NEWS

In the midst of a terrible war in Gaza, why would I be reading a book about Sam Bankman-Fried (SBF)? That book is Michael Lewis’s “Going Infinite: The Rise and Fall of a new Tycoon.” Coincidently, the book came out just a few days before Bankman-Fried went on trial for fraud.

There were two main reasons I wanted to read the book. First, I wanted to learn how SBF had made so much money before his world collapsed. Second, I hoped I would finally understand how and why bitcoin and some other crypto coins gained value, going from zero to tens of thousands of dollars, sometimes seemingly overnight.

Here is what I learned.

SBF got rich early in his career as a securities trader working at a company named Jane Street Capital. When SBF first interviewed Jane Street, he was not asked the typical questions such as “what did you do on your summer vacation?”

Instead, he was barraged with a host of games. They were gambling games. He was required to give quick answers to math problems or questions about the odds of something happening. For instance, “If you roll two six-sided dice, what are the odds you roll at least one three?”

Or “What are the odds of not rolling a three with two dice.?

These were easy questions for SBF and he thrived. The more complicated math-like questions came and the faster they came, the better he performed.

He saw “right away that the key to the game was to make quick judgments about the expected value of bizarre situations, and act on them.”

He realized that they “were testing him for an ability to make messy judgments and act quickly on them—and not to be too bothered about questions to which he did not, and could not know, the answer.”

This kind of game playing tested the potential of a future trader. But the pay-off was putting these skills to work in a practical setting. In the 2016 presidential election, SBF noticed that preliminary election reports like those from CNN had an immediate reaction in stock prices.

He designed a program to gather results quicker than CNN and make them available to other Jane Street traders, who banked a three-hundred-million-dollar profit, betting that the market would be buoyed by a Trump loss. But when Trump turned out to be a winner, the market changed and Jane Street’s profit turned into a three-hundred-million-dollar loss.

Jane Street and SBF shook it off and moved on to the next project.

I began to see how SBF and other traders had to be quick, smart, and resilient.

Jane Street paid him $300,000 for his first year, $600,000 for his second year, and after his third year, a bonus of $1,000,000. In ten years, “if he kept on doing as well,” he would be making $75 million a year.

Now that I had some idea about how SBF began making so much money as a trader, but I still did not know how bitcoin and other crypto coins were valued.

It is simple according to Michael Lewis, quoted in an article by Giddon Lewis-Kraus and titled “Cryptoball” in the October 16 The New Yorker. Lewis explained that SBF’s fame “was due in part to the candor and alacrity and with which he conceded that crypto was mostly a scam; as an advocate for clear government regulations, he positioned himself as an unlikely grown up in the industry.”

Sadly, SBF’s title is likely to be convicted felon. But thanks to him I know a little bit more about how high-level finance works.

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D.G. Martin, a retired lawyer, served as UNC-System’s vice president for public affairs and hosted PBS-NC’s North Carolina Bookwatch.