FTX (with Sam Bankman-Fried & Mario Gabriele)

Hey, Acquired listeners, David and I are recording this in November of 2022, while lots of news is coming out about FTX's collapse in real time. We recorded this episode about a year ago, and we wanted to acknowledge there's been lots of accusations and lots of very apparent wrongdoing by FTX and potentially Alameda since we recorded this. We wanted to leave this up for posterity. We recorded this interview. We think it's worth watching with full context. Indeed. Rather than making any sort of statement instead, we just finished recording a three-plus-hour-long episode about the history of Enron, which felt like a much more appropriate, acquired way to add to the conversation around FTX. If you're watching this, we also recommend watching the Enron episode

and hearing the discussion on that show as well. With that, on to the episode. Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down, say it straight. Another story on the way. Who got the truth? Welcome to Season 9, Episode 7 of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.

And I'm David Rosenthal, and I am an angel investor based in San Francisco. And we are your hosts. Today, we are telling the story of the crypto trading exchange, FTX, started just two and a half years ago and today worth over $25 billion. They're by far the fastest growing crypto exchange. In the research, I found that they grew an astonishing 10x by volume in the year 2020. I went to look if they repeated that unbelievable feat in 2021 and found out that they actually 10x'd just in the first half of 2021. So the answer is no, they didn't. They doubled it.

Unbelievable. So the pace is accelerating for FTX. We're still waiting on end of year numbers, but this company is just astonishing. So FTX is now the sponsor of the Miami Heat's basketball arena, FTX arena, and you can see their logo on every Major League Baseball umpire's uniform. You can see Tom Brady and Giselle in FTX commercials. It's wild. So what is going on here? And how did they get so big so fast? What's with these huge brand deals? Today, we're going to tell the story with the CEO and founder, Sam Bankman-Fried. Sam is a genius, an effective altruist, and he's also the wealthiest person under 30 in the world with an estimated net worth of nearly $9 billion.

And we are trying something new at Acquired. We have a guest host here with us today. We've brought in Mario Gabriele from The Generalist to team up for this episode. Welcome, Mario. Thank you guys so much for having me. I'm quite honored to get to be the first. You bet. Listeners, if you haven't read it yet, Mario did a three-part epic series on FTX over at The Generalist. And I think it's safe to say, Mario, you are truly a world expert on this company after writing, I think, 36,000 words. Yeah, it was a long series. Brevity is never really my strong suit, but I really let myself sort of fly on this one. I think that's why us and you and Paki get along so

well. We are all birds of a feather. So before we get in, is it right to say, Mario, is this company only 200 employees? And I think maybe started the year at a few dozen employees? Yeah, that's right. When I sort of wrote my pieces in summer, it was closer to, I want to say 70, 75. So they're growing extremely fast. But still, when you look at the output, the leverage on each individual person is astonishing.

All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora, the agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Lagora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months.

They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lagora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

And they recently launched Lagora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And Lagora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Lagora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Lagora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at lagora.com slash acquired and just tell them that Ben and David sent you.

All right, listeners, we're going to dive in here. Please know, and maybe even more than usually when we tell you this, but this is not investment advice. We may have investments in the projects, the tokens, the companies that we discuss. This show is for informational and entertainment purposes only. Mario, I think we want to make sure that we say this and cover you as well, that you may have interests in things discussed and do your own research. With that, on to our interview with Sam Bankman-Fried. Sam Bankman-Fried, welcome to Acquired.

Thanks for having me. Well, it is our pleasure and our privilege to really get to have you tell the story of FTX today, of Alameda Research, how this whole crazy thing came to be, and really help us analyze the crypto assets ecosystem today. It's a crazy world. Well, the first question I have for you is, how did this all get started? Take us to the moment where you became crypto curious, for lack of a better term, or maybe a tongue-in-cheek term, and how you started digging in on all this. Yeah, so the first thing I did, I can actually step-by-step go through it because it's a pretty simple process. I went to coinmarketcap.com, I clicked on Bitcoin, and then I clicked on markets. That was my first investigation. And I'll do that right

now to see what it shows today because I think it's going to be an interesting contrast. So if you do that today, it's going to show you a bunch of markets for a Bitcoin. And just sort of looking across the prices here, the data here is not perfect. They don't understand others pricing extremely well. But sort of the range of numbers that I'm seeing, with a few exceptions that we can get to, is 48,280 at the low end, and 48,320 at the high end. And so that's like a 10 basis point difference, I think, between sort of like the low end and high end of pricing of a Bitcoin across major cryptocurrency exchanges. And that's like about typical today. If you're

thinking like, is there an arbitrage in Bitcoin, the answer is maybe, sort of. I mean, you're going to be paying a few basis points fees on both sides, right? This data, it's like, it's not perfect, it isn't perfectly synchronized, they're not pricing tether quite right. So really, the answer is like, yeah, kind of borderline. So it's a couple basis points. And when you went to coinmarketcap way back when and looked, was your intention, hey, is there an arbitrage here? Is there a large spread?

Yeah, it's basically what I was looking for. There's just an incredibly simple calculation you can do to get some sense of maybe kind of sort of what one could maybe do, if for some reason, everything was easy, and all the data was right. And it's sweeping a lot under the rug, but it gives you an upper bound on how much you can make doing arbitrage. And what is that bound? Well, you take the difference in pricing between major exchanges, right? That's like the amount maybe you could make on each trade, you multiply by the daily trading volume across those exchanges.

And then you say, I don't know, maybe it'll be a percent of volume. I don't know, sort of making that up. Again, this isn't meant to be precise. And back then, so daily trading volume was only like a few billion dollars, I think. And what year is this? This is late 2017. So it's a lot less than today. The spread between the exchanges was about five to 10%. Wow, was what you saw. So it was about 1000 times bigger than the spread today.

And was that even across major exchanges, not even going esoteric? Coinbase to Bitstamp was usually like one or 2%. And that's not even looking at Bitfinex or anything based on Tether or Japan or Korea or anything like that, right? Which would sometimes get in the 20s of percents. So okay, what's this number say? Some number of percent, I don't know, let's say 2%, maybe you could make, times a few billion, times 1% of volume. So 1% of volume is 20 million, I don't know, dollars a volume or something like that. Make 2% on that. I think that's like 200 grand.

And so okay, that's an estimate for how much money maybe you could make per day doing arbitrage. And that's a lot of money to make each day. Like I sort of saw that and it's like, oh, wow. I mean, again, I don't know, this all might be fake. But if it's not fake, that's pretty compelling. And that was enough for me to like, go create some accounts on exchanges and try and do it and see what happened. Sam, do you remember where you were when you first looked at that CoinMarketCap page and sort of the sensation of recognizing opportunity there?

I was in California. I moved to California shortly after leaving Jane Street. And I sort of looked through it and it was very hard for me to do anything but immediately go try to do that. It's one of these things where you see it and sort of the way I'd been trained to think was it was painful every day you don't do that. You see a great trade in front of you and you're not doing it and that should be painful. Like there should be a negative feedback. Why are you not doing that thing right now? Right? Why are you missing this opportunity? And so it's just like, I just need to fucking do this right now. To set some context, you were a trader at Jane Street Capital, which is

one of the top quantitative hedge funds in the world. So that $200,000 a day potential arbitrage opportunity in Bitcoin. How did that compare to the best trades you saw in traditional markets at Jane Street? So it's interesting. And without going into detail about IP sensitive things here, I guess what I'll say is, first of all, how much volume did Jane Street trade per day? I don't know if there's a public number here. But I can tell you that equity markets trade some number of hundreds of billions of dollars per day, maybe a trillion per day, depending on how you count. And like Jane Street is one of the big players in it. I would guess it's not the biggest by volume, generally like a true HFT firm

would be. But okay, the volume numbers that you'd be talking about there would be way bigger than the volume numbers that we're seeing. I mean, maybe if you traded 100% of crypto volume, but you're not going to do that, right? On the other hand, if you can make one basis point on a trade in traditional finance, that's a good trade. No firm like, oh, you're only making a BIP on it, why bother? If you can get it done in a day or something, right? Say like, yeah, here's like a shorter time scale trade, you're going to make a basis point. I'm like, yeah, go do that trade. That sounds great.

