Aditya Baradwaj, a former engineer at the bankrupt cryptocurrency trading firm Alameda Research, has revealed that the company was behind bitcoin’s 87% plunge in 2021.
Baradwaj explained the events that led to the sudden drop, saying the incident was a result of a work philosophy established by Alameda’s co-founder Sam Bankman-Fried (SBF), which maintained that the utility gained by moving fast outweighed the occasional costs paid due to a poor risk management system.
Alameda Behind BTC’s 87% Drop 2 Years Ago
On October 21, 2021, BTC experienced a flash crash after skyrocketing to $67,000. While the leading digital asset had plummeted by a small amount on several exchanges, Binance.US, the American arm of the world’s largest crypto exchange, saw the worst of it.
On trading platforms like Kraken, FTX, and Bitstamp, BTC dropped to $54,100, $58,500, and $63,600, while it nosedived to $8,200 on Binance.US. The plunge was corrected within a few minutes, and the asset’s price returned to its pre-drop levels; however, the cause of the decline remained unknown.
Binance.US released an update on the incident about 24 hours later, claiming that the flash crash was caused by a trading algorithm bug from one of its institutional traders.
In a surprising turn of events, Baradwaj disclosed that Alameda was the institutional trader Binance.US was referring to and that a misplaced decimal point caused the incident.
Waiting Until Something Broke
The former Alameda engineer explained that the firm’s trading was done in automated and manual systems. The former was Alameda’s main mode, and it entailed using semi-systematic strategies to set model parameters that controlled the automated system. This meant traders were not placing actual bets but fine-tuning an algorithm that decided how to execute the trades at high frequency.
Nevertheless, the traders needed to manually send trades occasionally, especially if Alameda’s automated systems were affected by market volatility or an arbitrage opportunity emerged in a venue without automated trading. While the automated system had risk checks because most of Alameda’s trading occurred there, the manual system did not.
Unfortunately, one day, an Alameda trader’s finger slipped while trying to sell a block of BTC through the manual trading system. They wrongly placed a decimal point and sold the BTC for pennies on the dollar instead of the market price. This affected the crypto market immediately and led to the crash.
SBF and the Alameda management were forced to implement additional sanity checks for manual trades, as was the pattern at the firm: to “wait until something broke, and then rush to fix it.”
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