A 30-year-old billionaire explains how he got rich with sophisticated crypto deals
- Sam Bankman-Fried became a self-made billionaire by starting a crypto trading firm in 2017.
- In a podcast, he revealed a strategy that reportedly secures 10 percent daily returns on million-dollar trades.
- He also shared why carefully weighing risk in the crypto world is important to making profits.
- You can find more articles on Business Insider here
In just three and a half years, Sam Bankman-Fired has transformed from an ETF trader to a cryptocurrency legend and one of the world’s youngest billionaires. He has an estimated net worth of nearly nine billion U.S. dollars.
In 2017, Bankman-Fried, a former trader at hard-to-find quant trading firm Jane Street, founded a crypto trading firm called Alameda Research that manages more than $100 million in digital assets. Because of the company’s big moves in the crypto market, Bankman-Fired is now known as the "Moby Dick of crypto whales".
The firm’s multimillion-dollar trades made Bankman-Fried a self-made billionaire at just 29 years old, Forbes magazine reported. However, he plans to donate and give away as much of his wealth as possible.
Bankman-Fried: In crypto world, there’s not enough time for institutions
For U.S. news outlet Bloomberg’s "Odd Lots" podcast, Bankman-Fried sat down with Tracy Alloway and Joe Weisenthal to explain his journey into the crypto world, the lucrative arbitrage opportunities he’s found along the way, and the evolution of his cryptocurrency exchange FTX.
Bankman-Fried described how he stumbled into the cryptocurrency world when he was looking for a career change. What he found was a crypto market ripe with arbitrage opportunities – taking advantage of price differences in a single asset – at a time when bitcoin was in the midst of a raging bull cycle in late 2017.
"There was a lot of the hallmarks of a really inefficient system with a big need for liquidity, which is basically a gigantic demand all at once," Bankman-Fried said on the podcast. "It’s growing really fast – a lot of revenue, a lot of retail users, and not a lot of time to build institutions and liquidity or a system that works seamlessly."Bankman-Fried saw that the bitcoin market would likely have very large volumes, and therefore price discrepancies.
The Kimchi Premium
During this time, there was a well-publicized bitcoin arbitrage opportunity in Korea known as Kimchi Premium.
In the U.S., the price of bitcoin was around 10.000 U.S. dollars. On Korean stock exchanges, however, the price was about 15.000 US dollars. According to Bankman-Fried, that was largely due to a huge net demand for bitcoin in Korea. At the peak, there was a huge spread of about 50 percent, he said, but the problem was that it was basically impossible to take advantage of the opportunity on a large scale because the Korean won is a regulated currency.
"You can’t do this arbitrage that easily. You get stuck at one end," Bankman-Fried said. "And a lot of people have tried to implement this trade. Many found a way to do it for small sizes. But it’s very, very hard to do it for large sizes, even though there are billions of dollars a day of turnover in this trade, because you couldn’t just unload the Korean won for noncrypto." The premium still exists today, though it’s not really significant anymore. CryptoQuant listed the premium on 06. April at 18 percent on.
Daily returns of 10 percent
Bankman-Fried looked for a similar opportunity in other markets and found it in Japan. He described the Japanese trade to the Finance Magnates website as "an absurdly good trade," the best trade he had ever seen.
"It wasn’t quite the same trading premium, but the trade was peaking at a 15 percent premium or so, instead of 50 percent" said Bankman-Fried on the podcast "Odd Lots".
Investors could buy Bitcoin for 10.000 U.S. dollars in the U.S., send it to a Japanese exchange, buy it for 11.Sell 500 U.S. dollars in Japanese yen and then exchange it back into dollars. "It took about a day to process this trade, considering the transfers involved. But it was doable, and you could scale it and literally do 10 percent per weekday, which is just absolutely insane," Bankman-Fried said.
The hardest part, he said, was finding investors
He added that trading was thousands of times what could be done with traditional financial spreads, and that trading could be done at scale with hundreds of millions of U.S. dollars per day.
But why haven’t others understood and implemented this trading opportunity before?? This is mainly due to the complexity. Traders face hurdle after hurdle when attempting this type of trade – from finding the right platform to buy bitcoin in bulk, to getting permission to use Japanese exchanges and bank accounts, to moving millions of U.S. dollars from Japan to the U.S. every day.
"You have to put together this incredibly sophisticated global corporate framework to actually do this trading," Bankman-Fried said in an interview with "Finance Magnates". Finding investors who are willing to put up the capital for this is the hard part, but it pays off. "Somehow you get your $200 million in capital," Bankman-Fried said on the podcast.
Risk versus opportunity
The dispersion of the crypto ecosystem is what helps generate the big arbitrage premiums over the traditional financial model. There is no merging between exchanges and no central clearing firms or brokers, Bankman-Fried said. "So it’s really capital intensive, and you have to worry about counterparty risk," he added.
But this risk also creates opportunities. With so many unregulated and under-regulated players in the crypto space, it seems risky, especially for an investor who is relatively uninformed about crypto, to enter the business, Bankman-Fried said. But once investors and traders understand the trade a little deeper, and that the counterparty risk is close to zero, the advantage is still high, he said.
"You can make a lot of money if you can really figure out when there’s a lot of upside and when there’s not, and when there’s a lot of actual counterparty risk and when there’s not," Bankman-Fried said.