You know, if you can do it big, do it big. That sounds pretty good. We're happy with that. Maybe you can make two basis points. That'd be even better. Three? Wow. 10 basis points. Come talk to us if it's big, because we all make sure you're not missing something about it, because that's a lot of basis points. And you're looking at 10 to 20% here. Right. It just blew it out of the water. And so I don't want to say this would have made a lot of money compared to the total amount of money that a top trading firm would make. I would not believe that statement. But I do think that in terms of percentages, I'd never seen anything like it

before. 1%. I don't know that I'd ever done a trade good by 1% before in my life on anything. Maybe I had some weird, tiny, illiquid shit, which is like, holy shit, guys, this trade is good by 1%. They're like, yeah, it's $38. Congrats, Sam. So yeah, the spreads here were just unheard of, if true. But of course, maybe they weren't true. You know, maybe it's all fake data. I don't know. Or at least I didn't know that.

You had left Jane Street and you went to California. Was it like the classic, I don't want to be a trader. I'm leaving this world. I'm thinking about what I'm doing next. But you got pulled back in because the opportunity was just so unignorable. Only sort of. I really, really loved my job at Jane Street. I really enjoyed it. It was a good fit for me. And they were also just really good to me there and to most of their employees.

It was a good place to be. And it suffered from basically none of the problems that you generally hear about on Wall Street. I think many places do suffer from those problems. It mostly didn't. So I was super happy there. It was more that I sort of sat down and thought about what I want to do with my life and felt like, I don't know what the answer is, but there are a lot of things I have to try before I die. There are a lot of things that I want to give a shot at.

So I just think they're extremely high upside. I don't know how good they'll be. But like, I just listed 10. I'm like, oh boy, there are 10 compelling things. Probably one of them's going to be great. What was on that list? So it was a pretty diverse list. Examples of things on that list. Politics, going into politics is one of them. Becoming a journalist was one of them. Working at a nonprofit was one of them. Just bumming around the Bay Area and seeing what happened was one of them. Trying to found some startup, I don't know what, was one of them. Fundraising for nonprofits was one of them.

I didn't feel very confident about which direction to go in. I kind of felt compelled in a lot of different conflicting ways. So it's kind of impossible from the outside, looking at you in this story, not to make the analogy to 30 years earlier, Jeff Bezos and Mario made that analogy in his great pieces. How does that resonate to you? And of course, Jeff leaving D.E. Shaw, quantitative trading hedge fund, because he saw the huge opportunity of the internet. And it was like, I don't know what I'm going to do on the internet, but I'm going to do something.

So I didn't know that story at the time. I think it probably would have resonated with me had I known it. But all of those stories are things that I didn't dig into until more recently. But I think there are a lot of parallels there. At the time that you looked at coin market cap, how much knowledge did you have about Bitcoin in general? Had you been introduced to the white paper? Were some of your friends talking about it? I'm trying to decide whether nothing is the right answer.

It might be. I'm not sure if it's quite the right answer. I'm not sure it's not the right answer, but it's pretty close to that. Like if you asked me, what is a Bitcoin? I would not have been able to give you an answer other than a thing that trades on some exchanges and decentralization. I don't know. It's kind of better than everyone else at the moment a lot of the time. Maybe. Right. I got one word further, but I couldn't have described a blockchain.

I guess it was like, you know, they chained the blocks with the transactions in them. I didn't really know who they was. I don't know if the blockchain does it. I really didn't know what crypto was when I first jumped in. It's a fascinating way to come to it because there's so many other folks. I mean, I can remember in 2012 or 2013, seeing Brian Armstrong at South by Southwest and getting obsessed with the notion of decentralization, but totally coming from the product manager developer side, never having experience in finance. And the fact that it was a tradable asset was the part that was the completely foreign thing to me all these years later. It's fascinating to me how technologists see the

core technology. People from the finance world see the core change in the financial asset. And this crazy soup that we're in is because those two things are merging. I think that's right. And one thing which we really try to maintain as a company is that people understand both of those sides. I mean, I did not before. I do now understand what a blockchain is, but we want our business development team to understand what a blockchain is and how it works. And we want our developer team to understand what a trade is and how it works.

And I think it's really hard to make good decisions. I'll give you an example. We want to list a new asset and we have to think about risk parameters for it. Is there some interplay between blockchain confirmation times and initial margin to even know whether there is interplay between those, whether that is a thing you have to think about? You have to have some instinct on both sides, right? You have to be able to tell me it takes about five minutes to send something on a blockchain and that number could get up to five hours during congested periods. And you also have to know we care about movements on the order of a few percent for risk purposes. And we don't credit people for

margin purposes until it lands. So we're not usually pre-crediting, but maybe for some blockchains, we want to. And we have to do some extent. I say we don't pre-credit, but how many confirmations do we require for Bitcoin? It's not infinity. I think the answer is mostly there isn't a lot of interplay between those two things. But I think it's really hard to know there was interplay unless you can sort of go through that thought process on both sides, be able to know what to think about and how to ballpark it. Well, I want to take us back chronologically. You talked about you pull up CoinMarketCap. You think maybe there's an opportunity to make $200,000 a day. You end up finding a trade

that makes about $20 million a day. How did that transformation happen and how long was that opportunity available? Basically, the best trade we found was the Japan arb. So Korean Bitcoins were trading 10 to 50 percent above American Bitcoins. And lots of people said, well, why don't you buy American Bitcoins and sell them in Korea? And the answer is that Korean WAN is a restricted currency. You can't get the Korean WAN out of Korea. You can't sell it for dollars easily. So you could buy a $10,000 Bitcoin, sell it for $13,000 in Korea of Korean WAN. Now you have Korean WAN on a Korean exchange and the only thing you do with it is buy a Bitcoin back for $13,000. Right? I'm being a

little bit clipped. There's some things maybe you can do, but you couldn't fundamentally just do that trade. Nearby though, Japanese Bitcoins are trading 5 to 20 percent higher than American Bitcoins. Still quite a bit. And the Japanese Yen, it's not a restricted currency. In theory, you could buy an American Bitcoin, send it to Japan, sell it 20 percent higher, turn the yen back into dollars, wire it back to America, and you've just made a bunch of percent. So anyway, we tried to get set up to do that. It was incredibly logistically complex to do so. But around the start of 2018, we finally were able to turn it on. Sam, when you say we, who's in the room there at this point?

20-ish people who we cobbled together at the last moment. Myself, some high school and college friends of mine, some people from the effective altruism community, some people who are friends of friends of friends. I mean, we'd only existed for like a month or two and had been sort of frantically trying to put together something that looked like a team. It was very sort of ad hoc. And what was the scale of it? Well, in theory, if one had infinite capital, one could have made 10 percent on a few hundred million dollars a day, maybe. So I think 20 million was the size of this trade. Now, we did not have a few hundred million dollars of capital at the time, which is very frustrating.

We still made like a million dollars a day from it during that period. So it was still a fantastic trade. But meantime, we're doing everything we could do to scale up our capital base, because we're just like, look, we can just like print insane. Like, what's the APY of this? It's a number that doesn't even sound real. Like, I don't even want to say it. You like, you hear that number like, oh, yeah, Ponzi scheme. And unfortunately, we basically scaled up capital base the day that the ARB went away. And so we failed to really ever get to the point where we could have gotten with it.

But it's still an amazing trade for the three or four weeks that both we were active and it was alive. And so the we at this point is Alameda Research. This all predates FTX. That's right. And are you thinking you guys are going to build a crypto quantitative trading firm at this point? We were thinking that. And while doing that trade, we were doing a lot of other trades much smaller. Our vision was, look, this probably won't be the last good trade ever. We should build a firm here, whatever that means. We want to be scaling up. Like what was fundamentally happening here?

Incredible amounts of customer excitement about crypto, right? Huge, huge buying and selling pressure, usually buying pressure, but some of each in different exchanges and jurisdictions and tokens all over the place. And very little liquidity. None of the institutional liquidity buyers were in this space. So like, yeah, when Japan was buying $400 million a day of crypto, there was no firm set up to like be able to provide that liquidity. And so this is like giant mismatch of liquidity demanded, liquidity supply that was creating gigantic spreads. Customers were getting terrible prices. And there was a pretty big opportunity to come in and provide on both sides of that. And the Japan ARB was just one example of that.

Before you guys ramped up on the LP side, were you guys just running your own money into this? Basically, yeah. So it was, you know, money we cobbled together. Like I don't know, I had a little leftover. I mean, we cobbled together a few million dollars, then, you know, sort of like iterated on that capital base over time. Although without ever taking external equity or anything like that. Without naming names, because I'm sure you can't, do you have any fun meetings of what it was like to walk into a pitch? Like any memory that sticks in your mind where you're trying to raise capital and you're describing the trade that you're making?

Yeah. So people were really excited hearing it, but they had all these questions. And the questions just keep coming of like, how'd you handle A and B and C and D and E and like risk and custody and things like that. And we're trying to answer them. But what's the honest answer? Where are we really actually coming from? I don't know. We just fucking started this company two months ago. And we're trying to scale up extremely quickly. We don't have great answers to some of your questions.

