“A blind leap into the unknown” is how Caroline Ellison could be juxtaposed with billionaire Sam Bankman-Fried.
In November 2022, the cryptocurrency world was left shaken after CoinDesk (a news site that specializes in digital assets and the future of money), raised concerns about the financial health of two of the biggest crypto exchanges in the world, FTX and Alameda Research.
As a domino effect, the protagonists of this story were questioned by the crypto community and rivals, while the firms were buckling to stay afloat in the volatile market.
Days after the reports that Alameda was heavily invested in FTT, the digital token issued by FTX, 130 entities affiliated with Alameda and FTX filed for Chapter 11 bankruptcy.
Caroline, who was content behind the scenes, was suddenly put in the spotlight. Her elusiveness is raising eyebrows. Was she the mastermind behind FTX’s Collapse or was she a scapegoat?
Who Is Caroline Ellison?
Growing up in the Boston suburbs, Caroline Ellison had a special aptitude for mathematics. Born to Glenn Ellison (the Head of the Department of Economics at Massachusetts Institute of Technology) and Sara Fisher Ellison (Senior Lecturer of Economics at MIT) in 1994, Caroline loved reading books and was called ‘nerdy’ and ‘highly intelligent’. At 8, she compiled an economics report analyzing the prices of stuffed toys for her father.
Life At Stanford:
After attending Newton North High School, Caroline attended Stanford University in 2012 and graduated with a Mathematics degree. She was described as ‘Focused, very mathy and bright’ by her college professor.
As a self-proclaimed bibliophile, her Tumblr reviews ranged from the Harry Potter books to a Substack of Matthew Yglesias, a blogger of economics and politics.
It was in college that she began exploring the principles of Effective Altruism (EA).
EA is a philosophical and practical movement or a community that calculates how a person can use their time and resources to find the best ways to help others. Effective altruists prioritize global health and development, social inequality and animal welfare among a few of their charitable causes.
Life In Jane Street Capital:
She then worked at a quantitative trading firm, Jane Street Capital as a junior trader for 19 months. There, she met Sam Bankman-Fried (SBF). She hadn’t always been interested in markets and investing before, she had later said in the FTX Podcast.
Before I did any trading, I didn’t consider myself a trader-y person, really.
Life In Alameda Research:
When Sam Bankman-Fried founded Alameda Research in 2018, she left her job after his persuasion to join the crypto firm. The inner circle comprised Caroline, SBF, Gary Wang, Nishad Singh and Sam Trabucco. Upon her arrival, she was surprised at how Alameda made fast-paced Jane Street look slow. It was a fledgling cryptocurrency hedge fund, according to her.
This was very much like, ‘Oh, we don’t know what we’re doing really, Ellison told Forbes of her initial impressions of Alameda.
One of Alameda’s aggressive trading strategies was arbitrage, which is buying a coin in one location and selling it elsewhere for more. In 2018, Alameda earned $20 million through an arbitrage trade because of the higher price of Bitcoin in Japan than in America.
In the same year, Alameda Research was shifted from Berkeley to Hong Kong where everyone traded in crypto fiercely. It was alleged that Ellison and Bankman-Fried were living together out of a luxury compound in the Bahamas alongside Wang and Singh and seemed to have been romantically interlinked with each other.
It was like, wow, the way of doing things is just that someone suggests something and then someone codes it up and releases it. An hour later and it’s already happened.
Around 2020, Alameda had begun ‘Yield farming’ which was a high-stakes endeavor where investors chase returns by lending out their crypto holdings.
Ellison’s skeptical concern about Decentralized Finance led to arguments within the firm.
In 2020, Ellison indicated her affinity for LARPing — in which people dress up to portray fictional characters.
The Beginning Of FTX: Alameda’s Sister Concern
In 2019, Bankman-Fried started FTX Crypto and handed the reins of Alameda to Ellison and Trabucco. They were featured in the Forbes ‘30 under 30’ for building a quantitative trading firm that made $3-4 million daily. This income was invested in blockchain platforms. Simultaneously, FTX emerged as a promising institution and as a key marketplace for big as well as small investors to buy and sell crypto. The sister concern was a big player in the digital world, and traded often on FTX too.
