Demystifying Crypto: Sam Bankman-Fried on Quant Trading, UX, & More

In late 2020, NY Magazine described Sam Bankman-Fried as the presiding entity over a “fledgling crypto empire.” And it’s true–at less than thirty years old, he has already founded several successful companies in the crypto space (namely, crypto quant trading firm Alameda Research and crypto trading firm FTX); he has also played a role as a major investor in a growing number of crypto projects. He also dabbles in DeFi, and played a key role in the SushiSwap saga last fall.

But besides all of that, Sam Bankman-Fried is also is an “effective altruist.”

What does this have to do with working in the financial world?

Let’s back up for a moment: Sam began his time in the financial sphere on Wall Street, where he traded ETFs at Jane Street Capital. “I really, really liked it there,” he said. “I had sort of an exceptionally good experience–but in the end, it felt like it was time to try building my own thing.”

This is what led him into the cryptosphere. In 2017, “I started Alameda Research, a crypto quant trading firm, and then in 2019, started FTX, a crypto derivatives exchange, and have been building that out ever since.”

(This is an excerpt that has been edited for clarity and length. To hear Finance Magnates full interview with Sam Bankman-Fried, including more details about FTX, Alameda Research, and the Sushiswap Saga, visit us on Soundcloud or Youtube.)

Cryptocurrency and “effective altruism”

Throughout his time working in finance and crypto, “effective altruism” has played a driving role in the work that he’s been done. What is effective altruism? Sam explained it as a movement or philosophy that asks people to “figure out how they can maximize their positive impact on the world.”

More specifically, effective altruism movement asks its participants to discover what options they have to do the most good for the world.” For example, “if you have $100, and you’re going to give it to charity–which charity should you give it to? Which charity saves the most lives per dollar?”

“You have one life to live. How are you going to spend that life? What are you going to do? And what could you do that would have the most impact?”, he said.

How does this philosophy relate to his work in the cryptosphere? “Sh*tcoin promotion,” he joked.

On a serious note, though, Sam’s philosophy as an “effective altruist” is part of what has driven him to become so prolific in the crypto world. “What drew me to crypto originally–and what drew me to Wall Street as well–was the opportunity to be able to maximize the amount that I can donate to charity,” he said.

“Giving to charity’s not the only way to do good–there are people doing a lot more good than I am who are working for some of these places,” he added. “But if that is how you’re going to do it, you can come at it from the angle of ‘which charities are doing the most good per dollar?’ And also from the perspective of ‘what can you do to be able to give as much as you can?’”

The best way to build a crypto platform? Just “don’t be dumb”

While effective altruism hasn’t necessarily played a role in the “making of the sausage” for the companies that Sam has founded, it’s clear that empathy has played an important role in defining the user experience of the companies’ platforms.

For example, “the way that we approached [the building of FTX] was that we’ve used these products before; we’ve thought about them a lot, we’ve interacted with them a lot–what would we want to use? What would the product that we would most like to use for ourselves be like? And how can we build that for other people?”

The task was daunting. “We weren’t sure whether to do it–it felt like, ‘geez, how the hell are we ever going to get users?’ And I had never built a consumer-facing business before. But it felt like, ‘ah, f*ck it’–either we’re going to try or we’re not. It had enough upside that it seemed worth a shot.”

Part of the inspiration for FTX’s development was also the fact that “we basically just found a lot of things that were really frustrating” about other derivatives trading platforms. “A lot of it was just ‘not being dumb,’” he said.

“The crypto space has cleaned this up a little bit,” he said, but for example, “back in 2018, there was one exchange that had upwards of $300 million of lost customer funds because of an improper liquidation engine.”

“What happened, basically, is that every single week, they’d clawback 10 percent of whatever earnings you had to compensate for the accounts that went beyond bankrupt,” he said. “How did they get there? Well, if you let someone put on a $100 million futures position, with $3 million of collateral, and then markets start going down–you’re not going to be able to close that position down before that account goes bankrupt.”

“That’s a particularly egregious example,” he said. “But there were a lot of things that weren’t working so well.”

“Anytime you can find something that is making a product worse and more complicated,” get rid of it

Sam also gave the example of “trading an EOS future.”

If you’ve never done it before, the process on many platforms is quite a bit more complex than it may seem: “how would you do that? Well, first you would go and acquire spot EOS tokens; then you’d move them into your EOS futures wallet, and then you start trading EOS futures.”

But what happens if you also want to trade Ether (ETH) futures? You would repeat the same process–and eventually, “you end up with hundreds of wallets, each for a different future.”

“If one position moves against you, you could get liquidated on (for example) your EOS futures position; it doesn’t matter if you have a ton of extra collateral in all of these other wallets. They don’t help each other. And not only that, but all of these wallets are in different currencies, so you can’t really move your collateral between them.”

“At FTX, we just said, ‘we don’t need to do this,” Sam explained. There’s just one wallet on the platform–”you can put whatever you want in it…we just total up the value of everything that’s in there.”

