How FTX achieved a $3.5 billion valuation in 1.5 years by pursuing 'low-hanging fruit'

Sam Bankman-Fried, the 28-year-old CEO of crypto exchange FTX, recently achieved a degree of minor celebrity when he appeared on this year's Forbes 30 Under 30 list.

Meanwhile, his exchange has achieved unicorn status.

Hong Kong-based FTX, which launched last year, is already valued at $3.5 billion, Bankman-Fried told The Block in an interview. 

FTX is also profitable. The exchange is expected to close this year with a $70 million profit, on revenue of about $80 million, said Bankman-Fried. It has also raised $120 million to date.

Its booming business has placed FTX in the same league as competitors Deribit, OKEx, and BitMEX, each of which has already achieved unicorn or near-unicorn status. But those exchanges have been established for years; FTX’s rise to prominence happened much more rapidly. 

What was the formula? If you ask Bankman-Fried, FTX’s fast success has come in large part from pursuing “low-hanging fruit.” 

In 2018, when he was considering building the exchange, there were some real issues in the market he wanted to resolve. "BitMEX's matching engine was constantly falling down. OKEx's bitcoin cash fork event was like the worst handled corporate action I had ever seen,” said Bankman-Fried. "We knew we could do better.”

FTX was born in May 2019. Today it is the eighth-largest crypto spot exchange and bitcoin futures exchange (in terms of aggregated open interest), according to The Block Research.

Source: The Block Research, Skew

The exchange currently counts "hundreds of thousands" of customers. While the number is small compared with the biggest exchanges in the crypto space, Bankman-Fried claims that FTX's volume to user base ratio is "quite a bit higher" than comparable exchanges.

About 99% of FTX users are retail traders in absolute numbers. In terms of volume traded, retail's share is over 50%, said Bankman-Fried. The rest of comes from people making large-scale trades.

Key to the plan for acquiring more customers is building compelling new products. An example, said Bankman-Fried, was listing U.S. election prediction futures contracts several months ago, which he said led to "a lot” of people signing up on FTX.

He also revealed a related, previously unknown acquisition that FTX made last year: Electionbettingodds.com. That helped boost sign-ups tied to the election futures market. 

"This is like by far the best acquisition we've ever made," said Bankman-Fried, adding that the website's referrals contributed around 5% of the exchange's trading volumes in recent months. 

Bankman-Fried said that FTX is interested in expanding its prediction market offering. "They are much more of a long-term play and a customer acquisition play for the short term.”

He’s also unsurprisingly bullish on the exchange’s new decentralized exchange protocol, called Serum. Besides operating FTX, Bankman-Fried runs the market-making firm Alameda Research, which has also grown into a venture capital firm. Bankman-Fried said that most of the projects that Alameda is looking to back in the near future are building around Serum.

"Some of them are going to be pretty huge … I'm hopeful that they will really jump-start the DeFi [decentralized finance] space."

FTX is also in talks with several companies for potential acquisitions. The exchange recently acquired crypto price tracking app Blockfolio for $150 million.

Bankman-Fried said discussions are ongoing with a "significant fraction of all crypto companies and a significant number of non-crypto companies" for potential deals. "A lot of conversations have progressed to like stage 1.5 or whatever.” He declined to share specific names.

While the future may look bright, however, there’s always a risk that a future regulatory change could cause FTX’s ambitions to hit a wall. That uncertainty presents a big challenge for business, said Bankman-Fried. 

"We are not going to be able to ever predict exactly what is going to happen with regulation because this is still getting written. The world doesn't know the answer,” he said. “We put a lot of time and thought into how to be cooperative with regulation rather than combative."