In a matter of days, Sam Bankman-Fried has gone from crypto hero to villain.

His billion-dollar fortune has collapsed. He is facing Justice Department and Securities and Exchange Commission investigations. His firm, FTX, is bankrupt, and with it many hopes for the future of crypto itself.

An outwardly genial 30-year-old commonly referred to as SBF, Mr. Bankman-Fried was until this week the industry’s leading champion. His firm’s finances were opaque, but he seemed to be an open book on Twitter and in scores of media interviews.

Bill Clinton, Tom Brady, Katy Perry and other boldfaced names trekked to FTX’s Bahamas base to appear with him at a conference he organized to promote his vision of a sophisticated financial system built around digital assets. He spoke recently of becoming the world’s first trillionaire. He gave liberally to political candidates and causes, and he became an advocate of effective altruism, a trendy philosophical movement that encourages young people to make big bucks so they can donate fortunes to charity.

Another side to Mr. Bankman-Fried emerged as his firm grew. He was brusque and insulting with overseas regulators and others, said people involved in the meetings. He demonstrated a cocksure style in negotiations to buy struggling crypto companies. He courted U.S. politicians and regulators, and seemed to egg on their scrutiny of his rivals.

And behind the scenes, FTX was using billions of dollars of customer money to fund risky trades by Alameda Research, a digital-currency firm he also founded. Revelations of the practice this week shocked Mr. Bankman-Fried’s admirers, as well as many of his own employees. The undisclosed loans tore a hole in FTX’s finances that set the stage for the exchange’s swift implosion earlier this week.

Favoring regulation

In the end, one of Mr. Bankman-Fried’s fatal mistakes might have been antagonizing members of the crypto world by advocating for crypto regulation. In particular, he made an enemy of Changpeng Zhao, the billionaire founder of Binance, the world’s biggest crypto exchange by trading volume. Mr. Zhao, who goes by CZ, was an early financial backer of FTX.

Last weekend, he helped pull it apart—tweeting that Binance was dumping its stash of more than $500 million worth of FTT, a token created by FTX.

The Binance founder said the move was for “risk management” purposes, citing a recent report on crypto website CoinDesk revealing that billions of dollars worth of the illiquid token were sitting on the balance sheet of FTX’s sister firm, Alameda.

That was a problem because it showed Alameda was dangerously dependent on FTT, a token with uncertain value, and Alameda’s finances might collapse if selling caused the token’s price to crash. It was unclear at the time whether Alameda’s troubles would extend to FTX, but fears quickly mounted in the market about FTX’s stability, given the intertwined nature of the two firms.

Later that day Mr. Zhao added a dig: Binance couldn’t support those who lobby against other players behind their backs, he tweeted. It was a clear reference to Mr. Bankman-Fried’s activities in Washington, where the FTX chief had emerged as one of the largest political donors.

Mr. Bankman-Fried in Washington after testifying on Feb. 9.

Photo: Sarah Silbiger/Bloomberg News

Almost immediately, hedge funds and other firms yanked money from FTX, causing a crisis that jeopardized the exchange’s future. On Sunday alone, customers slammed FTX with $5 billion worth of withdrawals, according to a tweet posted later by Mr. Bankman-Fried.

Seeking a rescuer, FTX turned to the same rival who had sparked the crisis: Mr. Zhao. Binance agreed to buy FTX, only to withdraw its bid a day later. Adding salt to the wound was that Mr. Bankman-Fried only learned about the deal falling apart after it was reported in the media, he told employees in a Slack message seen by The Wall Street Journal.

“I’m deeply sorry that we got into this place, and for my role in it,” he wrote in the Slack message. “That’s on me, and me alone, and it sucks, and I’m sorry, not that that makes it any better.”

As recently as last month, Mr. Bankman-Fried was boasting about his plans for expansion. He was in talks with investors for fresh cash to pursue “efficient acquisitions,” he said at the Journal’s Tech Live conference. He said FTX was already well known among crypto pros; he was interested in buying something that would get more mom-and-pop traders on board, he said.

On Friday, Mr. Bankman-Fried resigned as chief executive. The bankruptcy put an end to his frantic efforts to find suitors to save FTX—an ironic twist given that FTX itself bailed out ailing crypto firms earlier this year.

And after previously criticizing bad actors in crypto, Mr. Bankman-Fried is himself facing federal probes. He has described the decision to use customer funds as a poor judgment call, according to someone close to the matter.

