Multicoin Capital Co-founder: How Did We Get Involved with FTX and Ultimately Suffer 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 one of the heaviest topics 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 with 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 in its early days (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 topics 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."

So 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 it an extra advantage in its market-making business, which would scare off other market makers on FTX. We spoke with some market makers, but they said they did not notice 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.

After 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 cushion… 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 did not think this would lead to bankruptcy."

When the host continued to press on how close the relationship between Multicoin Capital and FTX was, citing their joint investments, Jain countered, "I don't think so (the relationship is too close); there are too many embellishments 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 in the world and persuade them to invest in himself."

Jain believes that the root cause of the FTX incident was "the lack of governance restrictions on SBF, 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 go to the CTO and ask him to write a backdoor program so that when the CEO transfers assets, it wouldn't alert 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 needs to be auditable in real-time.

Jain concluded, "The future of finance should not 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."