You know, what's your policy on X? We haven't written a policy on X. We've been around for two months and we've been desperately trying to get a bank account the whole time. So definitely, there are a lot of people who are like, I'm super excited to this. Can you show me your audits? And we're like, literally no crypto company has ever gotten audited before of any type. And we've been around for two months. Obviously, we don't have an audit. Insane. So there's a lot of the pain of doing it was just people were like, provide us some reasonable assurances that every other investment we've ever made has been able to provide us and we're like, oh boy, that sounds hard.

Other things that were going on, basically, were, you know, we're trying to do what we can to kind of optimize this opportunity. But this was a period in crypto when a lot of people made a lot of money. We weren't the only ones who thought that we had a pretty good opportunity. So how do you compare a quantitative trading firm to, for instance, someone who had just issued a token and then it went up a lot? And they're like, well, our returns are 3 trillion billion percent.

And it's like a little bit of a silly comparison, but it's not like completely obviously a stupid comparison. Like it's a little bit complicated to think about what the right way to think about that is. There's no clear right answer sometimes. And so we're simultaneously like fighting for capital versus a lot of firms like that. And, you know, frankly, people who invest in tokens made a lot of money. Well, sometimes it depends when you mark to and from. But those are probably the two biggest things I think like came up during our conversations. And you're referring to the fact that you're doing all this just after the ICO boom. So there was a lot of people that were sort of inventing

securities, not securities out of nothing. And then those would go up rapidly. It could also go down rapidly. Yeah, that's right. It was sort of at the tail end of the ICO boom. The ICO boom had not actually quite ended yet as of then. And LPs are essentially looking at it as just high risk capital. And so the opportunity to earn a trillion billion percent versus 10 percent, they're sort of trying to weigh those two things in a category that they think, well, what the hell? It's high risk anyway.

Yeah, that's sort of right. And we fell in a little bit of an awkward in between, frankly, where on the one hand, we were high risk in that, like, who the fuck are these people? And it has the word crypto in it. So it's as a word crypto in it. But we're also like, well, we're low risk. We're doing arbitrage, you know. And those aren't a firm exactly for extremely risky, low risk investments that make a fair bit of return, but less than extremely risky ones do.

It was trying to appeal to a non-existent niche. And that definitely made it harder. Okay, so why start FTX? You've got this quant crypto trading firm. It's going well with Alameda. You're finally landing some big institutional capital to have real AUM here that you can make interesting money with. So you decide to start a futures exchange? Right. So I guess there are a few things going on there. And the first is, frankly, when you do the math, in order to really scale up to where it needed to go, Alameda would have needed, and it did eventually succeed in this, but to actually get a substantially bigger capital base than it had. If you look at, I mean, the amount that we're paying on capital combined with just a

bunch of other sort of difficulties there. The bigger thing, though, was, I mean, one cool thing about crypto is it's very transparent from some perspectives. It's very easy to see how much are the exchanges making, as an example, right? That is basically public. And it's also big, like really big. To give some sort of like sense of what that means, like how big is big? Well, again, it's all public. You can do the math. So this is circa late 2018.

Well, they were transacting how much per day? Globally, five to ten billion dollars. What were their fees? They're making like four basis points on average on that. That's a few million dollars a day that they're making. It's a billion dollars a year of revenue. It's a lot of revenue. And the core business model of an exchange from some sort of like really simplistic perspective is very simple. Now, I want to note this is really a reductionist perspective that I did not ultimately think really reflected reality. But the core business model is you have a matching engine and you let people submit bids and offers to it.

That call it billion dollar run rate revenue for the industry, which obviously was growing super fast to very high margin revenue. That's software revenue. High margin revenue. And we kind of pretty deeply understood what product one would need to make. If you want to do this, what you need to do, the answer is like, oh, no, actually, that's pretty straightforward. We could do that. And for all of our listeners out there who are not familiar with the trading world, I'm going to make a way oversimplified comparison here. But imagine running Airbnb or Uber, but you don't actually have the hard part of any humans or any cars or any Airbnbs. You just have pure matching of supply to demand of a purely digital asset. So your variable costs are near zero, zero?

Yeah, I mean, it's sort of very near zero. It's a definitional issue. Like maker rebates, it's a variable cost or that's just decrease your revenue, whatever. But it's basically near zero. And so we sort of felt like, look, we've been using these products. We understand it. It's a big business. But okay, fine. Whatever. I understand Amazon sort of. It's making a lot of money. I'm not starting Amazon 2.0 tomorrow. We're going to sell socks. Bet they haven't thought of that one.

So what was the other thing? The other thing was that in theory, I think an exchange is a much more complex business than what I described. In practice, exchanges circa 2018 were not. And there's a lot of other things you might think you would have to do as an exchange. And you'd mostly be right that you have to do them. But that doesn't mean people did do them. We're not that far removed from the Mt. Gox era at this point, right?

We're not. And you think back to that and you're like, well, okay, obviously you can beat Mt. Gox by just not losing everyone's money. It's a killer feature. It really is, right? And okay, that's being a little good. But what were the killer features back in 2018? I mean, sometimes they weren't that much harder than just don't lose everyone's money. The biggest exchange at the time was bleeding each day about a million dollars of customer assets to a risk engine that didn't work.

Whoa. Can you explain what that means? So let's say that you have futures on a platform, as one does, right? So people are taking leveraged positions on these futures. And they put on a leveraged position, and it doesn't go so well. They kind of start losing to it. Nothing sort of all that exciting has happened. Markets start moving against their position. They're 3x long. And they put on a $500 million position. Because people do that sometimes, right?

And then markets go down 50%. Now, all of a sudden, their account is worth how much? So they lost $250 million. And their beginning account equity was, what, like $170 million or something? So like negative $80 million of account value right now. What does that mean for them to have a negative account? Who holds that bag, right? Right, exactly. You can call them up and ask for $80 million, and they'll say, ha ha, no. So are they basically not liquidating people's positions fast enough when the market starts to turn against the leverage bet they're making?

That's exactly right. That is exactly what they were messing up. And they were messing this up extremely consistently. It wasn't just like, oh, yeah, you know, something weird happened that day, and they didn't quite get their liquidations done in time. That's sad. It was like, yeah, it's Tuesday. I guess they lost $823,000 today. Oh, that wasn't so bad. Wednesday was worse. And this is okay because they're making so much money. So like, if this were purely what was happening to their cash flow, then they would be out of business immediately.

But they're making so much money that they're just running super inefficiently because they have this problem. It's actually worse than that. So, sorry, you made an assumption there. Can you walk through that assumption? I don't know if you realize you made an assumption there. My assumption is if they're taking three to four basis points of everybody's trade, then they have this nice fat revenue stream that they can afford to make these screw ups and not liquidate people out of their positions fast enough.

You're making a more fundamental assumption. Is the assumption that Ben's making that the exchanges are covering the losses? Yeah, that was the assumption. Because they're not, right? They're not. So, okay, but that's weird because, again, the person's not going to pay up. So what's going on then? Who is covering the losses? The answer is the customers. So each week, they would email the customers and be like, congrats. You got 83% of your P&L this week. The other 17% went to bail out people who were underwater.

Whoa. And that was just happening every week. Wow. It's like, yeah, you know, you'd average whatever, some 80 something percent of your positive P&L. If you lost money, of course, you'd owe all of that. Unless you lost more than all of your money, in which case you couldn't owe more than all of that. You got bailed out. Right. So that's what was happening. And that was not good. And since Alameda was a customer of these other exchanges, you were getting these emails and you're like, wait a minute.

Oh, yeah. I mean, we saw this firsthand. We just saw it happening in real time. And it wasn't fun. That's not how I would describe it. And at this point, Sam, it feels like, if I'm not wrong, the futures market is particularly uncompetitive. I remember talking to Chris McCann at Raise Capital and talking through how they thought about investing in FTX's seed round as like spot and futures are almost equivalent in market size, but there are much less competitive players and much less robust exchanges when it comes to futures.

Was that something that you guys thought about at the time? Absolutely. Basically, just a couple of players who are the entire futures ecosystem. And just for definitions, the spot market being able to buy and sell the underlying asset, kind of like how Coinbase started. I go to Coinbase, I buy some Bitcoin. That's a spot trade. Futures trade being more complex derivative instruments. That's exactly right. And so basically, like, look, the futures markets have the total market.

There are only two real players in it. And they're shit shows. But they're still printing money. Right. But they're still printing money despite being shit shows. That's right. Which is an interesting combination. Yeah. Your margin is my opportunity, as someone once said. Exactly. And that was sort of the point at which we felt like, look, this is a huge opportunity. And people just to say they're not nailing it would be like a bit of an understatement.