The year is 2020. Your heroine is working for a digital currency exchange that allows all citizens of repressive regimes to move money anywhere in the world.
– A 25-year-old Caroline Ellison’s now-deleted Tumblr diary.
The inner circle started a board called the FTX Future Fund to make grants to investments in ‘socially impactful companies’. This was their way of promoting Effective Altruism.
The Rapid Ascent of CEO Ellison
Cryptocurrency prices were soaring and FTX was booming. In July 2021, both Ellison and Trabucco were elevated to the position of CEOs. They were heading an operation of a 25-member team. The mathematical genius had an active online presence as @carolinecapital on Twitter and LinkedIn.
In an interview for Liquid, Ellison spoke about her plans as CEO of Alameda. She expressed her views on formalizing the world of digital currency.
We’ve come to occupy a fairly unique space in the crypto industry,” she said in the interview, “bringing traditional finance backgrounds to help the crypto markets become more orderly and also efficient.
In an interminable thread on Twitter, she illustrated her process of decision-making.
So I don’t think success can usually be obtained from getting hard decisions right. It comes more from looking for bigger problems & opportunities and actually trying to address them.
Between 2021 and March 2022, Alameda Research amassed $60 million worth of crypto tokens in the Ethereum Blockchain.
Crashing At Breakneck Speed
Some critics view effective altruism as an encouragement for excessive risk-taking since people may believe that bigger paychecks lead to humongous donations.
Alameda had already built a reputation of being a cutthroat risk-taker. It would ruthlessly dump tokens, sell things whenever it wanted and had no control. Trabucco, who was the public face of the crypto firm, stepped down in August 2021 making Ms Ellison the sole CEO. He described working at Alameda as ‘difficult, exhausting and consuming.”
As it grew more out of place, the strategies changed to rely more on intuition.
Alameda started facing losses between May and June 2022. The digital currency market was in a free fall. Panic gripped the investors. They started pulling out their funds from FTX frantically even amidst assurances from SBF and Ellison.
Bankman-Fried tried to be a hero by buying out troubled firms and extending credit to foster the re-stabilization of the crypto market. Even though Alameda was also on the near-ends of sinking, the workers were told little to nothing of the management scenario which was spiraling.
Former employees of FTX and Alameda spoke to CoinDesk that the group had a major conflict of interest and went wild on oversight.
The descent to bankruptcy caused alarm. Changpeng Zhao, head of Binance was a rival to FTX and announced to dump FTT holdings as a risk management move.
The internet spar between Zhao and SBF made Ellison try to cool the situation. But it backfired when Alameda’s balance sheet was leaked and concerns arose regarding the hedge fund’s assets.
Ellison’s last post on Twitter stated that not everything was disclosed and that Alameda had assets greater than $10 billion worth.
A few notes on the balance sheet info that has been circulating recently:
– that specific balance sheet is for a subset of our corporate entities, we have > $10b of assets that aren’t reflected there— Caroline (@carolinecapital) November 6, 2022
Within days, on 9th November 2022, Ellison addressed her employees in a video meeting in which she admitted that Alameda had dipped into FTX’s customer funds to cover up their liabilities and slew of poor trades. While Bankman-Fried now admits to it as a poor judgment call, FTX had a strict rule against this. She told her employees that apart from her, Bankman-Fried, Wang and Singh were aware of this decision. Alameda owes more than $10 billion to the crypto market.
They have all been fired from their positions. FTX is being investigated for their mishandling of client funds and the jury is pending on the size of the role that Caroline Ellison played in what could be named one of the most shocking financial frauds in history.
The plausibility of FTX’s collapse being a collusion is highly likely. The diminishing online identity of Ellison in contrast to the wide media coverage of Bankman-Fried, raises a question as to whether her silence is the answer to her involvement in FTX’s collapse. Bankman-Fried is now being considered for extradition to the United States.
What was the necessity to play roulette with client funds? A slow and steady rise in business gives better decision-making power with lesser risks. A spectacular jump in success could also lead to a staggering downfall.
