEAR, ETHBULL, and ETHBEAR. I think it depends on the day which of those is the highest volume. Those four tend to be the most active followed by the EOS and XRP leverage tokens.

[CB]: Outside of these unique products, why do you think FTX has become so popular?

You’ve quickly risen to become a top-five derivatives exchange, and you’re outpacing Bitfinex, Kraken, Binance, and many others.

[Sam]: I think there’s a ton of cool things we do.

We have flexible collateral so you can trade futures on 30 different underlying assets with Bitcoin, dollars, stablecoins, Ether, BNB, FTT, gold and a bunch of other things as collateral. 

So, whatever’s convenient for traders. We also have index futures and futures on a lot of different tokens, including perpetuals and quarterlies. We have options and fiat on-ramps.

Putting those all together, it’s a really more complete product offering than almost any other exchange. It has a well-functioning API that has reasonable performance even during volatile times with reasonably large rate limits. 

It has fixed Rust and WebSocket APIs. And then we’ve also just put a ton of work into reaching out to customers and working with them to onboard them onto the platform.

[CB]: Who has been your primary demographic for customers?

[Sam]: It’s pretty broad-based. I don’t think that there’s one dominant one. But I would say East Asia makes up a big swath of it. FTX is also growing in Southeast Asia, Eastern Europe, and Western Europe. 

We tend to skew more towards the higher-volume users. So, we tend to do well and have a quicker and easier time onboarding the medium- to large-size traders.

[CB]: Are the regulatory constrictions in the United States a concern for FTX?

[Sam]: Yes. So FTX does not offer in the United States. It’s actually a pretty different product offering that fits into the regulatory landscape of the United States versus the international one.

If we were to launch a US business, I think it would be a pretty separate one. It would be a completely fenced-off entity with a separate product offering and US Regulatory Approval.

[CB]: Has FTX thought about setting up a second business in the United States?

[Sam]: Yeah. It’s something that we’ve played around with. And I think if we do decide to do it all, we’ll make that public.

[CB]: Based on a lot of this growth, it seems reasonable that FTX has been searching for several investors. You recently launched a tokenized equity offering, and I noticed that Sino Global Capital, one of their venture arms, has made a substantial contribution.

Sino Global Capital’s Liquid Value Blockchain Fund Invests in FTX Exchange

March 2, 2020: Liquid Value, the investment arm of Beijing-headquartered Sino Global Capital, announced a Series B investment in Hong Kong-based cryptocurrency derivatives exchange FTX.

— Matthew Graham (@mattysino) March 2, 2020

[Sam]: Yep.

[CB]: Could you name any other investors at this time?

[Sam]: None of the other investors have given me permission to release their names publicly. Most of them, in fact, are still in the process of finalizing it. I’ll go back and see eventually who wants to be made public. I don’t want to name some of them if they don’t want to be named.

[CB]: Are they investors akin to Sino Global Capital or are they individual investors as well?

[Sam]: It’s a pretty wide variety of people because we touch a pretty wide variety of the ecosystem. So, it’s everything from venture firms, individual traders, trading firms, to whales.

We also have people that FTX has an established relationship with as well as with other businesses in the industry. So, interest is coming from all over the place.

[CB]: How close is FTX to completing this round?

[Sam]: It totally depends on exactly how much people end up putting in. If everyone puts in what their soft-commitment was worth, then we have completed it. But people are still in the process of talking with their LPs and finalizing that.

The coronavirus situation has also slowed that process down in a lot of places. International communication, for instance, has been slowed down somewhat by it. 

I still haven’t firmed up those numbers, so I can’t 100% say that we’ve hit the target. But if their commitments end up panning out, then we will have met our goal.

[CB]: And if those commitments do pan out, that will put you guys at $1 billion evaluation, is that correct?

[Sam]: Yep. That’s right.

[CB]: What would these investments be used for specifically?

[Sam]: The biggest thing is international growth. We want to massively grow out our operations in a lot of different regions, and also grow the team out along with that.

[CB]: What regions are you focusing on?

[Sam]: It’s going to be a lot. 

This is not going to be so much pouring it all into one place as allowing us to do many places at once. And so it’s going to be most of East and Southeast Asia, and then building up bases in West and Eastern Europe as well, looking to the Middle East too. 

Then we’ll tentatively venture into a few other places and see how that goes.

[CB]: In terms of priorities, East and Southeast Asia are at the top, and then you’ll move into Europe and the Middle East?

[Sam]: Yep.

[CB]: I noticed that Alameda also invested in Folkvang. Could you explain that a little more?

Because it looks like these two companies, Folkvang and FTX, are direct competitors.

[Sam]: I know Mike van Rossum [CEO of Folkvang], I know his business and his team. I’ve been impressed with them, and I think that they have the potential to do very well.

But I think that they’re in a position where capital can really help them get there. And so it seemed like a win-win.

[CB]: Because both companies have two technically competing businesses, how will you maintain a degree of independence?

[Sam]: Neither of us controls the other. And I don’t want to control him. He should do what’s best for his business. I’m happy to be a resource for him if and when that’s helpful.

[CB]: Do you think you will be making any similar investments in other exchanges?

I understand Amber is also based in Hong Kong and Shenzhen, and they’ve just pulled together an interesting funding round.

[Sam]: We may be investing in a few other places. Yeah.

[CB]: I also wanted to discuss a screenshot from a Chinese chat room that shows you lost $12 million in speculating on Bitfinex. 

[Sam]: Yep. It was hedged. Alameda’s in the business of doing arbitrage. It has a long on one exchange, short on the other.

Bitfinex was trading very cheap at the time, other exchanges were rich, so Alameda got long on Bitfinex versus short on the other exchanges. 

Markets went down. It lost on Bitfinex, won on the other exchanges. 

[CB]: Where did this money come from?

[Sam]: These were proprietary funds of Alameda Research that it did the profitable arbitrage on.

[CB]: In a blog post from 2019, the FTX team have described 2019 as the year of derivatives. How do you feel about 2020?

[Sam]: It’s the year of coronavirus.

[CB]: Yeah, that’s for sure. That’s a shame, isn’t it?

[Sam]: Yep.

[CB]: How is your team reacting to this? Have you been affected in any way?

[Sam]: It’s had almost no impact on us. That may change. But, so far, I think it’s not really affected us much.

[CB]: And Bitcoin has dropped quite a bit recently too. Do you think this has any correlation to coronavirus?

[Sam]: Yeah, I think it’s 90% caused by it.

[CB]: So, the risk-off asset narrative is basically dead?

[Sam]: Yep. Everything in the world is down a lot overnight except gold.

[CB]: And do you think FTX will be making a March Madness token by chance?

[Sam]: It’s one of the things we’re looking into. I think we’re probably more likely to do NBA Finals than March Madness, but we’ll look into both.

[CB]: Thank you very much, Sam, for taking the time. Much appreciated. 

[Sam]: Thank you.

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