How FTX crypto exchange won over 1 million investors and grew 25-fold
FTX crypto derivatives exchange pioneered TRUMP crypto futures and now dwarfs Coinbase in trading volume. Is going public in FTX’s near future?
Two years since its founding, crypto derivatives exchange FTX may no longer be considered an upstart in this space. As the company that famously offered crypto futures last year for betting on U.S. presidential candidates, FTX’s trading volume in other crypto derivative areas has been growing quietly by leaps and bounds. In April alone, FTX handled a higher trading volume than Coinbase’s estimated volume for the first three months of 2021 — and FTX’s CEO and co-founder Sam Bankman-Fried says his company is gearing up for more.
“A lot of financial institutions right now are toying around with getting into crypto, with starting to trade crypto, starting to offer crypto to their customers,” said Bankman-Fried, in an interview with Forkast.News.
“You probably will start to see over the next year or two really substantial increases in flows into crypto coming from asset managers, banks, investment banks, mutual funds, pension funds and traditional brokers,” Bankman-Fried said. “That's going to open up a huge new area of the space and I think it's also going to have its own product constraints.”
Even by the standards of crypto exchanges in a bull market, Hong Kong-based FTX has been one of the fastest-growing. Last month, FTX saw US$400 billion in monthly trading volume, or about US$14 billion in average daily volume on its platform, representing a 25x year-on-year growth from April 2020. In comparison, Coinbase — the largest cryptocurrency exchange in the U.S. that was founded in 2012 and is now listed on Nasdaq — reported an estimated US$335 billion in trading volume for the first quarter of 2021. The giant in the space, Binance, reported US$2.14 trillion in Binance Futures trading volume in April, up 54% from March.
The FTX platform now has around a million registered users, ranging from institutional traders, family offices and crypto-native investors. While primarily focused on professional traders, FTX is also expanding its retail trading offerings. Last year, FTX acquired Blockfolio, a portfolio tracker for US$150 million, a move that gives the company access to global retail users looking to invest in cryptocurrencies.
“Several years ago, we took a look at the state of the world’s crypto exchanges and identified a gap in the marketplace for a reliable and secure platform robust enough to meet the needs of institutional traders and other power users,” said Bankman-Fried, in an emailed statement. “In May of 2019, we launched FTX, determined to revolutionize how trading was conducted in the digital asset space.”
Innovations in crypto
Bankman-Fried, who graduated from the Massachusetts Institute of Technology with a degree in physics, had worked as a Wall Street ETF trader at Jane Street. After working briefly at the Centre for Effective Altruism in 2017, Bankman-Fried decided to apply the trading techniques he had learned at Jane Street to cryptocurrencies. He founded the cryptocurrency trading firm Alameda Research before launching FTX in 2019 when he was 27 years old.
Two years on, FTX’s range of products now includes crypto derivatives, options, volatility products, tokenized stocks, prediction markets, leveraged tokens, OTC and pre-IPO tokenized stocks that cater to a variety of traders — no small feat for a team of about 100 employees.
"I had a ton of fun with the Trump futures,” Bankman-Fried told Forkast.News, adding that the Trump contracts traded a few million dollars on election night and that it was FTX’s biggest day in terms of active users at that time. “It was just really exciting and fun to see that rolling out as the election happened, and to see the reaction of the markets to news coming out and trying to understand what's happening and why.”
FTX also pioneered streamlining margin collateral loan wallets that allow traders to hold all their margin in one wallet as collateral. Explaining that the norm for some exchanges was to hold multiple different wallets of different assets for collateral, Bankman-Fried said: “You have like literally hundreds of wallets and no choice about what assets went there. You had liquidations happening on random wallets and you had to manually manage this process.”
“FTX's philosophy has always been to try to remove the barriers to the extent we can. For us, you can put whatever you want in your wallet and it all counts as collateral and you can trade whatever you want out of it as long as you're not over margin limits,” Bankman-Fried said. “That's one of the bigger design philosophy differences that we had. And over the last few years, we've seen the other exchanges slowly start moving bit by bit in that direction.”
But innovation can also raise regulatory concerns. Cryptocurrency exchange Binance recently attracted regulators’ scrutiny over its tokenized stock offerings. FTX’s tokenized stocks, first introduced last year, are “really more like a traditional brokerage offering” said Bankman-Fried, adding that FTX was tied into licenses, equivalent to that of an introducing broker, for the tokenized assets.
It will require some more regulatory legwork to get to the point where the tokenized stocks could become free floating tokens on the blockchain, Bankman-Fried said. “Our philosophy is always get a license when there is one.”
Regulations for crypto derivatives emerging
Bankman-Fried said that FTX was in discussions with countries introducing crypto derivatives licenses in view of acquiring one. “This is obviously a new area for the world and most jurisdictions are still trying to figure out how to handle the more complex products in the space."
He added that while there was guidance from a lot of global regulators on spot cryptocurrency products, this was less true for derivatives.
“We're excited for governments to start building out regulatory frameworks and licensing regimes for us to be able to offer that we can acquire for crypto derivatives,” Bankman-Fried said. “That's going to play a big role in where we shift a lot of our resources to and we're having a lot of conversations behind the scenes right now and scoping places.” He adds that there will be some announcements on that later this year."
Will FTX be going public?
Last November, Hong Kong-based cryptocurrency exchange Diginex listed on Nasdaq via a special purpose acquisition company. U.S. cryptocurrency exchange Coinbase’s direct listing on Nasdaq last month and cryptocurrencies’ increasing popularity in recent months have further fueled interest among cryptocurrency exchanges, including FTX, to go public, too.
“We're doing the due diligence on that,” Bankman-Fried said. “It's something it'd be crazy of us not to not to be looking into and trying to understand.”
Bankman-Fried said that he “liked the idea of a direct listing.” Though there are no formal plans for FTX going public for now, the CEO is paying attention to direct listings, SPACs and what regulators and exchanges are doing on the formats to go public. “We're kicking the tires on it and just trying to figure out what is the right direction for the business,” he said.