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Alameda/FTX Collapse (November 2022)

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This document was created on 2026-01-09, and has not yet been reviewed.

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In November 2022, FTX—the third-largest cryptocurrency exchange—collapsed in less than a week after revelations that its affiliated market maker, Alameda Research, had been using customer deposits as its personal trading fund. Over $8 billion in customer assets vanished. The founder received a 25-year prison sentence.

The collapse demonstrated what happens when a market maker operates without oversight, with privileged exchange access, and with other people's money.

Summary

  • Alameda Research was FTX's affiliated market maker, both controlled by Sam Bankman-Fried
  • Alameda had secret exemptions from FTX's risk controls, including immunity from auto-liquidation
  • Customer deposits on FTX were funneled to Alameda to cover trading losses
  • A CoinDesk article exposing Alameda's balance sheet triggered a bank run
  • FTX filed for bankruptcy on November 11, 2022, with $8.9 billion in customer funds missing
  • Sam Bankman-Fried was convicted of fraud and sentenced to 25 years in prison

Background

The Players

Sam Bankman-Fried (SBF) founded Alameda Research in 2017 as a quantitative trading firm. In 2019, he founded FTX, a cryptocurrency derivatives exchange. Both entities shared leadership, office space, and—as it turned out—customer funds.

Alameda Research operated as FTX's primary market maker. It provided liquidity on the exchange, captured arbitrage opportunities, and served as counterparty to customer trades. It had special access that other market makers did not.

FTX grew to become the third-largest crypto exchange by volume, valued at $32 billion at its peak in early 2022. It was endorsed by celebrities, sponsored sports stadiums, and was considered one of the "legitimate" crypto companies.

The Structure

graph TD
    SBF["Sam Bankman-Fried<br/>Controlled both entities"]

    subgraph "Alameda Research"
        ALM["Market Maker"]
        TRADE["Prop Trading"]
        VC["Venture Investments"]
    end

    subgraph "FTX Exchange"
        CUST["Customer Deposits"]
        ENGINE["Trading Engine"]
        FTT["FTT Token"]
    end

    SBF --> ALM
    SBF --> ENGINE

    CUST -.->|"Secret loans"| ALM
    ALM -->|"Special exemptions"| ENGINE
    FTT -->|"Collateral"| ALM

    style SBF fill:#FF6B6B
    style CUST fill:#FFE4B5
    style ALM fill:#FFB6C1

Figure 1: The circular relationship between FTX and Alameda.

The Fraud

Special Exemptions

Alameda had privileges on FTX that no other trader had:

PRIVILEGE NORMAL TRADERS ALAMEDA
Auto-liquidation ☑ Enforced ☒ Exempt
Negative balances ☒ Not allowed ☑ Allowed
Withdrawal limits ☑ Enforced ☒ Exempt
API latency Standard ☑ Faster access

The liquidation exemption was particularly dangerous. When other traders' positions moved against them, FTX automatically closed their positions to prevent losses from exceeding their deposits. Alameda could maintain underwater positions indefinitely.

The Hidden Line of Credit

FTX's code contained a hidden feature: a $65 billion line of credit exclusively for Alameda. This allowed Alameda to withdraw funds that didn't belong to it—customer deposits.

When Alameda's trading bets went wrong in 2022, it didn't face losses. Instead, it borrowed from FTX's customer deposits to stay solvent. The customers' balances still showed on their screens, but the actual assets were gone.

FTT as Collateral

Alameda's balance sheet was heavily composed of FTT—FTX's exchange token. The problem:

  1. FTT was illiquid (Alameda itself was the primary market maker)
  2. Alameda used FTT as collateral for loans
  3. The "value" of this collateral depended on Alameda continuing to support the price
  4. If FTT's price fell, Alameda's entire balance sheet collapsed

This was circular: Alameda's solvency depended on FTT's price, which depended on Alameda's market making.

Timeline of Collapse

timeline
    title FTX/Alameda Collapse Timeline
    section November 2022
        Nov 2 : CoinDesk publishes Alameda balance sheet, reveals FTT concentration
        Nov 6 : Binance CEO announces intent to sell $580M in FTT holdings
        Nov 6-7 : Bank run begins, $6B withdrawal requests in 72 hours
        Nov 8 : Binance signs LOI to acquire FTX
        Nov 9 : Binance backs out after due diligence reveals hole
        Nov 10 : SBF attempts to raise $8B, fails
        Nov 11 : FTX files for Chapter 11 bankruptcy
    section Aftermath
        Dec 2022 : SBF arrested in Bahamas
        Nov 2023 : SBF convicted on all 7 counts
        Mar 2024 : SBF sentenced to 25 years in prison

November 2: The CoinDesk Article

CoinDesk published a story based on leaked documents showing Alameda's balance sheet. The largest asset: $5.8 billion in FTT and "FTT collateral." A trading firm supposedly worth $14.6 billion was primarily holding tokens issued by its sister company.

