How FTX Went from $32B Valuation to Fraud Conviction in 12 Months

FTX grew explosively by offering innovative crypto trading products. Sam Bankman-Fried (SBF) cultivated an image of an altruistic genius — he slept on beanbags, drove a Toyota, and pledged to give away his wealth through "effective altruism."

But behind the scenes, FTX was lending billions in customer deposits to SBF's hedge fund, Alameda Research, which was making high-risk bets. There were no independent board members, no real compliance, and no separation between the exchange and the hedge fund.

What went wrong — No one applied basic governance thinking (RACI Matrix):

A RACI Matrix would have immediately revealed the conflicts:

Decision	FTX (Exchange)	Alameda (Hedge Fund)	SBF
Customer fund custody	Responsible	Should have NO access	Was lending funds to Alameda
Investment decisions	Not involved	Responsible	Was directing both
Risk management	Responsible	Responsible	Was doing neither
Compliance oversight	Responsible	Responsible	Was evading both

SBF was Responsible, Accountable, Consulted, AND Informed for everything. There were no checks, no balances, no independent oversight. A RACI exercise would have shown this is a governance catastrophe.

What they needed — Pre-mortem:

"Imagine FTX has collapsed. Why?"

• Customer funds were commingled with hedge fund trades
• One person controlled both entities with no oversight
• No independent board, no real CFO, no compliance officer
• A market downturn exposed the hidden leverage

Every single prediction would have been correct.

Ladder of Inference trapped investors:

• Observable data: FTX is growing fast, SBF is praised by regulators and media
• Selected data: Revenue and user growth (ignoring the total absence of governance)
• Interpretation: "SBF is a genius; FTX is the future of crypto"
• Assumption: "Fast growth means everything is working"
• Conclusion: "Invest at $32B valuation"
• Action: Major investors (Sequoia, SoftBank, Ontario Teachers' Pension) invested billions

Sequoia wrote a now-deleted 14,000-word profile calling SBF "the next Warren Buffett." Walking DOWN the Ladder of Inference — asking "what data am I ignoring?" — would have revealed the governance vacuum.

FTX's collapse was the biggest financial fraud of the decade:

• $8 billion in customer funds was missing
• FTX filed for bankruptcy on November 11, 2022
• SBF was convicted of fraud and sentenced to 25 years in prison
• Sequoia, SoftBank, and other investors wrote their investments down to zero
• The Ontario Teachers' Pension lost $95 million in retirement savings
• The "effective altruism" image was a facade — funds were used for luxury real estate, political donations, and risky trades

The contrast with Coinbase is stark: Coinbase invested in regulatory compliance, independent governance, and transparent financials — the "boring" approach that FTX's supporters mocked. Coinbase survived the crypto winter; FTX didn't exist anymore.