And so we just felt like, you know, fuck it. We can do better than this. This is the bar. We will beat this bar. And I also think that we were in a position where we could really directly tackle this. We weren't sort of like, it wasn't like this sort of like dark room. And we're like randomly iterating. And one day we say like, what if we just tried increasing the price we displayed by a percent?

No, that makes no sense. Like we sort of like understood these products very deeply. And understood like exactly what we could do. And what would make them more powerful. That helped quite a bit. And in the end, it's taken a ton of work and iteration. And some of it's just saying like, yeah, having a good product is important. But it's just an incredibly important part of the sector, which was not done well. And I think that's maybe another thing worth emphasizing.

Why an exchange? Why not like a custody firm or like a, I don't know. Right. There's lots of other players in this potential value chain here. Right. And so why exchange? The answer is that there actually weren't a lot of other players in this value chain. And that's one of the bigger differences between what we see in crypto. And I think what we see in most financial ecosystems, where usually by the time from start to finish, how many people are involved in an average equities trade?

Like, it's a pretty big number, in fact. As we learned with the whole Robinhood situation. As we learned with that thing. Right. Like what actually happened in the Robinhood situation, if you sort of trace it through well, their broker dealer, I guess they have a mobile app that then goes to some PFOF firms. Separately, there's like the clearing, the settlement of that. Then they go to an ATS, goes to another PFOF firm. Stock loan. Yeah, I guess there's a third party stock loan desk involved somewhere here.

Probably. Right. You start going through this and you're like, oh, wow, there are 12 firms. Because you buy side and sell side. And then someone's like, well, OK, was this trade fully funded? What do you mean this trade? Technically, there were 12 trades involved in the one trade. It wasn't actually the case that one trade is even really the right way to think about it. So is the thought that if you're starting the exchange, then you can sort of take on more and more players on each side and basically turn it all into one transaction instead of this gigantic mess?

And in fact, that is how most crypto exchanges work, how they work then and how they work today. Is if you look at the traditional crypto exchange, who is actually involved in it from start to finish? Well, there's the buyer, there's the seller, there's the exchange. That's actually it. Oh, I see. So the point you're making is because this is a whole brand new system, there's actually not all this cruft of all the players involved in every transaction.

So you kind of can't be anything but an exchange. That's right. And that sort of is how crypto happens to evolve. That way, I'm not necessarily saying it needs to have, but it did. Well, it certainly seems like the purest form of making a market. I think that's right. I think it's probably the right way to evolve. Yeah, there are a lot of advantages of that system, you know? And which of the intermediaries in the traditional system were providing large value?

Have you come out saying like, oh, maybe one of them was? It's not totally clear. Maybe zero? I don't know. So I think it makes a lot of sense as a system. And I don't think it's a coincidence that it ended up there. But because it did, the exchange is the important piece. It's just like there's no ambiguity about that. And so if you're going to do something in crypto, you were going to do it at the exchange level on the infrastructure side.

That's where the value was. And of course, at this point in time, I think the whole even idea of a DEX, of a decentralized exchange, didn't even exist yet, right? I mean, I think it did technically exist, but it just wasn't really much of a developed thing. Certainly Serum wasn't around because that would be years later by you guys. Uniswap hadn't started yet in V1. Yeah, that's exactly right. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta.

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So you can get $1,000 off Vanta at Vanta.com slash acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off. And just tell them that Ben and David sent you. Going back to the story here a little bit. So I've got a list in front of me that I pulled up from PitchBook of the original investors in FTX. And this is a nutso list. I mean, BlackRock, IVP, Sequoia Capital, SoftBank, Race Capital, Binance. There's, I don't know, 30 firms and all of them, it's like the who's who.

So your fundraise, once you decide, oh, we're starting a company called FTX and it's an exchange for crypto derivative products. This seems to go very well very quickly as opposed to Alameda, which seemed like kind of a grind to get off the ground. So why is that? I think there are a lot of things that went into it. I think eventually the story that convinced us that FTX would be exciting convinced a lot of people. It just passed diligence.

The more diligence you did on it, the more it seemed like, oh, that kind of checks out. We're kind of like, look, the existing exchanges have serious issues. And people look into it like, yeah, okay. We've talked to a lot of people who use them. We kind of agree. I think we have compelling reasons to be able to do better. I think that there's maybe a more general thing going on here of like, it's not like they messed up a few specific things, but were great.

Otherwise, they're sort of indicative of like execution ability. I think some of them also just made a lot of money and peaced out. They're like, yeah, we're not going to. Why would we try hard now? I think the other things were that it's a much more legible company. When you talk about like recurring revenue, there sort of like doesn't exist a clearer example of that than like, I don't know, we have volume each day and we charge a transaction fee on it.

It's incredibly clean. People are like, is this revenue real? Yeah, I don't know. It's all public. Versus the story of, hey, this arbitrage opportunity exists and we're going to keep doing it and it may or may not be there tomorrow. And if it's not, we'll find others. Right. In theory, that actually goes away over time. The more apparent this opportunity becomes, the less money you can make. Whereas in this one, it scales beautifully. The more money you can make, the bigger you get.

Totally. I think I tend to find some things more credible than other people do sometimes and tend to believe a little bit more. Things might be great even if it's not provable or something like that. But for whatever reason, that sort of was the case. And so, yeah, it just was a more legible product. And it was, from that perspective, sort of a nice one. And Sam, isn't it almost exactly around the same time as you guys announce your seed round that Arthur Hayes, CEO of BitMEX, which is, I think, the biggest player at that point, is getting into real trouble with the CFTC.

So if there's ever a sign that there is an opening here, it really seems to all be happening in mid to early July of 2019. Yeah, you know, I think some of this was coming from the perspective of, you know, oh, wow, coincidentally, a lot of good things happened for us. Who would have thought? I think some of it is also a lot of hypotheses about ways that product differentiation would happen in the exchange space started playing out.

We're sort of like, look, this is a big problem that some people have. We think it's going to get worse over time. And then, like, I don't know, it sort of started happening. And an important backdrop for this. Like, how high of a standard do we need to hold ourselves to? The answer is incredibly high. Because we're coming from behind. We don't have a user base. We don't have a brand name. We are coming from a perspective of everyone knows our competitors and no one knows us.

And just being about as good is just not worth anything. It's just like, you know, whatever. Okay, you're about as good as the other people. That's not going to cause someone to change what they're using. Yeah. And Sam, what were the things you were really intentional about as you realized, okay, we're going to build a company, an enduring institution here, an operating company with FTX? Because it seems like the crew that you got together for Alameda, it was like, there's this crazy opportunity.

We have to go exploit it. Go, go, go. We'll probably exploit more opportunities in the future. But now suddenly you're realizing you're building a company that's going to become a key piece of infrastructure in this next paradigm. So what did you have to be super intentional about? I think maybe splitting this up into two things. One of which is internally. What did we have to be intentional about? And another of which is from a communication perspective.

I think one thing both of those trades down to is a long-term plan. The plan not just being, I don't know, we'll do the best thing at every point in time. Ask me in 10 seconds. I'll tell you what that is in 10 seconds. I can't tell you what that is now because the world might change. Which is honestly sometimes how we think about things. That the world does change and you have to adapt. But starting to think about, let's try and understand where this could be going.

And what we could do now to prepare for that. And how we can communicate that to our audience, to investors, to regulators, to users, to the company internally. And so I think that that's probably the single thing that we've gotten the most sort of increasingly intentional about. You know, one of the things that Ben pulled up was the sort of analog to Bezos. It feels like there was also kind of a case of the Amazon AWS first best customer principle here.

Where you were building this exchange and you also kind of knew that Alameda could really benefit from having something like this in the ecosystem. Yeah, I think that having a built-in example of like, we are quite confident that this is going to be a product with demand. Because like, we've wanted this product for a while. This isn't sort of like some hypothetical, maybe someone wanted type thing. This is like a, Jesus, is it here yet type thing.

And is the killer feature, I'm assuming, is it literally just as straightforward as, look, with the crappy platforms out there today, I get net 83% of my profits. We're going to get you much closer to 100% of your profits. So that was the most compelling thing at the time. I mean, one of them was like, we'll have an actual compliance department. And we'll engage with regulators in a productive way. One of them is like, our deposits and withdrawals will hopefully work most of the time.

We'll get banking. One of these is, we will innovate. We'll build new products. We'll explore other product areas and see if we can integrate it into the system. We'll be able to find a way to build cool things in the United States, as well as outside of it. There's sort of eventually a lot of things that end up becoming pretty relevant here. But I think the most legible thing and the most like egregious thing at the time was this sort of 83% of profits thing.

