If you’ve heard the name “BlockFi” floating around cryptocurrency circles, you’re certainly not alone. This platform is making waves in terms of investing in bitcoin assets.
But is the BlockFi platform worth using? Let’s explore what BlockFi is, their various accounts, the risks involved in using BlockFi, and everything else you need to know about this platform.
BlockFi is a type of financial management platform.
In particular, BlockFi focuses on cryptocurrency assets. For the most part, these assets include Litecoin, Bitcoin, and Ethereum. Some BlockFi assets also include USD-based stablecoins such as GUSD or USDC.
When compared to BlockFi’s various competitors in the financial management sector, this platform does not offer native tokens like SALT, NEXO, and Celsius Network.
Overall, the main appeal to BlockFi is that they offer a very simplistic product without a lot of bells and whistles. This is arguably a good thing, as it focuses development time and dollars on what matters - the financial products and the returns they give you. No attention is wasted on speculative coins with questionable use-cases.
Part of the reason BlockFi started making waves in the cryptocurrency world is because of its outstanding venture funding attempts. The company received an outstanding $18.3 million Series A fund in August of 2019, and they went on to receive an additional $30 million Series B fund.
BlockFi’s CEO Zac Prince noted in a recent interview,
We decided to opportunistically raise the Series B to expand the balance sheet and give ourselves the ability to invest in the things we’re doing this year.
The Series B was fronted by Val Ventures and notable investors were involved, including CMT Digital, Winklevoss Capital, Avon Ventures, Morgan Creek Digital, PJC, Akuna Capital, Arrington XRP Capital, HashKey Capital, Castle Island Ventures, Purple Arch Ventures, and Kenetic Capital.
Hashkey was one of the most notable investors in BlockFi, as their involvement could open up doors for BlockFi to expand into the Singapore market within the year.
The two main services that BlockFi provides are interest accounts and crypto loans. To put it simply, BlockFi makes it possible for users to earn interest on their cryptocurrency and also to gain USD without needing to sell that currency through collateralized loans. It’s one of the first companies to merge traditional financial management with cryptocurrency.
Currently, BlockFi offers a cryptocurrency interest account and a cryptocurrency collateralized loan.
BlockFi also supports crypto to crypto trading. This means that you can swap any current assets on deposit with BlockFi for other assets they support. For instance, if you have Litecoin on deposit with BlockFi, you could trade it for Ethereum for a small fee.
You can trade between all of their supported assets:
BlockFi’s interest account makes it possible for users to take full advantage of their cryptocurrency by lending it to BlockFi at a fixed yearly rate.
Users who have been holding their crypto for quite some time with no interest in selling their funds in the near future could find some benefit to this, as it could generate additional funds in the meantime.
On one hand, the annual interest is fairly good. These accounts are also backed by many established and reputable figures in the cryptocurrency world, and it makes it possible for users to compound their earned interest.
On the other hand, we’re still talking about a baby company that launched in 2019. And they only support Bitcoin, Ether, and Litecoin for interest accounts.
BlockFi offers competitive interest rates, which is yet another reason why it’s gaining so much traction.
The annual percentage yield (APY) for BlockFi are as follows:
Interest is compounding and paid monthly.
The primary risk involved with BlockFi crypto interest accounts is what we call “gap risk”.
But what is gap risk?
When you deposit Bitcoin into a BlockFi interest account, BlockFi loans your Bitcoin out to someone else - usually large institutions. Now, when someone asks for a loan from BlockFi, they pay BlockFi cash for the BTC at some rate greater than the present value of the BTC they are borrowing.
For instance, if Chase Bank borrows 1 BTC valued at $10,000, they may put up $20,000 as collateral. If the price of Bitcoin goes up 50% to $20,000, Chase’s loan would be margin called, and BlockFi would execute a purchase of 1 BTC using the $20,000 Chase put up as collateral.
Chase would keep the 1 BTC and effectively lose $10,000. BlockFi would give you the 1 BTC they purchased, and you would be protected.
However, trades don’t happen instantly, especially when markets are volatile.
It is therefore possible that the price of Bitcoin could shoot upward so fast that BlockFi’s trading bots are not able to make the purchase fast enough to buy the Bitcoin at $20,000. If they were only able to buy it at $16k or $17k, they would lose money on this trade.
For a great primer on Gap Risk, bloomberg made a great video explaining it. While the video mainly applies to traditional currencies, the information still applies to crypto.
Back to our example, if you multiply this gap risk problem by every loan BlockFi has on the books, they may not have enough money to pay everyone back.
In reality, there are some details I glossed over in the above scenario. For one thing, BlockFi is going to “bake in” some interest for you and BlockFi, so they might close Chase’s position sometime before the BTC price hits $20,000.
Additionally, each loan on deposit is not made individually like I made it sound above. If Chase is going to borrow BTC from BlockFi, they are going to want a lot more than 1 BTC. BlockFi will pool your BTC with dozens or maybe hundreds of other depositors to fund Chase’s loan.
The important takeway here is that these gap risks are not insignificant. As Zane Pockcock notes in his brilliant write up on the risks of companies like BlockFi, the risks could be even more drastic than I’ve outlined above.
As we have seen many times before, the gap risk in Bitcoin is significant. This means that if an institution borrowing funds from BlockFi incorrectly assesses the risk on a net-long or net-short position during a big move in either direction, they might miss their stop-gaps (“safety” orders designed to limit losses in case of big moves), default and leave BlockFi empty-handed.
