In what could outstrip Enron as the biggest accounting-fraud scandal ever, Sam Bankman-Fried’s crypto-currency exchange, FTX, and the associated hedge fund Alameda Research came crashing down over the course of a few weeks in November. The noise that started the avalanche turns out not to have come from a professional journalist, or a government regulator, but from a hobbyist named James Block, who self-publishes on the newsletter platform Substack, and who only started writing and reporting this calendar year. It’s amazing what one self-described “nerd” can do in his spare time.
FTX, which according to recent reports has an $8 billion shortfall and more than a million creditors, has declared bankruptcy. Bankman-Fried, a major political donor who had appeared on the covers of Forbes and Fortune, is now under investigation. And the millions of dollars in grants promised by the FTX Foundation’s Future Fund, for causes such as pandemic prevention and protection against rogue A.I., are now worth about as much as the company’s digital tokens. That’s a dramatic comedown for a 30-year-old billionaire that had Tom Brady hawking his product during the Super Bowl, plus a branded N.B.A. arena in Miami. Or, as Bankman-Fried put it in an interview with The New York Times, “I’ve had a bad month.”
On November 4, Block published a Substack post under the title “Is Alameda Research Insolvent?” The post, which analyzed a leaked Alameda financial statement reported two days earlier by the crypto-focused news site Coindesk, concluded that Bankman-Fried was running what Block called a “flywheel scheme.”
“It’s almost as if SBF found a way to hack the financial system, printing billions of dollars out of thin air against which he was able to borrow massive sums from unknown counterparties,” he wrote. Block ventured that “the fair market value of [Alameda’s holdings in FTX’s crypto-currency] in the event of large sales would rapidly approach $0.”
The post went micro-viral in tech and V.C. circles, and on November 6, Changpeng Zhao, the Chinese-Canadian head of Binance, another crypto-exchange, liked it on Twitter. “Somebody D.M.’d me saying, ‘Hey, C.Z. liked your article,’” Block recalls. Later that day, Binance sold out of hundreds of millions of dollars of FTX’s crypto-currency, prompting a run on the FTX bank. “I don’t even know how to describe what it was like,” Block says. “I don’t know if I will ever get that kind of scoop again.”
Block, who is in his early 30s and has an M.D. and a Ph.D., works as a resident at a Michigan hospital by day. His background is in breast-cancer research. He started his free newsletter in January of 2022, writing mainly at night, or on his rare days off. Yet he still manages to stay abreast of the latest developments in crypto while retaining a healthy skepticism of its boosters’ claims. Such skepticism was in short supply at Vox, Semafor, the Intercept, and ProPublica, all recipients of large infusions of cash from S.B.F.
Block ventured that “the fair market value of [Alameda’s holdings in FTX’s crypto-currency] in the event of large sales would rapidly approach $0.”
Block is a native Michigander, whose librarian mother and legally trained, small-business-owner father moved a lot within the state while he was growing up. He spent his teenage years in the town of Frankenmuth, Michigan (pop. 4,987, according to the latest census), regionally known for its Bavarian-style architecture and traditional Christmas festival. Block speaks like he is thinking twice about every sentence as it comes out. He only lets his words get out ahead of him when marveling about how business journalists and hedge-fund quants can’t put together what he does with what he repeatedly assures me is publicly available information, like blockchain transactions recorded for all to see.
Why does Block do it? “For fun,” he says. After eight years getting a simultaneous M.D. and Ph.D., “this is the first thing I’ve ever done for fun.” Block had already broken some real stories just by tracking public crypto transactions—for example, figuring out that NFT companies were pumping up their valuations by saying celebrities such as Justin Bieber and Reese Witherspoon had made big purchases of million-dollar-plus digital artworks, when the celebrities were allegedly accepting the NFTs for free. And he had called in advance the collapse of Celsius Network, a “crypto lender” that blew up earlier this year.
“I’ve always kind of been fascinated with finance fraud,” Block tells me. “I was a kid when Enron happened. The other kids in my high school were playing sports, and I was reading about all this crazy stuff. And so when I saw what was happening in the crypto space, I recognized it as somewhere where there’s a lot of fraud going on.”
Who will be the next to fall in crypto, according to the guy who started a $2 trillion selloff? “The answer is everyone.”
Nicholas Clairmont is a reporter and the Life and Arts section editor of the Washington Examiner magazine