He was the golden boy of crypto. He wore cargo shorts to meetings with presidents. He played League of Legends while pitching venture capitalists. Then, in the blink of an eye, $8 billion vanished. People keep asking: what did he do to cause the biggest financial collapse of the decade?
It wasn't just a "bad trade."
When Sam Bankman-Fried (SBF) founded FTX in 2019, it was marketed as the "safest" exchange in the world. He told everyone that FTX was different because it had an automated liquidation engine that prevented losses. He was the "adult in the room" during the 2022 crypto winter, bailing out companies like BlockFi. But behind the flashy Super Bowl ads and the naming rights to the Miami Heat arena, a massive lie was festering. He was essentially using customer deposits as a personal piggy bank for his hedge fund, Alameda Research.
The Secret "Backdoor" That Broke the System
Most people think FTX just got unlucky with market fluctuations. That's not the case. What did he do specifically? He directed his developers—specifically Gary Wang and Nishad Singh—to hard-code a secret "allow_negative" flag into the FTX codebase.
This wasn't a glitch.
It was a deliberate feature. This piece of code allowed Alameda Research to carry a negative balance on FTX that eventually reached a staggering $65 billion. While regular users would get liquidated if their collateral dropped too low, Alameda could keep spending money it didn't have. It was an unlimited line of credit funded entirely by the people who thought their Bitcoin was sitting safely in their FTX accounts.
Caroline Ellison, the former CEO of Alameda, later testified that SBF directed her to use these customer funds to pay back Alameda's lenders. When the crypto market started tanking in early 2022, Alameda's risky bets went south. Lenders wanted their money back. SBF didn't have the cash, so he reached into the FTX jar and handed over billions of customer dollars.
Where the Money Actually Went
If you're wondering how someone spends billions of dollars that fast, the answer is "everywhere." SBF wasn't just trading; he was buying influence and a lifestyle that felt like a fever dream.
- Political Donations: He funneled over $100 million into political campaigns. He wanted to shape the very regulations that were supposed to oversee him.
- The Bahamas Real Estate: FTX spent roughly $256 million on luxury real estate in the Bahamas. This included the $30 million penthouse at the Albany, where SBF lived with his inner circle.
- Venture Capital: He threw money at anything that moved. He invested $500 million in the AI startup Anthropic—which, ironically, became one of the few assets that actually gained value later on.
- Celebrity Endorsements: Tom Brady, Larry David, and Steph Curry weren't cheap. He paid them tens of millions to tell the public that FTX was a sure bet.
Honestly, it was a mess.
Internal record-keeping was non-existent. John J. Ray III, the man who took over FTX to clean up the bankruptcy (and the same guy who handled Enron), said he had never seen such a "complete failure of corporate controls." They were using QuickBooks to track multibillion-dollar movements. They approved expenses with emojis on Slack. It sounds like a joke, but it’s the reality of how billions were lost.
The Collapse: November 2022
The house of cards started shaking on November 2, 2022. A report from CoinDesk revealed that Alameda Research’s balance sheet was heavily comprised of FTT, a token created by FTX itself. Basically, SBF was using his own "magic beans" as collateral for massive loans.
When Changpeng "CZ" Zhao, the CEO of Binance, announced he was selling his FTT holdings, it triggered a digital bank run.
🔗 Read more: Who's the richest person: What the Headlines Always Get Wrong
Users rushed to withdraw their funds. But the money wasn't there. It had already been spent on Bahamas condos and bad trades. Within days, FTX filed for Chapter 11 bankruptcy. SBF went from being worth $26 billion to essentially zero overnight. He tried to claim it was just a liquidity crunch, a simple mistake in accounting. The Department of Justice disagreed.
Justice and the 25-Year Sentence
What did he do in the eyes of the law? He committed wire fraud, securities fraud, and money laundering. In November 2023, after a month-long trial in New York, a jury found him guilty on all seven counts.
Judge Lewis Kaplan didn't buy the "awkward math nerd" act. During the sentencing in March 2024, the judge noted that SBF had committed perjury and shown a "lack of remorse." He was sentenced to 25 years in federal prison.
It's a long fall for a guy who was once compared to J.P. Morgan. The trial revealed that SBF knew exactly what he was doing. He wasn't a victim of a market crash; he was the architect of a massive fraud. He lied to investors, lied to customers, and lied to Congress.
Actionable Lessons for the Modern Investor
The FTX saga changed the crypto landscape forever. If you are still active in the markets, here is what you need to do to protect yourself.
- Proof of Reserves is Bare Minimum: Never keep your life savings on an exchange that doesn't provide transparent, third-party audited proof of reserves. Even then, be skeptical.
- Self-Custody is Non-Negotiable: If you have significant holdings, move them to a hardware wallet like a Ledger or Trezor. "Not your keys, not your coins" isn't just a meme; it’s a survival strategy.
- Beware of "Founder Worship": SBF used his image to distract from his balance sheet. Don't trust a project just because the founder is on the cover of Forbes or donating to your favorite cause.
- Understand the Tokenomics: If a platform's value is backed mostly by its own native token (like FTT was for FTX), it is a giant red flag. That is circular logic that ends in a death spiral.
The story of Sam Bankman-Fried is a reminder that in finance, if something looks too good to be true, it’s probably because someone is breaking the law. He didn't just lose money; he destroyed the trust of millions of people. Understanding the mechanics of his fraud is the first step in making sure it doesn't happen to you again.