FTX Downfall: How This Trader Made 5,000% Off Sam Bankman-Fried’s “Stupidity”

FTX was a popular platform for traders for its many exotic derivatives. Among them leveraged tokenswhich made it possible to hold a spot token that replicates an underlying asset with the sink. These enabled a trader to utilize the platform to make an astonishing performance +5,000% ! Let’s take a look at how this trader did it.

The problem with leveraged tokens

Let’s take a quick look at how these leveraged tokens. The latter therefore made it possible to obtain a spot asset that replicated an underlying with a leverage effect.

For example, the token “ETHBULLwas a token place to replicate Ethereum’s performance with leverage 3.

the token”ETHBEAR” the goods spot token Before replicate reverse performance of Ethereum with a leverage of 3, as well as a short position in leverage of 3.

the token”ETH HEDGEwas a u leveraged ETH card for hedging.

The latter’s interest is to be able to take advantage of leverager without taking the risk of liquidation. Many of these tokens were available on a multitude of underlyings: ATOM, BTC, ETH, the “DeFi” index, and were often very illiquid.

In fact, these tokens never really had the expected leverage effect. If you had an ETHBULL token (equivalent to a long position with a leverage of 3) and the market went up sharply, your leverage was actually close to 1.5 or 2.

If you had the same token and the market fell sharply, your leverage was close to x4. In short, if you were right, you were less profitable than expected, if you were wrong, you lost more than expected.

To maintain roughly adequate leverage, FTX rebalanced its tokens daily at 00:02 UTC. To rebalance the tokens, it was enough to inject capital into the respective perpetual market to restore the leverage effect. Information that will be important to the rest of this story.

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To extract value from these tokens, a trader by name @adlay_eth on Twitter simply grouped leveraged tokens based on their underlying perpetual market. He used Excel to determine how much each forever was unbalanced in relation to his leverage tokens.

He then used the chart below to see how unbalanced each token’s leverage was.

A picture of how the strategy works
Graph revealing that the leverage of certain cryptocurrencies is unbalanced

This allowed him to position himself in the same direction as FTX, and on top of that he knew when they entered position (00:02 UTC).

He states that he made this strategy work for a long time until he had an achievement on 2000%. Then FTX blocked his account and changed the rebalancing process.

But he still manages to create new accounts with new email addresses and continue his strategy. The loophole had not actually been closed, FTX was simply working against its own strategy.

Another error on FTX

The author of the thread says so himself, funds that invested in FTX were completely blindsided. According to his words, he considers himself a “street child” and he has managed to find this anomaly, quantify it and extract added value from it.

The conclusion I want to draw from this case is that everyone is on the same level in the markets. When you’re just starting out, you often think some people are geniuses, especially when you think about the biggest mutual funds. However, these investment funds have invested in FTXand the smartest person there is this self-described street kid who managed to exploit an ill-conceived rebalancing process.

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