Setting The Story of Sam Bankman-Fried In Its Broader Historical Context

The appearance of figures such as Sam Bankman-Fried should be viewed as a harbinger of a market downturn.

By Aiden Singh, April 30, 2024

If you followed the trial and recent sentencing of Sam Bankman-Fried (SBF), you heard sordid details of alleged polyamory and drug-use in the Bahamas, peculiar tales of socially awkward individuals managing billions of dollars out of the Caribbean tax haven, and accounts of legal intrigue involving former co-workers and alleged romantic partners turning on each other to minimize prison time. 

But while the salacious details of what took place at SBF’s Bahamas-based operations were headline grabbing, understood in the broader context in which they occurred it becomes clear these are merely specifics in a much bigger story. Zoom out from these particulars and we see that the rise to prominence of SBF occurred in the context of a very specific and recurring social phenomenon known as a speculative bubble. Specifically, his ascension to ‘king of crypto’ status occurred in the context of a financial euphoria in cryptocurrencies, meme stocks, penny stocks, big tech stocks, special purpose acquisition vehicles (SPACs), and non-fungible tokens (NFTs). As a financial frenzy took hold of these markets in 2020, and prices thereby appreciated, a bandwagon effect pulled in new traders in increasing numbers. Overnight, dental assistants and stock clerks with limited understanding of asset valuation and the history of financial markets became day traders in bitcoin, ether, and a slew of other cryptocurrencies so seedy they earned the moniker of ‘shitcoins’.

When people become so easily willing to part ways with their money, so uncritically amenable to being sold financial products without deep reflection on their actual underlying value, snake oil salesmen and false messiah figures tend to come along to separate them from their loosely-held money. Whether you believe SBF to be a conman or a well-intentioned philanthropist-businessman who got in over his head, he follows a long line of such individuals who pop up during speculative manias. Among the most notorious of the names on this list are Bernie Madoff, whose Ponzi scheme could no longer perpetuate after the U.S. housing bubble of the 2000’s ended in the crash of 2008, and Charles Ponzi, who became infamous after the financial fraud he engineered came to light in the early days of the Roaring 20’s and after whom the Ponzi scheme is named.

In the case of the Meme Asset Frenzy of 2020-2021, the explosion in interest in cryptocurrency trading meant an influx of trading volume for crypto exchanges such as SBF’s FTX and seemingly easy returns for crypto bulls. Consequently, at the height of the mania, many viewed SBF as a wunderkind on the front lines of financial innovation. But when the bubble burst, both SBF’s cryptocurrency trading hedge fund, Aladema Research, and FTX blew up, and hundreds of millions of dollars entrusted to FTX were revealed to be missing. SBF’s reign as a leading figure in crypto finance came to a sudden end.

Sure the legal case that followed this historic financial collapse was full of all kinds of gossip-worthy stories - it played as a kind of Wolf of Wall Street financial crime drama meets The Social Network epic of coders building a billion dollar tech company. But when SBF is understood, not as some uniquely interesting individual, but as an archetypal character who pops up whenever a financial frenzy is underway, it becomes clear that, while engaging, the intrigue surrounding him and his colleagues is just a small part of a much larger and more interesting story. The key takeaway from the saga of SBF is an understanding that the rise to prominence of such figures amidst a widespread belief that riches are to made in some new financial product is an omen of a market downturn.