Multicoin Capital Co-founder: How We Became Involved with FTX and Ultimately Suffered the Consequences?

Original Title: Down With the FTX Ship: Multicoin Capital Talks Lessons Learned

Author: DARREN KLEINE, Blockworks

Compiled by: Azuma, Odaily Planet Daily

The collapse of FTX is the heaviest topic in the cryptocurrency industry in 2022, especially for individuals and institutions that suffered financial losses as a result.

Multicoin Capital is one of the most well-known investment firms in the industry. During the rapid rise of FTX, the firm had close collaborations with FTX and its founder SBF. However, as the house of cards fell, the firm also suffered significant losses.

In just two weeks in late autumn 2022, with the collapse of SOL, heavily involved by SBF, and FTX's own platform token FTT, Multicoin Capital lost 55% of its book value. According to a letter to investors released in March this year, Multicoin Capital's hedge fund experienced a staggering loss of 91.4% throughout 2022.

How Did Multicoin Capital First Get Involved with FTX?

Recently, Multicoin Capital co-founders Kyle Samani and Tushar Jain participated in a podcast with overseas media Blockworks, where host Jason Yanowitz asked, "How did Multicoin Capital get entangled with FTX?"

Samani explained that although Multicoin Capital did not invest in FTX early on (in 2019), they were very interested in the rapid growth of the exchange. At that time, Solana had just launched its mainnet, and DeFi Summer was gradually gaining momentum. SBF was frequently discussing on Twitter, which caught the attention of Multicoin Capital.

After a phone discussion between the two parties, SBF began building Serum, a DeFi hub running on the Solana network, and Multicoin Capital decided to invest in the project alongside FTX.

Samani stated, "At that time, our relationship with SBF was good, but soon there were some issues, and the reason was simple."

Samani continued, saying that Multicoin Capital had some concerns about the suspicious relationship between Alameda and FTX. While their initial collaboration was successful, Multicoin Capital conducted its own investigation, seeking opinions from other market makers, but the feedback was "very positive."

Thus, Multicoin Capital had to choose: "Well… let's take another look."

Jain added, "Our initial concern was that the relationship between Alameda and FTX might give them an extra advantage in their market-making business, which would scare away other market makers on FTX. We spoke with some market makers, but they said they hadn't noticed such an advantage."

How Did Multicoin Capital View FTX Before the Collapse?

In the autumn of 2022, when Samani and Jain attended the Solana Breakpoint conference in Lisbon, Portugal, the crisis began to quietly approach.

Upon hearing rumors that FTX might be in trouble, Multicoin Capital's first reaction was that the situation should be manageable.

Jain stated, "Given that FTX had raised a significant amount of equity capital, that should be enough to buffer… FTX's profits were substantial, with revenue exceeding $1 billion in 2021, so they had quite a bit of money… There might be some liquidity mismatch issues, or funds tied up in leveraged positions, and they needed some time to unwind those positions… We didn't think this would lead to bankruptcy."

When the host pressed on how closely Multicoin Capital and FTX were connected due to their joint investments, Jain countered, "I don't think so (the relationship is too close); there's too much embellishment in that."

Samani added that in many investment cases, Multicoin Capital was competing with FTX or Alameda for investment shares. Sometimes FTX would push Multicoin Capital out, and sometimes it was Multicoin Capital that pushed FTX out.

Samani said, "Are we on good terms? Yes, but this is the financial market, and we are also competitors."

What Lessons Did Multicoin Capital Learn from FTX?

In the podcast, Jain also reflected on his early impressions of SBF: "This person could talk to the most well-known investment funds and the most seasoned investors and persuade them to invest in himself."

Jain believes that the root cause of the FTX incident was "the lack of restrictions on SBF's governance methods, and the complete lack of transparency in internal operations," which resulted in them being able to act almost without restraint.

Jain gave an example: "For instance, the CEO could find the CTO and ask him to write a backdoor program that would allow the CEO to transfer assets without alerting the auditors… From a supervisory perspective, there was almost no way to prevent this from happening."

To improve future regulatory standards, Jain suggested operating exchanges like DeFi protocols, where everything should be subject to real-time auditing.

Jain concluded, "The future of finance shouldn't be quarterly reports; that's an outdated concept from the 20th century. The future of finance should be real-time awareness of everything that is happening."