Where it's just like, okay, like that will change. That has to change. Like there's no way that that's how the world is going to remain. It is worth noting, because you just brought up this in the United States and outside the United States, for our half of listeners that are in the U.S., you'll note that the thing you can use and I can use, FTX US, is not a derivatives platform. It's just to trade the underlying assets.

And it's a very, very simplified version of the complex platform that y'all have built, Sam, at FTX. Can you talk a little bit about your realization of that early on that actually international is kind of the addressable opportunity for now and how you structured the company to be able to go after that? I guess I should also just explicitly flag that my thoughts on this have to some extent changed over time. That I think my thoughts have become a bit more nuanced.

And I think that I was a little too skeptical of the U.S. opportunities when we first started. Thank you for being with us because you testified in front of Congress yesterday. So we really appreciate, A, your testimony, and B, you being here with us. Well, thank you. I wanted you to rock back up in the suit, Sam. I know, right? No, that one's gone for good. I actually thought about leaving it. My brother lives in D.C.

I thought about just leaving it at his house there. Because they're going to be back? Right. What's the next time I'm going to wear it, right? Like probably D.C.? But thinking about this for me, like this is a limited time opportunity potentially. What is the fastest way to get something compelling here? If you look at the U.S. crypto ecosystem, the product that is relatively clean, at least today to get off the ground, is a spot Bitcoin USD order.

And the thing about that is that it's clean, but it's not super compelling as a product. A lot of people have that product. And innovation is harder with it because just the, I don't know, the core product sort of is what it is to a greater extent. And, you know, a lot of it is customer acquisition, which that was our weakest point, right? We're coming from zero on that side. So that was sort of like not the most compelling thing to start with.

If you want to build something more, if you want to build the products that there is really demand for and where most of the volume was trading at this point, those were the derivatives. And it's a really long process to launch those in the United States. It takes probably five years from the start. And so, you know, what's the opportunity? The opportunity is elsewhere to start. At least it was, you know, as of when we started.

And so, you know, we started by not servicing Americans. It just had a really long regulatory regime. And so, you lived in San Francisco and then at some point you didn't. Did you have to move to launch that product? Did everyone else have to move? How'd that work? More or less, yeah. And so, you know, when we launched it, I moved to Hong Kong when we started building it out, I guess. So this is late 2018 at this point.

And we launched spring 2019. And so, you know, we built it out from Hong Kong. And at least that's where I was at the time and then launched. Do I have it right? You're in the Bahamas now? That's right. You mentioned in the things that you were going to have to do, you knew to build this out. You know, regulatory was the first thing you mentioned. You were signing yourself up to completely change your life. That was a big decision.

Yeah. It happened sort of iteratively bit by bit, but it felt like the right thing to do, I guess. And in the end, I sort of have felt and continue to feel like this is the most important thing I'm going to do. And whatever I can do to make this go well is what matters to me. And so it never felt like, I don't even know that choices is exactly the word I would use to describe how it felt.

It just felt like, it's more like, yeah, that's the thing I'll do here. And so that's what I did. I've heard you say in the past that you can't take zero risk. I always think that's an interesting point because everything has some amount of risk associated with it. Otherwise, you're just sitting in your chair doing absolutely nothing. And not only is there no economic opportunity, but you're also not going to live your life or build anything.

And so I think it's interesting how you've decided to live your life in this way that you're saying, look, we don't know the regulations yet. So like, I'm not doing anything currently wrong. I don't know what the future holds. We are doing our absolute best to do all of the know your customer and all of the anti-money laundering requirements we possibly can. We're getting as many licenses at as many places as we can. And also, we're brand new and doing something in a brand new ecosystem.

And I think it's a, as I've been preparing for this episode, it's really sort of brought me to this perspective of actually everything in life is a risk reward calculation. And you just have to make it a lot more often than other people do. That's right. And, you know, as you said, we'll do the best we can. We'll get every license that we can get. And you can't get more licenses than everyone you can get. And that's sort of how it is.

And it's not zero risk. Nothing is zero risk. But so be it. And that's, in the end, the perspective that I think we've taken and we sort of had to take. And I think it's been the right one to take, although not always the easiest one to take. And I think it involves accepting that you're going to have to go out on a limb and you're going to have to make judgment calls. Because there's always judgment calls involved in all these things.

And again, that's just how it is. There's no point in pretending it isn't. Which honestly, in some ways, feels like almost a fairly singular or unique stance in many respects. There's the more U.S.-centric exchanges, which I would say have maybe moved a little bit more slowly, but have been super cautious about regulation. And then there are maybe more foreign-focused exchanges that move super, super fast and are basically like, listen, we're not going to sweat this too hard.

Whereas I think you guys have really managed to thread the needle by saying we're going to innovate. We're going to push new products forward. But we're also like here to push the regulatory side of things forward as well. And, you know, yesterday was obviously an example of that too. I think that's right. And I think that in the end, our sense of this is, look, this isn't, you can choose to be compliant or you can choose to be functional.

And like, you have to choose which company you're launching. I think, you know, the way we think about it is in the same way that you can make informed, reasonable decisions on one front, you can make informed, reasonable decisions on another front. We will come back to some of this in our analysis section, but just to kind of finish out the growth of the company and bring us to today. Now, one of the ways that you're acquiring customers is by owning naming rights to arenas and patches on Major League Baseball umpires and all these things, celebrity commercials.

I imagine when you launched in January 2019, that wasn't the strategy. So how did you get your early customers? And then you've been pretty much explosive growth from the get-go, if my understanding is correct. In terms of the early customers, right, the ones before we sort of started building out the paradigm that we have now, it's a good question. And I think the basic answer is you do what you can. And what that meant for us, basically, was we think we have a good product, right?

That's where a lot of this started from. Our strength is our product. And to be super clear for people, because, Sam, you're not good at bragging, you have an unbelievably reliable and fast product with some of the cheapest transaction fees on the market. So we think we have a good product translates into that. I appreciate that. This is a market where it's easy to objectively measure the quality of product. That is true. That is an interesting piece of it.

And it's transparent, right, for better or for worse. And it's usually for better. But that means that, yeah, you can often just sort of say, like, what does a good product mean? Well, you know, there's an answer to that. And so I think that what you do if you think you have a good product, like, what's the right place to start? Well, I kind of think that the place you start then is let's try to reach out to the people who care the most about the product.

The people who are going to be really receptive to we have a good product. And those generally are the power users. Those are the people who are using it every day, who use it deeply and intensely, who explore every angle of it. They're the ones who really care the most, right? And so we basically started to try and reach out to the people who use crypto exchanges the most and say, hey, you know, why don't you try this out and tell us if you don't like it?

And if you don't like it, great. Tell us why. And we'll see what we can do about that. And by the way, we've got a giant amount of volume from our sister company, Alameda, on the platform. So there's a big counterparty if you want to trade with us, right? Right. It helped basically solve this sort of problem of, well, you're just starting up an exchange. Sometimes there's a catch-22 where, like, how did you get volume without liquidity?

How did you get liquidity without volume? And this sort of gave a solution to that, of, you know, basically starting with liquidity so that people could come and trade. We took a lot of feedback. We kept iterating. And in the end, most of our initial growth came from power users, the people who, you know, are spending hours a day in the ecosystem and would try out every new exchange that came and use the ones that they like the most.

Like, that was the best fit. And we didn't really do marketing, per se. Eventually, we learned how to tweet. That was about it. Which is very important in crypto. It's very important in crypto. But, you know, importantly, we didn't need to use Facebook ads. Right. Those are not your customers. Right. They're just going to go on CoinMarket and be like, oh, there's a new exchange. Let me try it. Right. They don't need to see Facebook ads.

And so that's sort of our initial growth. But presumably also, Sam, like, those initial customers were mostly institutions. Is that right? They were about half and half. The thing that really set them apart was less being institutions and more being power users. And some of those were institutions. Some of those were individuals. Crypto is somewhat unique. Mutual funds don't exist. Pension funds don't exist. Right. So individuals don't all funnel all of their activity through a few central counterparties in crypto.

They actually do it themselves. And so, you know, for really high volume users, a surprising number of them are individuals. And also you at this point were already kind of the avatar of the trader's trader in crypto. I remember reading interviews from 2019. People were talking about your ARB. People were talking about Alameda. And I think Chris McCann, I can't remember which product this was on, but weren't you at the top of a leaderboard for your trades?

