The Exchanges

Q And when you went to CoinMarketCap way back when and looked, was your intention, hey, is there an arbitrage here? Does there, is there a large spread?

A Yeah, it's basically what I was looking for. Um, and, and basically, like, 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, but it gives you an upper bound on how much you could make doing arbitrage. Right. And, and what is that bound? Well, you take the, the difference in pricing between major exchanges, right? That's like the amount maybe you could make on each trade. Um, 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, you know, I don't know, sort of making that up. Again, this isn't meant to be precise. It's just meant to be like, you know, let's like ballpark what we could be looking at here. And back then, their daily trading volume was only like a few billion dollars, I think.

AI assessment note: “Yeah, it's basically what I was looking for.”

Q And are you thinking you guys are going to build a crypto quantitative trading firm at this point, or are you not even thinking you're just like, I want to take advantage of this opportunity?

A We were thinking that. And, you know, while doing that trade, we were doing a lot of other trades much smaller. And our vision was, look, this probably won't be the last good trade ever. We should build, you know, a firm here, right? Whatever that means, right? We want to be scaling up so that we can continue to take, uh, you know, basically continue to like, 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, in different exchanges and jurisdictions and tokens all over the place. And Very little liquidity. None of the institutional liquidifiers were in the space. So like, yeah, when Japan was buying four hundred million dollars a day of crypto, there was no firm set up to like be able to provide that liquidity. And it's just like giant mismatch of liquidity demanded liquidity supply that was creating gigantic spreads. Um, customers were getting terrible prices and there was a pretty big opportunity to come in and provide on both sides of that. And this, you know, the Japan Arab was just one example of that.

AI assessment note: “We were thinking that. And, you know, while doing that trade, we were doing”

Q 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, 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?

A Yeah. So people were really excited hearing it, but they're also like, they had all these questions, right? And, and like 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 I mean, we're trying to answer them, right? We're trying to be like, well, you know, we like, here's what, but, but like, what's the honest answer, right? Where, where are we really actually coming from? Is like, I don't know, we just fucking started this company two months ago, and we're trying to scale up extremely quickly. Like, we don't have great answers to some of your questions, right? Like, we, 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. Um, so, Like, definitely there are a lot of people who are like, I'm super excited, um, 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.

AI assessment note: “people were really excited hearing it, but they're also like, they had all these questions”

Q And by the way, we've got a giant amount of volume from our, our sister company Alameda on the platform. So there's a, a big counterparty if you want to trade with us, right?

A Right. It helped basically solve this sort of like problem of like, well, you, you're just starting up an exchange. Sometimes there's a catch-twenty-two where like, how'd you get volume without liquidity? How'd you get liquidity without volume? And, and this, this sort of gave, gave a solution to that. Um, So, um, of, you know, basically starting with liquidity so that people could come and trade, you know, we took a lot of feedback, we kept iterating, and, you know, in the end, most of our initial growth, um, came from power users, the people who You know, or spending hours a day in the ecosystem and would try out every new exchange that came, you know, and, and use the ones that they liked 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.

AI assessment note: “It helped basically solve this sort of like problem of like, well, you, you're just starting”

Q And this is all out in the Bay Area, right?

A Yeah, that's right. And what was the scale of it? Well, in theory, if one had infinite capital, one could have made 10% on a few hundred million dollars a day, maybe. So I think twenty 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. Like it was amazing. But meantime, we were 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 because it's like, it's like, you hear that number, like, oh yeah, Ponzi scheme. That's what you said. Right. Um, so I, I, and unfortunately we basically scaled up capital base the day that the ARB went away. Um, and so we failed to really ever get to the, 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, like, we were active and it was alive.

AI assessment note: “Yeah, that's right.”

Q And was that even across major exchanges, not even going esoteric?

A Coinbase to Bitstamp was usually like one or two percent. And, and that's not even looking at like Bitfinex or anything based on Tether or Japan or Korea or anything like that, right, which would sometimes get in the twenties of percents. Um, so, so, okay, what's this number say, right? You have like some number of percent, I don't know, let's say two percent maybe you could make times a few billion times one percent of volume, right? So one percent of volume is twenty million, I don't know, dollars of volume or something like that. Make two percent on that. Um, I think that's like 200 grand. And, and, and, and so, okay, that's an estimate for how much money maybe you could make per day doing arbitrage. Um, and that's a lot of money to make each day, you know, like, like I sort of saw that and it's like, oh, wow. Like, I, I mean, again, I don't know, right. This, this all might be fake, but, but if, if, if it's not fake, that's, that's pretty compelling. And that was enough for me to like go create some accounts on exchanges and, and try and do it and see what happened.

AI assessment note: “Coinbase to Bitstamp was usually like one or two percent.”

Q Okay, so why start FTX? You've got this quant crypto trading firm. It's going well with Alameda. You're finally landing some, some, um, some big institutional capital to, you know, have, have real AUM here that you can make interesting money with. So you decide to start a futures exchange?

