The first week of the trial against FTX co-founder & former CEO Sam Bankman-Fried is complete. And there were some explosive allegations. What’s to come next?

These are Sophia's Thoughts:

The prosecution has painted Sam Bankman-Fried (SBF) as a fraudster that intentionally lied to customers and investors. But the defense is arguing that there was no intention in what happened at FTX.
The first couple of witnesses have devastated the defense’s argumentation. Several former FTX associates have directly tied SBF to fraud.
While the trial is shedding light on one of the worst events in crypto’s history, investors appear to understand that what happened at FTX has little to do with crypto per se. Crypto sentiment has remained positive throughout the first week of the trial.
In parallel to the trial, we are closely watching two new developments. The launch of Ethereum futures ETF in the US. And the association between crypto and Hamas fundraising efforts.

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🚀 Last week’s market performance

The crypto market took a 2% stumble and Bitcoin (BTC) flatlined in the last 7 days. The lone superstar of the week: Trust Wallet Token (TWT). It gained 22% while the second-best performing coin, Monero (XMR) only gained 5%. Speculation around a potential new release fueled the hype around TWT, a self-custody wallet. On the other hand, one of the biggest losers of the week was Chia (XCH). Chia faced some headwinds with its IPO plans and laid off a third of its staff. Sophia assigned XCH a bearish score of -71% over the last 7 days.

Sophia turned bearish over the last 7 days. Fundamentals appear to be on the weaker side for Sophia, especially in light of the growing Israel-Hamas conflict. In times like these, crypto sentiment often offers support and now is no different. As we highlighted in our last crypto sentiment update, sentiment for both coins and the crypto market has been strengthening.

🧐 What is your crypto mood today?

In each Sophia's Thoughts newsletter, we ask about your crypto mood. Your response to this question helps Sophia get a better sense of the pulse of crypto markets. And this ultimately translates into better insights for you when combined with Sophia's AI models. Your data empowers Sophia to provide you with even better intelligence going forward!

🤷🏻‍♂️ Conflicting opening statements

The trial against FTX’s co-founder and former CEO, Sam Bankman-Fried (SBF), has drawn significant attention. Prosecutor Thane Rehn from the Manhattan U.S. Attorney’s office described SBF’s actions as outright fraudulent. Rehn stated that SBF had been pilfering FTX customer funds to build his empire since the exchange was established in 2019. He emphasized that SBF’s empire was “built on lies.” This narrative is aimed to set the tone for the prosecution’s case. It portrays SBF as a deceitful entrepreneur who deliberately engaged in fraudulent activities to amass wealth and power.

On the flip side, lawyer Mark Cohen leading the defense presented SBF as an ambitious but sometimes careless entrepreneur. Somebody who lacked in risk management but bore no intentions of defrauding anyone. Cohen metaphorically described the scenario as “building the plane as they were flying it.” He highlighted the dynamic yet chaotic nature of the endeavors undertaken by SBF and his team at FTX. The defense strategy is aimed to humanize Bankman-Fried. It portrays him as a driven individual who may have overlooked certain risks amidst the high-stakes and fast-paced environment of the cryptocurrency exchange industry.

🧨 Explosive testimonies

The first week of the trial offered various witness testimonies that shed light on the operations of FTX and SBF’s actions. One of the key witnesses was Gary Wang, a former member of Bankman-Fried’s inner circle, who pleaded guilty and agreed to testify against him. Wang disclosed his involvement in financial crimes alongside SBF. In particular, Wang mentioned the manipulation of FTX’s software code to allow Alameda Research, the crypto hedge fund attached to FTX, to withdraw unlimited funds from the exchange. This manipulation was kept hidden from the public, according to Wang’s testimony.

“In the end, it was Sam’s decision”

— former FTX CTO, Gary Wang.

Adam Yedidia, a college friend of SBF who later worked for him at FTX, shared a conversation from the summer of 2022. In that conversation, SBF expressed concerns over the large debt owed by Alameda Research to FTX, hinting at financial instability. Yedidia’s testimony reflected a scenario where Bankman-Fried acknowledged financial challenges looming over FTX. This supports the prosecution’s narrative of deliberate fraudulent activities.

“We were bulletproof last year, but we’re not bulletproof this year”

— Yedidia claims to have been told by SBF.

In another significant testimony, Matt Huang, head of the crypto-focused venture capital firm Paradigm, stated that he was not informed about the commingling of funds between FTX and Alameda Research before his firm decided to invest $278 million in the exchange. Following FTX’s collapse, the value of this investment was written down to zero. This showcases the financial repercussions faced by investors due to the alleged mismanagement and fraudulent activities associated with FTX and SBF.

“It’s generally understood that customer deposits are sacred”

— said Matt Huang.

Today, Caroline Ellison took to the stand. Her testimony has surfaced critical allegations, further implicating SBF in fraudulent financial activities. As the former head of Alameda Research and on-and-off romantic partner of SBF, Ellison revealed that Alameda misappropriated several billion dollars from FTX customers for their own investments and to settle debts. And that all of this happened under Bankman-Fried’s directive. Her testimony underscores the alleged criminal actions leading to FTX and Alameda’s downfall. The defense, however, aims to challenge Ellison’s credibility.

“He directed me to commit these crimes ”

— said Caroline Ellison about SBF.

🤯 Shock reactions

The trial has generated varying reactions from different quarters. The general consensus suggests that the opening days of the trial have not been favorable for SBF. Prosecutors are laying down a case asserting that he was deeply involved in a long-term scheme to defraud customers and investors. This significantly challenges his defense’s narrative that he was largely unaware of the malpractices taking place within his exchange.

The reactions also spotlight the courtroom dynamics. It is reported that the defense attorneys have had a rough start. District Judge Lewis Kaplan has been noted to show visible annoyance towards SBF’s high-paid lawyers. Some observers have mentioned that a significant portion of defense attorney Chris Everdell’s questions were disallowed. These courtroom dynamics have, to some extent, echoed in the public domain, shaping the ongoing narrative of the trial.

But crypto sentiment has not taken a big toll from the trial. Unlike back in November 2022, when FTX collapsed and crypto sentiment crashed, investors are currently feeling better about crypto. As Santa Clara University Professor Seoyoung Kim told Forbes, what happened at FTX was much more about corporate mismanagement than crypto. It appears that crypto investors share this opinion as they have been expressing mostly positive sentiment on social chatter lately.

⚠️ What else is happening in crypto?

There are two additional events that we are tracking closely:

Hamas militants appear to have gotten millions in funding through crypto. Israel has been working with Binance to close some of the associated accounts. This is a developing story. It could have an impact on crypto sentiment if investors perceive crypto to be funneling funds to support terrorism.
Several Ethereum futures ETF started trading on the Chicago Board Options Exchange. But the new ETF has not been widely adopted by investors. Less than USD 10 million flowed into the Ethereum ETFs on the first day of trading, a fraction of the more than USD 1 billion that flowed into the first Bitcoin futures ETF when it launched. This may indicate cooling appetite for crypto ETFs.

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Sophia’s Thoughts on Week 1 of the SBF Trial