Yeah, Alameda was for a little while. It was on a few leaderboards. Some of them were more obvious than others. So people knew you were this guy who was sort of deep in the weeds. And so you had a lot of authenticity when you were talking to a power user because you were a power user. Yeah, I think the biggest thing that it helped with was not so much convincing people that this was what they should use and more convincing people that they should think about using this, you know?

And I think that that was where a lot of sort of our initial growth really came from. Well, rather than going through blow by blow over the last couple of years from your launch, can you just fast forward us to today? And what are some of the high level public stats that you can share on FTX as a business right now? So, yeah, where are we today? I mean, we've grown obviously we're nothing a few years ago.

A year ago, maybe we're like down 12th or so biggest globally. Today, we are the third biggest by volume. We're the second biggest by open interest and actually pretty close to first, I just realized. And we have $15 billion of volume globally in the last day. That's typically where we are. And, you know, obviously there's some volatility in that from day to day. I guess we have a few million users. We have FTX US as well.

So we opened up a US branch about a year and a half ago. And today, I guess that's done, you know, a few hundred million dollars of volume. The biggest thing for that is that we're anticipating is the launch of derivatives, you know, hopefully sometime in the next year. That we think could really bring a lot that's been missing to the market. Because, again, like the US players just have not had a sophisticated derivative suite. And we acquired LedgerX, now FTX US derivatives.

And, you know, are excited to work with CFTC on products through that. I think those are probably the biggest sort of headline stats about, you know, where we are today. How about in terms of your strategy and how you think about things? I mean, obviously, it makes so much sense in the early days. This is a market where there are strong power users. There's a power law curve to the customers in the market. You can objectively measure product quality.

Of course, you're going to go after those power users. Maybe you learned to tweet along the way. Now you're doing all those things Ben mentioned a minute ago of buying sports arena, naming rights, etc. That feels very different. Is it that now that you've won that initial beachhead market, is it now more about expanding the whole market? Or why this huge change? It's like a barbell almost. It seems like you're skipping the middle. You're getting this institutional multi-billion dollar trader.

And then you're trying to get, you know, me in the nosebleeds at a heat game. Right. And so what's going on there? Well, maybe I'll split up into a few different pieces. I think the strategy looks meaningfully different from different perspectives. To some extent, it just keeps doing what we're doing. I'm going to kind of ignore that piece, although it's important. But keep trying to grow it amongst power users. Ignoring that, what else is it? So one big thing is the U.S. derivatives play.

Derivatives are two-thirds of global volume in crypto. That's not unusual. That's true in most asset classes. Derivatives are generally more volume than spot. But in the United States, derivatives are less than half a volume. And the reason is, well, there's basically no real derivatives on you in the U.S., I guess. It just sort of is a missing segment because you need a CFTC license for it. And basically none of the crypto native exchanges have that. So we're really excited to build out that product suite.

And I think it could be like somewhat transformational for the ecosystem. It's just like it's a huge thing that doesn't exist today and should. So that's sort of another piece of this. And then, you know, putting aside those, and there's sort of Web3 Gaming, which I think we see as a potentially huge opportunity. And we're sort of working on a lot of partnerships with and NFTs in general. When you look at sort of the customer acquisition side, I think it's easy to see a lot of the endorsement deals that we've done and think of that as like customer acquisition.

It's actually not really how we think of it. It's not the most effective way to acquire customers. It's gotten us some, not an enormous number. We think of it as brand rather than marketing, if that makes sense. It's the diametric opposite of this is a Facebook ad, right? No one sees a Facebook ad and is like, oh, wow, that's a cool fucking company. They see it and they're like, maybe they accidentally click on it. That's the hope for them.

It's like pretty directly just trying to acquire customers. And when we think about what's the purpose of the partnerships and endorsements that we're doing, the biggest things we're thinking about are how do we communicate to people who FTX is in a way which is kind of, meaningful and which will hopefully leave a little bit of a mark, I guess, because if no one knows who we are, it's going to be really hard to convince them to like use our product or anything.

If we're just some sort of anonymous, you know, random crypto company, I guess, that's not a very compelling thing for most people. And so instead, what we're thinking is how do we really communicate who we are to people in a way which is going to be sticky and compelling? And when I say people here, I don't just mean potential direct users of FTX, a platform. I also mean institutional counterparties serve all the way through the spectrum.

How do we communicate who we are? Because this is something which extends a lot beyond just users of the platform. It's all of our partnerships. It's everything. And then the other thing is how do we establish our brand in such a way that, you know, if we do eventually go down more of just the direct marketing route, that it's going to mean something to people and that people will be compelled by it rather than just saying, oh, whatever, another scammy crypto marketing thing.

I'm going to ignore that. And so I think that sort of is like the more general vision behind the partnerships that we're doing. What feels like for crypto, so much of the battle globally is just the question of trust and especially maybe coming into a U.S. market as a late mover. I think, you know, you guys have been incredibly savvy about building that trust by aligning yourselves with entities that are part of people's lives in really meaningful ways and that they have longstanding emotional connections to.

That's the hope. It's so easy. So I'm going to keep going back to it. But going back to the Bezos analogy, like it's so early. We're in like 1992, three, like, I don't know, relative to the Internet. You can't trade derivatives in the U.S. The biggest part of the market doesn't even exist yet in the biggest financial market in the world. So like if you're playing the long game here, laying the infrastructure of trust is so much more important than acquiring a customer.

Right. Am I thinking about that right? That's how we think about it. All right. Well, I'm going to move us here into our analysis section of the show. There's a section that we always do, Sam, called Power, which is based on a book by Hamilton Helmer called Seven Powers, which is an analysis of why a business? What is it about a particular business that enables them to achieve persistent differential returns, sort of long term, durable profitability?

And there's seven of these, as you can imagine. There's counter positioning, typically versus an incumbent, scale economies, switching costs, network economies between participants in the network, process power, which is usually we know how to do something that's simply not transferable because it's too complex, branding, and then a cornered resource. We have something that other people don't. And I've been thinking a little bit about what applies here. I think a lot of FTX's success to date is because you guys have executed flawlessly very rapidly, as Mario puts it, speedrunning the market in his piece, when there's just a massively growing pie and huge amounts of opportunity opening up.

And I actually haven't given a lot of thought yet to, well, as there becomes more and more players and more and more competition, therefore profits get arbitraged away. What is it about FTX that will enable it to be durably profitable as competition pours in? And I'm curious how you think about that. I don't think the answer to that is obvious. I don't think that it's sort of like, oh, yeah, obviously, like we're good at left clicking.

No one else knows how to left click, right? They always right click and it doesn't take them where they're trying to go. And I think that part of that is like you look at the breadth and to some extent, frankly, randomness of the type of things that we've tried to do. It's a little all over the place, which I think is also a sign of it's going to fuck with some narratives. Maybe one way to think of it is like, well, you have Amazon, right?

And Amazon is AWS and they have their store. And I don't know, I challenge you to be compelled by the narrative about what those have in common. You know, I'm not I'm not compelled by that. I'm actually not of the opinion that it's value creative for them to be under the same corporate umbrella. I'm not sure it is. If someone said, look, they should obviously just be like different brands. I don't know. Maybe I don't see compelling reasons either way.

I sort of feel like, yeah, I could be swung either way on whether they should be the same brand. But the flip side of this is, well, it certainly seems to work for them. I guess from our perspective, what do I see as value creative for us or as like a persistent something? I think just good execution, which is sort of a lame thing to say. But I think that's the honest answer to part of it.

I could try and point to maybe what I think are like some things that cause that, I guess. Like what about us allows us to do that. And I guess part of it is, well, I guess I think that we like have built a strong team and we've been really intentional about it. And in particular about not overgrowing the team, if you're too aggressive about overgrowing the team, then you get this sort of monstrosity that no one can control anymore.

And these are like an underestimated factor often. And we see time and time again, this sort of really fuck with people and companies just like lose their ability to operate effectively because of it. So I think that's like sort of a piece of it. Although, again, I think that's like I don't want to try and make that sound more compelling than I think it is. I think it's like only sort of compelling. I think that like some of it really is just like the world is messy.

There's like a lot of things that we try to do better than other people. Maybe we do some of them better than other people. That helps us do well. And that's sort of lame but true. Well, there are also very intrinsic things about the business model that you are executing that have very natural scale economies and network economies where an exchange requires counterparties. It requires liquidity for the spreads to be very narrow so everyone gets the best price.

And the fact is you were able to build volume very quickly in a market that was early on. And so therefore, you'll reap the benefits of being a scale player forever as long as you keep executing well from being there at the right place at the right time and doing that. There's this interesting thing where also we started coming from behind, though. The market was still in the takeoff phase. You weren't coming from behind against FTX today.