This method of working is another one of the driving forces behind Sam’s work in the crypto space: “taking a system that was really needlessly complex for users (and also capital-inefficient and awkward and expensive), and trying to transform it into something that is ideally powerful and flexible, and also simple and clean to understand.”

“The way that you do that is to identify places where there are complicated barriers that are both making things messy and also making them bad at the same time–those are the best things to get rid of.”

It’s not always that simple: “sometimes there might be a complicated thing that adds flexibility for the user–is that worth it? Sometimes it is, and sometimes it isn’t–but anytime that you can find something that is making a product worse and more complicated, anything that you can do to get rid of it is super valuable.”

(In other words, “just not being dumb.”)

Fear, uncertainty, doubt, and rain dances

However, “there are some things that we have done that are really clever, but I don’t think that those were the most important things that we’ve done,” he said. “I think that the most important things we did were more like two hundred individual decisions put together: in each case, we said, ‘this seems kinda dumb; what if we did it this other way instead that seems more intuitive to us?’”

The way forward hasn’t always been clear and free of doubt: “there’s always a question of whether or not we may be missing something; maybe there’s this ‘rain dance’, and if you don’t do the rain dance, then your platform just won’t work. And we’re going to be sacrilegious–we weren’t going to be doing the rain dance. And we’re so proud of ourselves, and then the platform just falls over–that was our worry,” Sam said.

In other words, “the whole worry was that there was something that we didn’t know–something that we were missing that explained why these other products were so complicated.”

After all, “these are all giant companies making a billion dollars,” he said. “You don’t want to just write all of that off as noise.”

Demystifying quant trading

A similar philosophy of simplification has also guided the work of Alameda Research, the quant trading crypto company that Sam founded in 2017.

“There’s this thought that when you do quant trading, your brain gets huge, and you think of things that mortals cannot even fathom,” he said. “Like, ‘oh, boy, they must have their supercomputers and their geniuses’–that’s the sense you get from how it’s talked about.”

“That might be true eventually,” he said. “There are these people running complex machine learning models that are actually trying to have sophisticated AIs trading on markets, and each year they get closer to making money–each year, they lose less money. At some point, they’re going to become pretty good.”

However, “the real answer–at least, so far” seems to have been much simpler, Sam said, giving the example of “the best trade [he] ever saw.”

“In late 2017, early 2018 in Japan, Bitcoins were trading at about 10% to 20% higher than they were in the United States,” he said. In other words, a $10K BTC in the US would sell for $11K or $12K in Japan.

“The naive person might say, ‘obviously, this can’t actually be the trade–it has to be harder than that.’ But trade teams could send $10K to Coinbase, buy a Bitcoin, send it to a Japanese exchange, sell it for $11K, send those dollars back, and make $1000.”

Could it really be that simple? “Free money doesn’t lie on the ground–if you think you see it, you’re probably missing something,” Sam said.

“The answer–for crypto in particular, but honestly in a lot of places in quant trading–is that the ‘mystique’ erally overstates some parts of it,” he explained. The truth is that the $1000 arbitrage trade between the United States and Japan is the core trade–but there are a lot of logistical steps that need to be taken in order to get to that point in the first place.”

Crypto is still “a super-messy place to do things in general”

“[Let’s say] you’re starting with dollars in your (for example) Bank of America account in the United States,” Sam said. “Next, you try and wire it to (for example) Coinbase, and already you have a problem, because Bank of America does not want to deal with the regulatory burden of crypto companies.”

The bank may go as far to shut down your account. If that happens, “you’ve hit hurdle one, and somehow you have to solve that problem.”

But imagine that you’ve “managed to get the money to Coinbase somehow, and you buy your Bitcoin,” Sam said. “Then, you realize that there’s a $1000 a day withdrawal limit, and there’s a three-month-long support ticket line.”

The problems go on and on: after getting the withdrawal limit conundrum sorted out, you would then have to deal with getting Japanese residency, an account on a Japanese cryptocurrency exchange, and an account at a Japanese bank–not to mention convincing the bank that you’re not money-laundering huge amounts of cash.

However, “when you finally get to that point, it just f*cking works,” he said. “It works exactly as you think it will, and it makes exactly as much money as you think it could.”

Indeed, when it works, it works. “It’s an absurdly good trade–the best trade I’ve ever seen.”

“The real thing going on here is not that you have to be a genius to understand the trade,” he said. After all, the mathematics of arbitrage are fairly simple. However, “you do have to put together this incredibly sophisticated global corporate framework in order to be able to actually do this trade–that’s the real task, the real hard part.”

This is the difficulty of working in the crypto space.

“It’s a super-messy place to do things in general, compared to the normal financial ecosystem,” Sam said

. “But even so, people tend to overestimate the importance of what they think must be complex mathematics, and they underestimate the importance of figuring out a lot of complex systems and logistics, working them correctly, making a ton of random good judgment calls, and then, in the end, hopefully emerging with the right system.”

(This is an excerpt that has been edited for clarity and length. To hear Finance Magnates full interview with Sam Bankman-Fried, including more details about FTX, Alameda Research, and the Sushiswap Saga, visit us on Soundcloud or Youtube.)

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