In traditional finance, regulators require brokerages to segregate customer funds from any capital they use for trading. But in the Wild West of crypto, the rules are murkier. It wasn’t immediately clear what legal consequences Mr. Bankman-Fried or FTX might face for the loss of customer funds.

Alameda and FTX haven’t yet detailed what happened to the missing money, though Mr. Bankman-Fried has promised to share more information. Alameda was known to engage in risky trading strategies and was more vulnerable to volatility in the crypto markets than FTX.

On Thursday, Bahamas regulators froze the assets of a key FTX subsidiary and appointed a provisional liquidator. On Friday morning, FTX and its U.S. unit filed for bankruptcy.

Market implications

“What’s shocking is the fall from grace, it was so rapid,” said crypto analyst Dan Dolev of Mizuho Securities. “We’re learning that value can evaporate within minutes in crypto, that’s the most shocking thing.”

FTX’s collapse is the most serious setback yet for crypto’s wider goal—to build an alternative financial architecture that could supplant the system of banks and brokers that dominates the world of money today. A brutal decline in the price of bitcoin and other digital currencies this year led to a string of crypto-firm bankruptcies that revealed loose lending practices and rampant risk-taking.

FTX, which advertised sophisticated risk-management capabilities and gained a rapid following, was viewed as a stabilizing force, while Mr. Bankman-Fried was seen as a visionary capable of leading the digital-currency world to a bright future.

“The question now is can you trust any crypto investment,” Mr. Dolev said. “Will it expire worthless in a matter of seconds?”

The broader investment and financial worlds have long held their collective breath as the crypto universe evolved and expanded. A collapse of these investments was always possible, and financial players worried they might take down more entrenched firms or investors, creating potential problems for the broader financial system.

For now, there have been few signs of broader impact, reassuring professionals and others. When hedge-fund Long-Term Capital Management imploded in 1998, the Federal Reserve was forced to step in to help stabilize the financial system, and the downfall of Lehman Brothers and other financial institutions in 2008 also required the government and Fed to help bolster the economy. That’s not happening today. The stock market suffered a setback earlier this week amid the crypto troubles, but it has rallied in recent days on reassuring inflation data, and the pain seems contained to the crypto world.

Still, the financial world remains on edge because FTX had hundreds of mainstream investors and lenders, including some of the leading venture-capital firms and others. They likely have suffered enormous losses from FTX’s downfall and the resulting tumbles for bitcoin and other crypto investments. FTX, Alameda and other affiliates estimated in their bankruptcy filings that they have more than 100,000 creditors and face liabilities of between $10 billion and $50 billion.

FTX’s collapse also comes as the Fed moves to raise interest rates to fight inflation and end the era of easy money, putting a damper on risky assets like crypto. That suggests there may be more pain and shock to the financial system to come.

Mr. Bankman-Fried grew up on the campus of Stanford University, near a student house known for its vegan food and nude Halloween parties. His parents are both professors at Stanford Law School: Joseph Bankman, a tax-law expert, and Barbara Fried, who studies the intersection of law, economics and philosophy.

Changpeng Zhao, founder and chief executive of Binance, at a Paris conference in June.

Photo: BENOIT TESSIER/REUTERS

After graduating from Massachusetts Institute of Technology with a physics major, Mr. Bankman-Fried took a job at quantitative trading giant Jane Street. He was a shy, junior trader, a former colleague recalled. Like others at the firm, he dressed informally, wearing hoodies and walking the office without shoes. Over time, he rankled some at the firm by trying to push Jane Street to embrace effective altruism, the former colleague said.

In 2017, he started Alameda Research in a rented house in Berkeley, Calif. Within two weeks, the house was overrun with Amazon.com boxes as his small team ordered desks and computers, Mr. Bankman-Fried recalled in an interview this summer. “Effectively every free square foot of space was filled with cardboard boxes,” he said. “We couldn’t get to the kitchen.”

He hired a staffer to handle operations so he and his co-founders could focus on trading. He later moved Alameda to a WeWork office in Hong Kong, where crypto regulation was lighter than in the U.S.

Elsewhere in the WeWork space was a small office with a few employees from another crypto company: Binance, according to people familiar with the matter. The two companies were friendly, at least at first.

In January 2019, Mr. Zhao dropped by an Alameda-sponsored party at a luxury villa in Singapore, which took place on the back of a Binance-sponsored blockchain conference, according to people who attended the party.