November 6-7: The Bank Run

Binance CEO Changpeng Zhao (CZ) announced on Twitter that Binance would liquidate its FTT holdings (~$580 million) due to "recent revelations." FTT's price began falling.

FTX customers panicked. Over $6 billion in withdrawals were requested in 72 hours. FTX didn't have the funds—they'd been sent to Alameda.

November 8-9: The Failed Rescue

Binance signed a non-binding letter of intent to acquire FTX. Within 24 hours, after reviewing FTX's books, Binance withdrew. The hole was too large.

November 11: Bankruptcy

FTX, Alameda Research, and 130 affiliated entities filed for Chapter 11 bankruptcy. New CEO John Ray III—who had overseen Enron's bankruptcy—stated: "Never in my career have I seen such a complete failure of corporate controls."

Damage Assessment

Financial Losses

CATEGORY AMOUNT
Customer funds missing $8.9 billion
FTX peak valuation $32 billion
FTT peak market cap $9.6 billion
Broader market cap lost ~$200 billion
Creditor claims filed $16+ billion

The "Alameda Gap"

After Alameda's collapse, overall crypto market liquidity dropped by approximately 50%. Order book depth across major exchanges fell dramatically. This "Alameda Gap" persisted for months, demonstrating how dependent the market had become on a single (fraudulent) market maker.

xychart-beta
    title "Crypto Market Depth: Before and After Alameda"
    x-axis ["Oct '22", "Nov '22", "Dec '22", "Jan '23", "Feb '23", "Mar '23"]
    y-axis "Relative Depth (%)" 0 --> 120
    line [100, 95, 48, 52, 55, 58]

Figure 2: Aggregate order book depth dropped ~50% after Alameda's collapse and recovered slowly.

What Went Wrong

Conflict of Interest

The fundamental problem: FTX and Alameda were controlled by the same person. Alameda was supposed to be an independent market maker providing liquidity. Instead, it was a mechanism for the founder to trade with customer funds.

PROPER STRUCTURE ACTUAL STRUCTURE
Exchange and MM have separate ownership Same owner controlled both
Customer funds segregated Customer funds lent to MM
MM subject to same rules as other traders MM exempt from risk controls
Transparent relationships Hidden $65B credit line

No Segregation

Customer deposits on FTX were not segregated from operational funds. There was no independent custodian. When Alameda needed capital, it simply took from customer deposits.

No Oversight

FTX operated from the Bahamas with minimal regulatory oversight. There were no audited financials for FTX's core exchange business. The company's auditor was a small firm operating out of the metaverse.

Circular Dependencies

FTT's price was supported by Alameda's market making. Alameda's solvency depended on FTT's price. Customer deposits backed Alameda's positions. Customer "assets" on FTX included FTT. When any part failed, everything failed.

Criminal Convictions

Sam Bankman-Fried: Convicted on all seven counts (fraud, conspiracy, money laundering). Sentenced to 25 years in prison (March 2024).

Caroline Ellison (Alameda CEO): Pleaded guilty, cooperated with prosecutors. Sentenced to 2 years in prison.

Gary Wang (FTX CTO): Pleaded guilty, cooperated with prosecutors. No prison time (supervised release).

Nishad Singh (FTX Engineering Director): Pleaded guilty, cooperated with prosecutors. No prison time (supervised release).

Civil Actions

The FTX bankruptcy estate has pursued clawback actions against:

  • Celebrity endorsers who received payments from FTX
  • Political campaigns that received SBF donations
  • Venture capital firms that received returns before collapse
  • Companies that received investments from FTX/Alameda

As of late 2025, the estate has recovered sufficient funds to repay customers at pre-collapse dollar values (though not at crypto's subsequent appreciation).

Lessons

For Market Structure

  • ☒ Affiliated market makers create inherent conflicts of interest
  • ☒ Self-custody matters—"not your keys, not your coins"
  • ☒ Opaque corporate structures hide risk
  • ☑ Proof of reserves became standard after FTX (though imperfect)

For Due Diligence

  • ☒ Celebrity endorsements signal nothing about solvency
  • ☒ Regulatory arbitrage (Bahamas headquarters) is a red flag
  • ☒ Auditors should be reputable and verifiable
  • △ Exchange tokens used as collateral create circular risks

For Regulation

The collapse accelerated regulatory action against crypto:

  • SEC increased enforcement actions
  • Multiple jurisdictions proposed exchange licensing requirements
  • Calls for proof-of-reserves and customer fund segregation

References

Primary Sources

Investigative Reporting

Changelog

DATE AUTHOR NOTES
2026-01-09 Artificial. Generated by robots.
? ? Reviewed, edited, and curated by humans.