Former Alameda employee reveals cause of 87% Bitcoin drop on Binance.US in 2021

The bankrupt Alameda Research tied to Sam Bankman-Fried was behind the glitch that briefly saw the Bitcoin price on the Binance.US exchange plunge by 87% in 2021, according to a former employee of the firm.

PART 2: THE FAT-FINGER

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The story of how a misplaced decimal point at Alameda Research caused a market crash that echoed around the world.

(1/n) ?#SBF #FTX pic.twitter.com/jCykh6rg1o

— Adi (e/acc) (@aditya_baradwaj) September 20, 2023

On October 12, 2021, the price of the flagship cryptocurrency on the Binance US platform fell in a minute from above $65,700 to $8,200. Quotes quickly returned to previous levels. Other markets continued to operate normally, experiencing only a slight dip in Bitcoin’s price at the moment of the incident.

According to a Binance.US spokesperson, the fall was linked to a software bug by one of an institutional client’s trading algorithms, which malfunctioned. Some traders doubted that an automated system could have caused such.

Former Alameda programmer Aditya Baradwaj revealed an unnamed exchange client and confirmed skeptics’ view — it was a manual-entry error.

The trader’s ‘fat finger’ led to tens of millions in losses

He said most of the firm’s trading was carried out by automated trading systems, so traders simply configured the algorithms for them.

But there were cases like system outages due to market volatility or arbitrage opportunities, when trades were conducted manually.

Alameda’s algorithmic software underwent checks to ensure that orders matched market quotes. In manual trading, it was different, Baradwaj noted.

«The trader tried to sell a large block of BTC ‘on the news’ and sent the order through the manual trading system. What they missed was that the decimal point had moved by several spaces. Instead of selling Bitcoin at the current market price, they liquidated it for pennies on the dollar», — said the programmer.

The trader was trying to sell a block of BTC in response to news, and sent out the order via our manual trading system

What they missed was the decimal point was off by a few spaces. Rather than selling BTC at the current market price, they sold it for pennies on the dollar

7/n

— Adi (e/acc) (@aditya_baradwaj) September 20, 2023

According to him, Alameda’s losses from the typo ran into “tens of millions” of dollars.

Ex-programmer: fixes to the software were made on the fly

As the error was unintentional, the company simply introduced additional checks for manual trading.

«In Alameda this was usually how it worked: we waited for something to break, and then hurried to fix it», Baradwaj said.

Experts at the firm continued to implement checks for system functionality at all times, without which any traditional trading firm would never have begun trading, he emphasised.

«In Bankman-Fried’s view, the benefits we gained from moving quickly outweighed the incidental costs of poor risk checks, hacker attacks and the like. It was his philosophy of operation, and it helped foster a culture that thrived at Alameda and FTX»,» concluded Baradwaj.

In November 2022, both Bankman-Fried’s companies filed for bankruptcy along with other units of the group.

John Ray, who took over as CEO of FTX, blamed the exchange’s former leadership for giving Alameda preferential treatment, a lack of corporate oversight and unreliable financial information.

In his view, the business processes put at risk theft or other malicious activity worth “hundreds of millions of dollars.” For example, FTX stored private keys without encryption, Ray said.

Alexander Pack, managing partner at Hack VC, told of Bankman-Fried’s ‘catastrophic’ tendency toward risk. They met in 2018 when the crypto entrepreneur was seeking funding for Alameda. Over months of interaction, the investor developed serious concerns about his methods.

As previously reported, U.S. prosecutors incriminated Bankman-Fried with 13 criminal counts in connection with the collapse of FTX and Alameda. He pleaded not guilty to none of the counts.