Ex-Alameda employee reveals reason for Bitcoin’s 87% drop in 2021

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BTC_down_3-min

Sam Bankman-Fried’s bankrupt Alameda Research was behind a glitch that briefly caused Bitcoin’s price on the Binance.US exchange to plummet by 87% in 2021, a former employee of the firm claims.

On October 12, 2021, the price of the first cryptocurrency on the American platform Binance collapsed from above $65,700 to $8,200 within a minute. Quotes quickly returned to their previous values. Other markets continued to operate normally, experiencing a slight decline in Bitcoin’s value at the time of the incident.

According to a Binance.US representative, the drop was due to a software error in one of the institutional clients—its trading algorithm malfunctioned. Some traders doubted that an automated system could allow such a thing.

Ex-Alameda programmer Aditya Barathwaj revealed a client previously unnamed by the exchange and confirmed the opinion of skeptics – it was a manual entry error.

Trader’s “fat finger” led to the loss of tens of millions

According to him, most of the firm’s operations were carried out by automated trading systems. So traders simply set up algorithms for them.

However, situations such as systems failure due to market volatility or arbitrage opportunities arose when trades were executed manually.

Alameda’s algorithmic software has been subject to sanity checks to ensure orders submitted match market quotes. This was not the case with manual trading, Baratwaj noted.

“The trader tried to sell a large block of BTC “on the news” and sent an order through a manual trading system. What they missed was that the decimal place was off by a few spaces. Instead of selling Bitcoin at the current market price, they liquidated it for next to nothing,” the programmer said.

He claims Alameda lost “tens of millions” of dollars from the typo.

Ex-programmer: software corrections were made on the fly

Since the error was unintentional, the company simply implemented additional sanity checks for manual trading.

“At Alameda, that’s what we used to do: We waited for something to break, and then we rushed to fix it,” Baratwadge said.

The company’s specialists continually continued to implement system performance checks, without which any traditional trading firm would never have started trading, he emphasized.

“In Bankman-Fried’s opinion, the benefits we got from moving quickly outweighed the incidental costs from poor risk checks, hacking attacks and the like. This was his operating philosophy and it helped create the culture that flourished at Alameda and FTX,” concluded Baratwaj.

In November 2022, both Bankman-Fried companies and other divisions of the group filed for bankruptcy.

John Ray, who replaced him as CEO of FTX, accused the former management of the exchange of providing preferences to Alameda, lack of corporate control and reliable financial information.

In his opinion, the business processes built by the Bankman-Fried team put “hundreds of millions of dollars” at risk of theft or other malicious activity. For example, FTX stored private keys without encryption, Ray pointed out.

Hack VC managing partner Alexander Pak spoke about Bankman-Fried’s “catastrophic” risk appetite. They met in 2018 when the crypto entrepreneur was looking for funding for Alameda. However, during several months of communication, the investor developed serious concerns regarding the methods of his activities.

Recall that the US Attorney’s Office charged Bankman-Fried with 13 felonies in connection with the collapse of FTX and Alameda. He did not admit guilt on any of the counts.

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