A Right. So I guess there are a few things going on there. And the first is frankly, um, When you do the math, like, in order to really scale up to where it needed to go, um, Alameda would have needed, and it did eventually succeed in this, but to actually get a substantially bigger capital base than it had, um, if you look at, I mean, the amount that we're paying on capital combined with, like, just a bunch of other sort of difficulties there. Um, 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. Um, and I, it's basically public and it's also big, like really big. Um, and You know, to give some sort of like sense of what that means, like how big is big. Um, well, again, it's all public. You can do, you can do the math. So this is circuit late, um, well, they were transacting how much per day, you know, globally five to ten billion dollars. What were their fees? They're making like four basis points on average on that. Right. Um, And, uh, all right, you can sort of do the math there, actually, right? Like, that's a few million dollars a day that they're making. It's a billion dollars a year of revenue. Um, it's a lot of revenue, and the core business model of an exchange from some sort of, like, really simplistic …

AI assessment note: “It's very easy to see how much are the exchanges making as an example”

Q Well, the first question I have for you is, how, how did this all get started? Like, take us to the moment where you became crypto-curious, uh, for, for lack of a better term, or maybe a tongue-in-cheek term, and, uh, and how you started digging in on all this.

A Yeah, so the first thing I did, I can actually step-by-step go through it, because it's a pretty simple process. Um, I went to coinmarketcap.com, um, I clicked on Bitcoin, And then I clicked on markets. That was my first investigation. And, you know, and I guess I'll, I'll do that right now to see what it, what it shows today. Cause I think it's going to be an interesting contrast. So, so if you do that today, right, it's going to show you a bunch of markets for a Bitcoin and just sort of looking across the prices here. Um, I, It's not, the data here is not perfect. Like, they don't understand Tether's pricing extremely well, but sort of the range of numbers that I'm seeing, with a few exceptions that we can get to, is, um, you know, 48 thousand and 280 at the low end, and 48,320 at the high end. Um, and so that's like a, you know, what 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. Um, and that's like about typical today. You know, if you're thinking like, is there an arbitrage in Bitcoin? The answer is like, maybe, sort of, I mean, it's 10 basis, you're gonna be paying a few basis points fees on both sides, right? So, and, and this data, it's like, it's not perfect, it isn't perfectly synchronized, they're not pricing tether quite right. So, so, so really the answer is like, ah…

AI assessment note: “the first thing I did... I went to coinmarketcap.com, um, I clicked on Bitcoin”

Q To set some context, you, you said Jane Street, you, you were a trader at Jane Street Capital, which is one of the top quantitative hedge funds in the world. The, so that, that 200,000 dollar a day potential arbitrage opportunity in Bitcoin, how did that compare to the best trades you saw in traditional markets at Jane Street?

A So it's interesting, and without going into, you know, detail about IP sensitive things here, I guess what I'll say is like, 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, like, equity markets trade some number of hundreds of billions of dollars per day, maybe a trillion per day, depending on how you count, right? And like, Jane Street's one of the big players in it. It's not, I would guess it's not the biggest by volume, generally like a true HFT firm would be, but okay, so that can get you a sense of like, the volume numbers that you'd be talking about there would be way bigger, right, than the volume numbers that we're seeing. I mean, maybe if you traded a hundred percent of crypto volume, but, but you're not gonna do that, right? Um, on the other hand, if you can make one basis point on a trade in traditional finance, that's a good trade. No, no firm like, ah, you're only making a BIP on it. Why bother? If you're doing, if you can get it done in a day or something, right? Like if this isn't like a, you know, year long holding position, right? If, if you could just like say like, yeah, here's like a shorter timescale trading and make a base plan for 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. Mayb…

AI assessment note: “if you can make one basis point on a trade in traditional finance, that's a good trade”

Q Where in this, the 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?

A I think we're like a quarter of the way or something. Like my sense is like, I still think we basically don't know where it ends. Um, 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, you know, 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. Um, and, uh, uh, yeah, I don't know. I, I, I think we're like, We're starting to understand some aspects of it, but like, we still haven't quite seen how society, like what the new society that that forms is, you know?

AI assessment note: “I think we're like a quarter of the way or something.”

Q amount of transparency, and of course, you've got these great blog posts that, 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. Like, what's the thinking behind this, and why are you doing that when classically no one in their right mind would do that?

A A thing that I think I think about a lot is, sure, ok, like, you say, people do x. Like, tell me more. Why do people do x? You know? Do people do x for a good reason? Like, 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. You know? They said, do X, and we looked into it, and I don't see a reason why. Um, and you know, you should always update on the fact people think you should do something. Often there's a good reason for that, right? And I don't want to, I don't want to dismiss that. Um, 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. Um, And, um, and so I think this is sort of a case maybe of like, I don't know, this thing's basically gonna be public anyway, like, no matter what we do, like, ah, everyone's gonna see this deck. Like, this is, there's, there's a number of people you can show something to after which it's, it's not meaningfully private, and I think that's sort of like part of how I felt about it.

AI assessment note: “this thing's basically gonna be public anyway, like, no matter what we do”

Q 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. Like, 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, what's like the C?

A Yeah. So, I mean, what are the metrics we're going to judge ourselves by? And one of them is just like, you know, did we become the biggest crypto exchange? I mean, I think that that's clearly going to be one of the kind of core metrics here. Um, I, I think thinking about like, you know, did we ever succeed at getting retail users right at penetrating that market is going to be one of the things that I think we're going to create ourselves on, which I think I'm, I'm sort of cautiously optimistic about, but I, but we haven't proven that, right? Like, we've never really gone big in that segment before, and so I think that, like, um, I, that that's gonna be one of the big things here, and then I, I think, like, You know, did we manage to expand beyond crypto is going to be, I think, one of the big metrics.

AI assessment note: “did we become the biggest crypto exchange? I mean, I think that that's clearly”