That's right. But we are coming from behind with respect to today. Some of the things we're trying to do, some of the segments that we're trying to get at, we don't currently have that much penetration in. So I do think we're still trying to do that. But I agree that like there's some extent to which you can get liquidity modes and just customer modes and things like that and regulatory modes and whatever. There are a lot of modes I think can exist here.

Is it fair to characterize FTX as a whole as like you have the exchange business, both spot and derivatives as the bigger part of it? And that's a great business. And you've built certainly network economies and scale economies power there. But I think if I'm hearing you right, you're thinking about in the long term, there's a lot more opportunity for FTX to serve, build products and serve here than just beyond that. Gaming being just one of those.

I think that's right. And I think maybe another, I don't know if it's another way to say that a consequence of that or I don't know what flows from what exactly. But maybe a related statement is that I don't think of us as we've built the hard thing and now we're coasting. I don't think of it as like, great, we have our moat. Now let's run with it. You know, you've mentioned in the past how one of the growth strategies you guys might deploy is through acquisitions.

And everyone enjoyed it when you talked about maybe buying Goldman Sachs or, you know, what was the other one? One of the major exchanges. Blockfolio seemed like it was a pretty quietly transformational pickup for your U.S. business. I'd love to hear more how you think about that in particular and in general where there's opportunity. Yeah, I mean, I think it represented a pretty clear strategy that we'd not previously been emphasizing. Where, you know, we're looking beyond the power user.

And I think it was sort of the seminal moment of like we are now looking at the full spectrum of users. And I think that that is power pulling is important. I think it represents maybe an example of something I started talking about earlier where we're coming from behind very much on that front. But we're going for it anyway. As you think ahead to future M&A, do you wonder, like, maybe this isn't a binary or a dichotomy.

Do you think the play is expand beyond crypto and find new places for FTX to imbricate itself in users' lives? Or is it double down on these other crypto areas where we don't yet have a good base? Like NFTs is still too new for us. We should be finding a way to make a Blockfolio style move there. Same for Web3 Gaming, etc. Is it a yes and? Or is there some sense of preference there? I think it's closer to a yes and.

At least long term, we really want to try hard not to cut off avenues that we think are going to be valuable. And we'll have prioritization, certainly. But we want to be pretty mindful of keeping the ultimate upside in mind. Well, thinking about sort of the playbook that you've implemented to run FTX, of course, we've talked about some of these acquisitions. Another one is a remarkable amount of transparency. And of course, you've got these great blog posts that describe all the volume that's happened over the course of the year.

You're very public tweeting. You also gave Mario access to your entire data room so that he could write his pieces. What's the thinking behind this? And why are you doing that when classically no one in their right mind would do that? A thing that I think I think about a lot is, sure, okay, you say people do X. Tell me more. Why do people do X? Do people do X for a good reason? Convince me that X is the right thing for people to do here.

And I think often I sort of come away feeling like I was not convinced. They said do X and we looked into it and I don't see a reason why. And you should always update on the fact people think you should do something. Often there's a good reason for that. I don't want to dismiss that. But sometimes there isn't. And like when you think something is dumb, it's a good flag to look into it and see whether you're dumb or it's dumb.

Sometimes it's one, sometimes it's the other. And so I think this is sort of a case maybe of like, I don't know, this thing's basically going to be public anyway. Like no matter what we do, like everyone's going to see this deck. Like there's a number of people you can choose something to after which it's not meaningfully private. And I think that's sort of like part of how I felt about it. It feels like that sort of ties back in a way to how you guys think about hiring and training your employees, which is like, no, you have to know both the technical side of things and the sort of crypto native side of things, as well as the financial side of things.

I remember in our conversation, you really said that it's very hard for you to know whether to trust someone's opinion because they don't have context. And so I think one of the things you do really well, both internally, it sounds like, but also externally is like, give people all the context they need so that they can actually hopefully sense make from the data. And then you can decide sort of, you know, whether to agree with it internally or how to sort of communicate with it externally.

Yeah, I think that's basically right. I think it's basically right. And just updating your mental models. Everybody believes a thing because of some underlying set of fundamentals. And those fundamentals change, but oftentimes people still give out the same advice, even though the world's changed. Don't share your private company data made sense in a certain time in a certain market and may just not make as much sense for your particular scenario now. I mean, I think it makes sense in a lot of times in a lot of contexts, but not literally all times in all contexts.

And I think, yeah, this might be one where it doesn't. And we're pretty comfortable in general being like, fuck it. You know, yeah, this is kind of weird. But like, I don't know, like I don't actually see the harm in doing it. I see the benefits. Yeah, let's do it. This is, I think, one of the most clearest examples of a company we've looked at in really the history of acquired all six plus years of like, you are building a movement.

You are evangelizing. That is what FTX and SPF are doing. If that is the case, you want as many people to understand as much about what you're doing as possible. You're not trying to keep anything secret. You're no longer in the world where like you've got some arb and you want to exploit it before anybody else does. Yeah, I mean, I think that's right. I think it's basically right. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow.

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So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out ServiceNow.com slash acquired and tell them that Ben and David sent you. Sam, you know, we talked a little bit earlier about overhiring and the risk of that. Something that I've always been curious about, given the amount of leverage you guys seem to have managed to extract from a very small team, is like, what do you look for when you are hiring folks?

You personally or the team, are there certain things that just stand out to you as this is someone that I think can sort of hang at the velocity that we operate at? It's so hard when you interview, frankly, to do this. A lot of this is just something that you have to figure out over time. But I think a lot of this is like you put someone in an uncertain, messy situation where there's no obvious right answer.

There's no like, well, yeah, you do this and it's going to go well type thing, right? And you kind of see how that goes, right? And you just like, frankly, continue to stress the situation a bit, make the situation messier and messier and see if they like just continue to roll with it and be like, all right, yeah, I got a bit messier, whatever. I'll make another informed decision here. This is a new situation. I'll do the best I can and it's not going to be perfect.

Or whether eventually they just sort of like shut down and like this is too messy. There's just no good answers here. And what you have to say is, okay, then choose a bad one. You say there's no good answers here. That doesn't mean there's not a best answer. So it sounds like one of the selections then is people comfortable with limited changing information and that are happy to in absence of certainty commit to some path. Yeah.

And, you know, to do the best they can, given that. And obviously, you always want to do the best you can. Sure. But I think it's actually kind of meaningful. In the end, I think that in practice, that just like isn't something that people always do. I think often people kind of get flustered and end up doing nothing close to the best they can because they're just like, oh, geez, I don't even know what to do here.

There's no good decisions. Yeah, I agree. Mario, you wrote about this in your great pieces a little bit. But I think that that cultural value actually is quite different from Web2 and traditional Silicon Valley companies and hiring, which mostly is a gross generalization. And obviously, not every company fits this. But mostly, I think, has over the past 10, 15 years been hiring for experience. You scaled Google, come to Facebook. You scaled Facebook, come to Snapchat, you know, et cetera, et cetera, and on and on.

And that's really very different than what you're saying. Yeah. Experience is very much not what we hire for. Right. In fact, sometimes we're almost like I wouldn't quite say we're anti-selecting for it, but like we like flexibility. Like, I don't know. We can teach things like if there's something you don't know, you can overcome that. It's much harder to overcome. We can't teach someone necessarily how to like stay cool under pressure or something like that. All right.

I'm going to move us to our grading section here. And Sam, on our classic episodes, when one company would buy another, we'd grade how good of a use of capital was it for BigCo to buy startup. And classically, Instagram's your A+. They turned a billion dollars into like half a trillion and lots of examples of ones that are way worse. For these guest episodes where we're like the story's being written in real time, we tend to try and do it on a future looking basis and say like, OK, well, FTX has a set of resources right now.

It has human capital. It has financial capital, lots of it. And it's got time. And so if we look out, I don't know, let's call it five years from now. What's the scenario where you would reflect back five years and say, with all the resources we had, that was an A plus outcome. What are the things that you can achieve where that would be the case? And then paint me the other side where you're like, that was a failing grade based on what we had or potentially more interesting.

What's like the C? Yeah. What are the metrics we're going to judge ourselves by? And one of them is just like, did we become the biggest crypto exchange? Which that's clearly going to be one of the kind of core metrics here. I think thinking about like, did we ever succeed at getting retail users, at penetrating that market is going to be one of the things that I think we're going to grade ourselves on, which I think I'm sort of cautiously optimistic about.