At the time, Alameda was working on a project to launch a crypto exchange. It launched in May 2019, under the name FTX, shorthand for “Futures Exchange.” Binance became one of FTX’s first investors.

Mr. Bankman-Fried at FTX offices in Hong Kong last year. The company currently is headquartered in the Bahamas.

Photo: Anthony Kwan for The Wall Street Journal

Traders soon flocked to FTX. The exchange grew explosively, surpassing rivals that suffered from technology stumbles and poor user interfaces, though it still trailed Binance.

“FTX had by far the best trading experience of all the exchanges, it was the best designed platform, we really thought they would be the biggest company in the industry,” said Josh Kruger, a managing partner at Coral Capital, a $100 million hedge fund.

Flush with success, Mr. Bankman-Fried sought to bring in money to fund FTX’s growth and enhance its stature in the industry. He wowed potential investors. When he spoke over Zoom to senior investors of Silicon Valley venture-capital firm Sequoia Capital in 2020, they immediately became enamored with his vision.

“I want FTX to be a place where you can do anything you want with your next dollar,” he said, according to an article commissioned by Sequoia for the firm’s website.

“I LOVE THIS FOUNDER,” one Sequoia partner immediately typed to colleagues, according to the article.

“I am a 10 out of 10,” another responded.

The Sequoia team wasn’t aware at the time, but Mr. Bankman-Fried made his pitch while in the middle of a videogame, “League of Legends,” he later acknowledged in the Sequoia article.

Starting in 2021, FTX made a huge funding push, raising nearly $2 billion within seven months—including from Sequoia. FTX’s last funding round, in January 2022, put it at a valuation of $32 billion.

Mr. Bankman-Fried leaned into his personal brand as a chilled-out quant trader, showing up at crypto conferences in his FTX T-shirt and baggy shorts. He usually was treated as a rock star. Soon, stalwarts of finance, such as Ontario Teachers’ Pension Plan and Singapore state investment company Temasek Holdings, joined FTX as investors.

But FTX still had fewer customers than its primary competitors—around one million users last year, it has said—a fraction of the user bases of Binance and Coinbase. Mr. Bankman-Fried sought to attract crypto newbies through sports sponsorships and advertising, paying $135 million for the naming rights to the Miami Heat’s basketball arena and buying a Super Bowl commercial featuring comedian Larry David.

FTX Arena in Miami last month.

Photo: Megan Briggs/Getty Images)

The Binance-FTX rivalry grew deeper. Last year, Binance sold its roughly 20% equity stake in FTX, swapping it for a mix of cash-like stablecoins and FTT tokens. In June, Mr. Zhao tweaked Mr. Bankman-Fried’s drive for publicity: “It was not easy saying no to Super Bowl ads, stadium naming rights, large sponsor deals a few months ago, but we did.”

Regulation was a point of contrast between the two firms. Last year, governments around the world including the U.K., Italy and Japan warned Binance for offering unregistered crypto products, forcing it to pull back from some markets. The firm faced mounting scrutiny from the financial press for refusing to say where its headquarters were—an approach that critics said helped Binance evade regulation and dodge liability for mishaps.

FTX moved its own headquarters to the Bahamas for its crypto-friendly regulatory environment. It set up shop in an office park, and real-estate records show FTX paid $30 million for a five-bedroom penthouse in a luxury apartment nearby. Mr. Bankman-Fried has said he is one of 10 FTX colleagues who share it.

Alameda also partly operated from the Bahamas, and Mr. Bankman-Fried and Alameda’s CEO, Caroline Ellison, a fellow Jane Street alum, once dated, according to people familiar with the matter.

Mr. Bankman-Fried embarked on a campaign to amass regulatory licenses. He surprised many of his fans when he came to a December 2021 Capitol Hill hearing on cryptocurrencies, wearing a suit and tie. Soon, he was a frequent visitor to Washington, meeting with regulators and others. He gave $39.8 million in federal contributions in the current election cycle, making him the country’s sixth-biggest political donor and the largest funder of Democrats after George Soros, according to OpenSecrets.org.

Some in the crypto world were thrilled Mr. Bankman-Fried was emerging as the industry’s public face. Mr. Zhao, a Chinese-born citizen of Canada, launched Binance while living in China. His ties to the country, as well as the regulatory scrutiny of Binance, have complicated his relationship with Washington and made it hard for Mr. Zhao to serve as a crypto spokesman. Binance rejects claims it is a Chinese company and says its employees left the country after a 2017 crackdown on crypto exchanges.

