In three and a half years, Sam Bankman-Fried has quietly transformed from an ETF trader into a cryptocurrency legend and one of the world’s youngest billionaires, with an estimated net worth of almost $9 billion.
In 2017, Bankman-Fried, a former trader at the elusive quant-trading firm Jane Street, launched a crypto-trading firm called Alameda Research, which manages over $100 million in digital assets. He has become known as the “Moby Dick of crypto whales” because of the big moves the firm makes in the crypto market.
The firm’s million- and billion-dollar trades turned Bankman-Fried into a self-made billionaire by 29, Forbes reported. He plans to donate and give away as much of his wealth as possible.
In a recent appearance on Bloomberg’s “Odd Lots” podcast, Bankman-Fried sat down with Tracy Alloway and Joe Weisenthal to explain his journey into crypto, the lucrative arbitrage opportunities he’s found along the way, and the development of his cryptocurrency exchange, FTX.
Bankman-Fried described stumbling into the world of crypto as he searched for a career change. What he found was a crypto market ripe for arbitrage opportunities — taking advantage of the price differences in a single asset — at a time when Bitcoin was in the midst of a raging bull cycle in late 2017.
“It had a lot of the hallmarks of something that might be a really inefficient system with a big need for
, which is basically gigantic demand all of a sudden,” Bankman-Fried said on the podcast. “Growing really rapidly — lots of volume, lots of retail users, and not a lot of time to build up institutions, not a lot of time to build up liquidity, not a lot of time to build up a system that worked 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 the kimchi premium.
Bitcoin was pricing at around $10,000 in the US. But on Korean exchanges, it was pricing at around $15,000. This was because of a huge net demand for Bitcoin in Korea, Bankman-Fried said.
There was a vast spread of around 50% at its peak, he said, but the problem was that it was essentially impossible to arbitrage the opportunity at scale because the Korean won is a regulated currency.
“You can’t sort of easily loop that arbitrage through. You get stuck at one end,” Bankman-Fried said. “And a lot of people tried to do this trade. Many found a way to do it for small size. Very, very hard to do it for big size, even though there are billions of dollars a day volume trading in it, because you couldn’t offload the Korean won easily for non-crypto.”
The premium still exists today, although it’s not as significant. CryptoQuant had the premium listed at 18% on April 6.
Daily returns of 10%
Bankman-Fried searched for a similar opportunity in other markets and found it in Japan. He described the Japanese trade to the website Finance Magnates as “an absurdly good trade,” the best trade he’d ever seen.
“It wasn’t trading quite the same premium, but it was trading at a 15% premium or so at the peak, instead of 50%,” Bankman-Fried said on “Odd Lots.”
Investors could buy Bitcoin for $10,000 in the US, send it to a Japanese exchange, sell it for $11,500 worth of Japanese yen, and then convert that back to dollars.
“It took about a day to do that trade, given the wire transfers involved. But it was doable, and you could scale it, making literally 10% per weekday, which is just absolutely insane,” Bankman-Fried said.
He added that the trade was a thousand times what could be made in traditional finance spreads, and it could be done at scale with hundreds of millions of dollars of volume per day.
So, why didn’t others catch on and make the trade?
It comes down to complexity. Traders may face barrier after barrier when trying this type of trade — from finding the right platform to buy Bitcoin at scale to getting approval to use Japanese exchanges and bank accounts, to even getting millions of dollars out of Japan and into the US every day.
“You do have to put together this incredibly sophisticated global corporate framework in order to be able to actually do this trade,” Bankman-Fried said to Finance Magnates. “That’s the real task, the real hard part.”
Finding investors willing to provide the capital to do this is difficult — but it pays off.
“Somehow you then get your $200 million in capital,” Bankman-Fried said on the podcast. “And now what, do you make $20 million today? The answer is yes, you do.”
Risk versus opportunity
The dispersion of the crypto ecosystem is what helps generate the big arbitrage premiums versus the traditional finance model.
There’s no cross merging between exchanges and no central clearing firms or brokers, Bankman-Fried said. “So it’s really capital-intensive, and also 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 can seem like there is a risk everywhere. So to an investor who is relatively uninformed about the crypto space, it can seem risky with little edge relative to the risk, Bankman-Fried said.
But once investors and traders understand the space deeply, they can distinguish where the counterparty risk is close to zero but the edge is still high.
“There’s a lot of money to be made, if you can really figure out and pinpoint when there is and isn’t a ton of edge and when there is and isn’t a ton of actual counterparty risk,” Bankman-Fried said.