But we haven't proven that. We've never really gone big in that segment before. And so I think that that's going to be one of the big things here. And then I think like, did we manage to expand beyond crypto is going to be, I think, one of the big metrics. Because in other jurisdictions, you can trade equities at 9 p.m. on a Saturday, or at least assets that look like equities on your exchange. Like, I can go buy Tesla stock-ish.

That's right. I think that's something that we think is important that we continue to move in that direction over time. So I think that that sort of is another key piece of this. And I guess like, what else do I think is going to be important? Obviously, regulatory things, right? Did we manage to get licensure where we wanted to do it? Did we manage to continue to maintain good relationships there? That's going to be one of the things we're looking at.

But some of this, I mean, there's a huge variety of things we're going to be looking at. And I think some of this really is like, we don't even know what some of them are yet. And that's okay. Yeah. What about the C? Because the F's easy. Like, everyone can be like, oh, we went out of business or something catastrophic. What's the plausible C? I think the plausible C is we just kind of don't really grow.

You kind of look back at us in a year or in five years. Where is FTX now? And the answer is like, you know, one of the bigger, but not like the biggest crypto exchange. They're like, you know, number two. They sort of like dabbled in other shit. It didn't really go that far. They like groaned the retail user base a little bit. But like, come on, that's not really what they have. I think those are kind of the things that you would say in the C case.

I'm smiling so much. I totally agree with you. I love that. It's so awesome that you're saying like, man, it would suck. I'd give ourselves a C if we're the second biggest crypto exchange in the world in five years. That's so great. You know, it's how it is. All right. So we're moving out of grading. Normally, we'd go to carve outs or something, but we've got Mario here. So Mario, the philosophical fox, take us somewhere interesting.

I'll try to. Basically, the setup that I have in mind is that certain eras tend to have a sort of zeitgeist artist, someone who just understands the sensibilities of the modern day in some way and can play with them productively to create businesses, to create art, to create value. Sam, after studying you for a long time in a strange way, were it not for a newsletter, it strikes me that you're like probably one of the best zeitgeist artists we have right now.

You are incredibly attuned to pop culture in an interesting way, crypto in an interesting way, certainly the markets. And I think it's part of the reason that you're like uncommonly popular on Twitter. And so it feels like a good chance to ask you, how would you define this current era we're in? If we try and step out of it by 100 years or 50 years, what will we say about today? I think the defining property of today probably is social media.

I think it's changed a lot of aspects of today. I think that like investing has become quite different because of it. And I think somewhat straightforward ways, you know, with sort of the power to the people. I think that people's lives have been changed quite a bit by it. I think that news cycles have been sped up quite a bit by it. News cycles are no longer controlled by editorial cycles, right? It's tweet cycles now. And that just iterates much more quickly.

I think that you're seeing a lot of parallel worlds being spun up because you can split into different social media for better or for worse, right? So I think all of those are like pretty big changes. I think you look at memes, which have come to dominate not just sort of like laughter, but finance and presidential elections, maybe. And again, that's something on social media. I think that this is like, again, for better or for worse, I think that sort of defines the transitions that we're seeing today.

Where in this cycle of this era do you think we are to call it the social media era? Are we towards the end or are we just at the beginning? Are we in the middle? I think we're like a quarter of the way or something. Like, I still think we basically don't know where it ends. I think we're basically still kind of making this up as we go. And that it's probably going to be a while before people feel like, all right, we now understand all the implications that that ended up having for society.

Right? Like, I don't think we're close to that. We're starting to understand some aspects of it. But like, we still haven't quite seen how society, what the new society that that forms is. Yeah. And let me take it to like a S&P 500 graph for a moment. So news cycles are faster because they're tweet cycles, not editorial cycles. And that tends to mean that these market cycles are faster, too. I mean, it's amazing even just watching the crypto eras.

The crypto winters are getting shorter. And of course, this looks similar in the traditional stock market as well. So everything's moving faster. But do you think there's the GDP, like the total value being created in the world is accelerating also? Or are we just increasing the volatility while the pace of innovation and value creation actually remains either steady or at the same sort of rate that it always has? So I think, yes. Sorry, I want to say absolutely by leaps and bounds.

But that sort of relies on some sense of like how valuable the shit we're creating is. When it was all bananas, it was easier to answer that. But when it's not just bananas, but also like NFTs. Intangible assets. Right. I think that you start to get to pretty deep questions about like how you feel about marked market values of intangible assets. I think that becomes like just actually an important part of the answer to that question.

So yeah, I think it's kind of complicated. I think my answer is probably yes. But I always like as obviously yes as it would otherwise be because of that. Is there one way to look at it? The number of market participants in markets that matter has grown exponentially and is growing exponentially. That feels to me like one of the hallmark characteristics of the social media era. You know, it used to be your career. You know, there's Jane Street.

There's a handful of other like massive firms that make profits by trading in traditional markets. And then you said yourself, we were talking about who the power users are in crypto. And you're like, yeah, it's some institutions, but it's a lot of people too. Like that's different. That feels like value creative to me. I think it probably is. I don't feel like I can start saying, oh, yeah, value accretion right there. Here's how we can sort of define it.

I kind of think it should be like I sort of have a fairly strong prior that it is. But I say that again, without wanting to express total confidence in that, if that makes sense. Like, I think I more feel like I think it probably is. I think that's the right prior to have about it. And so like, I'm getting it like a tentative yes or something like that. If that makes sense. That's great. Well, Sam, thank you so much for joining us today.

Is there anywhere, you know, we've got a bunch of smart people out there listening who might want to work at FTX. They might want to trade some crypto. What should you direct folks towards? Yeah, I mean, my Twitter is like, certainly a good place to look. You can go to FTX.com or FTX.us if you're in the US and file support ticket there. That's where most of our communication is nowadays, I guess. Those are probably easiest ways to reach me.

I will say, actually, this episode came about because of a support ticket. That's so true. I forgot about that. Oh, interesting. Absolutely. Yeah, we tried to open a institutional account for Acquired and ran into some troubles. Yep. Well, here we are. I'm glad that our process sucked at least a little bit. Us too. It was great. All right. Thanks so much, Sam. Thank you. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

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It's very different than the way that you would ship features in a pre-AI world where you knew exactly what the software was going to do in production. Yeah, exactly. So this is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved. The result is a tighter feedback loop and learning that compounds over time so you don't just ship more, you ship better.

So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. Well, listeners, thank you so much for joining us. Mario, thank you for joining us for the interview with Sam. Oh, man, I had a blast. Thank you guys so much. What an interesting dude. Whenever David and I do an episode, we have like a seminal thing that we start our research with.

And back in the day, it used to be the Wikipedia page. And for more of the things that we've been doing recently, you know, we read the canonical book on a subject if it exists. And conveniently, there is a book on FTX, and you wrote it and published it on your website in three parts. So thank you for being the canonical piece of research that we used. And thank you. I am always humbled when you guys use something I wrote.

And yeah, I look forward to these podcasts so much as a listener. So it was a treat to get to be a part of one. You've been on a tear with some other great Web3 stuff recently, too. You had a MetaMask piece that was really interesting. What was the other one that I read? Oh my gosh, your Terra and Luna exploration. That was like a whole new world for me. Ooh, that would be a great acquired.

You should get Doe on here. He is a fascinating guy. Oh, that would be awesome. Yeah, he lives in the little bit of the other corner of Cryptoland getting subpoenaed at the top of an escalator on the way to give us a talk at a conference. Yes, yes, he does indeed. And then countersuing. It's crazy. Listeners, if you're interested in this, you should definitely go read Mario's piece on Terra. Subscribe to The Generalist. It's awesome. And we love collaborating with you, Mario.

Thank you so much. Likewise, guys. It's so cool now that like literally Ben was joking, but it's right. Like the books are being written real time on newsletters and social media. And like you are writing it. You are one of the foremost chroniclers of this new era. Thank you for the work you're doing. Oh, thanks, man. Well, back at you guys. You guys have led the way in this space for a long time and I think made it a lot easier for folks like me and Paki to get to jump in and be a part of the movement in a little way.

So I know that you guys feel the same, but I just feel so lucky that I get to do this and have so much fun getting collaborate with you. Well, thank you. Listeners, if you want more Web3 content, crypto Web3, I got to figure out what my umbrella term is here. We did great deep dives on both Braintrust and Audius recently and actually with Kyle Samani on how to run a crypto fund over at Multicoin. All of those and every other back catalog episode are now publicly available of the LP show.

So if you just search Acquired LP show in any podcast player or click the link in the show notes, you can go find all that and more. With that, you can join the Slack. Come hang out with us. Talk about this episode at acquired.fm slash Slack. Go subscribe to The Generalist, readthegeneralist.com. We will see you next time. See you next time. Thanks, guys. Bye. Thank you.