On Oct. 30, Mr. Bankman-Fried poked at Mr. Zhao by alluding to his regulatory troubles in a tweet: “uh, he is allowed to go to DC, right?” Mr. Bankman-Fried later deleted the tweet, but it irked Mr. Zhao, a person close to Binance said.

This week, Mr. Zhao said his intent wasn’t to kneecap a competitor. “Little did I know it was going to be “the straw that broke the camel’s back,” he tweeted on Nov. 7.

“The strategic brilliance behind CZ’s attack was that he realized crypto participants are rattled,” said Alex Valaitis, founder of crypto-consulting firm W3T Inc., who said Mr. Zhao undermined confidence in FTX, sparking a rush by investors to withdraw money.

There were signs for months that Mr. Bankman-Fried wasn’t quite what he seemed to outsiders.

In a meeting with a half-dozen top regulatory, banking and other officials in the Bahamas in January, Mr. Bankman-Fried surprised some in the room by frequently using the “F” word, while boasting about FTX’s capabilities. He promised his company would dominate new markets, including stocks, according to a participant in the meeting.

Asked by one of the Bahamian officials if FTX needed any infrastructure or other help from the local government, Mr. Bankman-Fried was curt, saying he wanted the country to permit Uber to operate in the country so his employees could use it, then left the meeting abruptly, according to the participant in the meeting.

This summer, when Mr. Bankman-Fried sought to prop up several struggling crypto companies, including broker Voyager Digital Ltd. and lender BlockFi Inc., some were struck by his aggressive style.

In one negotiation, Mr. Bankman-Fried made an initial offer and refused to budge from it, a person involved in the talks said. His inflexibility surprised some people involved in the negotiations, who previously viewed him as a friendlier industry presence, the person said.

Some FTX employees privately worried that the firm was growing too fast and expanding into areas too far from its core business, current and former employees said. Mr. Bankman-Fried relied on himself and a small core group of FTX executives to negotiate deals, didn’t use outside advisers to help judge their risks and sped through due diligence, according to people familiar with his deal-making style.

And the cost of the deals added up: From October 2021 through March 2022, FTX spent $1.1 billion on acquisitions, according to a copy of the firm’s financials seen by the Journal. Last year the firm also spent $153 million on sales and marketing and committed to spend $122 million on real estate, the documents show.

In recent months, Mr. Bankman-Fried lost friends in crypto because of his embrace of regulation. Critics in the more libertarian faction of the community blasted his embrace of a bill in Congress that was seen as tightening the government’s grip on decentralized finance, or DeFi—an assortment of freewheeling peer-to-peer marketplaces that operate without a central authority. The outcry forced the FTX chief to back away. “I could be wrong about those policies—I probably am wrong about some!” he tweeted on Oct. 19.

The damage was done, though. “Sam was a crypto-hero, but sentiment turned against him,” said Mr. Kruger of the Coral hedge fund. “Trying to push regulation through Congress was the final straw.”

Mr. Bankman-Fried in Washington in September.

Photo: Graeme Sloan/Sipa/Reuters

Mr. Bankman-Fried tried to raise cash for his business but wasn’t able to before the company collapsed. Last month, he joined Anthony Scaramucci, the financier and former adviser to Donald Trump, at a major Saudi business conference. Mr. Scaramucci arranged meetings with big private-equity firms and sovereign-wealth funds, including the Saudi state’s Public Investment Fund, but the cash never materialized, according to people familiar with the matter. FTX reached out to big investors, including TPG Inc., but those talks also went nowhere, people familiar with the matter said.

Inside FTX this week, there was a mix of anguish and anger. Zane Tackett, an FTX employee, tweeted Wednesday about his “complete disbelief and feelings of betrayal” toward Mr. Bankman-Fried. Constance Wang, FTX’s chief operating officer, was furious at Mr. Zhao’s takedown in an internal Slack message on Wednesday. “Also f— Binance!” she wrote.

—Julie Steinberg, Ben Dummett, Paul Vigna and Caitlin Ostroff contributed to this article.

Write to Gregory Zuckerman at gregory.zuckerman@wsj.com and Alexander Osipovich at alexander.osipovich@dowjones.com