It’s worth noting that BlockFi pays its creditors back before they pay themselves back, but this still may not be enough if a spike in the Bitcoin price happened fast enough.
Of course, there are other risks. As with any custodial institution, there a limits to how much you can withdrawal at a time. Thankfully, BlockFi is pretty generous with this. As of the time of this writing, you can withdrawal 100 BTC per week. For almost all users, this will be more than they will ever need to withdrawal no matter the time limit.
However, for whale users, this may be of interest to them.
Take a look at the graph below for each currency’s withdrawal limits.
This depends significantly on how much you invest. According to BlockFi, you can earn up to 8.6% annually on your cryptocurrency.
For example, if you deposit 10,000 stablecoins into your BlockFi Interest Account, you could earn up to $860.
BlockFi is not insured in the traditional sense, but their custody provider is Gemini. This means that your cryptocurrency assets are not stored with BlockFi, but rather Gemini. This company was created by the famous Winklevoss twins (of Facebook, or rather, ConnectU fame) and is considered one of the most regulated crypto companies in the world. To put it simply, they know what they’re doing. But there’s also little information available so to just how much is covered.
BlockFi’s current supported coins for interest earning accounts are BTC, ETH, LTC, GUSD, PAX, and USDC. There is also no minimum balance in order to begin earning interest on this platform.
Part of the appeal of BlockFi is its simplicity. BlockFi’s framework is very user-friendly, and the approval process for applying is very direct and extremely speedy. There is no need for credit checks because, obviously, we’re using crypto as collateral here. This is a good thing– there is less risk involved and the decision-making process is much quicker without any credit dings. However, non-U.S. users have reported problems with loan functionality.
The current minimum loan amount is $5,000. The interest rate will depend on your ‘LTV’ or ‘Loan to Value’ amount.
All loans also come with a 2% origination fee.
So what does all this mean? What is an LTV? ‘LTV’ means ‘loan to value’ and it is a ratio for determining how much collateral you put down for a loan.
For instance, if you take out a $10,000 loan with a 50% LTV, you will put down $20,000 of the coin of your choice. The interest rate on this loan will be 9.75%, and there will be the 2% origination feeas well. The approximate APR would thus be 11.75%
Your total payback amount would be $11,175.
At that point, you would receive your $20,000 of crypto back.
You’d be hard-pressed to find a similar loan for under 13% APR.
Just keep in mind you can decrease the interest (by up to half) by choosing a lower LTV. However you will need to put down more crypto as collateral.
That’s the beauty of Blockfi:
However, it’s unfortunate that BlockFi only supports three currencies.
Yes, BlockFi loans are interest-only. This means that BlockFi users only have to pay interest during their monthly payments via a flat fee at the end of the month.
As long as you are paying your interest, you can keep the loan open as long as you want.
NOTE: There are special risks to these loans that you wont see with traditional loans from banks. Because the collateral put up for this loan is a volatile speculative asset, the loan could get margin called.
That means, if the price of the coin you put up as collateral drops in value, you will lose some or all of the collateral after you pay off the loan. If the entire loan is margin called, you won't owe the money any more, but you also wont be able to get your coins back.
Keep this in mind if you plan on only paying interest and keeping the loan open for long periods of time. The longer the loan is open, the more risk there is of a major price movement that liquidates your position.
The supported coins that users can deposit (at a minimum of $10,000) as collateral for their loan include BTC, ETH, and LTC.
The value of your crypto assets that are stored with BlockFi may go up or down. If it goes up, any and all gains from the price, according to BlockFi, is the user’s to keep once the loan has been paid off.
As mentioned above, in the event that the price of your collateral drops, a crypto margin call could happen. Crypto margin calls are essentially calculated through the LTV you choose for your loan. If the value of your collateral drops, your LTV will increase. If this happens, you’ll have to add on more collateral to ensure a stable LTV ratio. The first margin call is at 70% LTV, and you’ll have three days to post additional collateral or pay down the overall loan balance.
Another big player in the crypto collateralized loan space is Unchained Capital. The way Unchained Capital handles loans is very similar to Blockfi. However there are some differences that may make one more beneficial to you than the other depending on the terms you need.
The biggest differences come down to the interest they charge (8-14%) depending on the loan amount. Unchained Capital also only allows a 50% LTV, so there are fewer options than BlockFi offers. One other difference is the lorn duration (between 3 and 60 months).
All of Blockfi’s loans max out at 12 months. Finally, it is possible that you loan with Unchained Capital will only charge a 1% origination fee. All of Blockfi’s loans charge 2%.
To find out more of the differences between these two firms, read our full comparison of bitcoin loan companies.
According to BlockFi’s website, the BlockFi Interest Account offers only one free withdrawal per user each month. Once you’ve used your free withdrawal, Gemini will charge a withdrawal fee of 0.0025 BTC or 0.0015 ETH.
On May 19th, 2020, BlockFi informed its customers that a breach had occured the previous week on May 14th. No customer funds are believed to have been stolen.
On May 14th, there was a data incident at BlockFi that exposed certain client account information for a brief period of time. While no information was accessed that would enable the intruder to access your account or your funds, we believe it is in the interest of transparency to share the...details with you, and all of our other clients who were potentially affected.
The email further read:
BlockFi should be commended for relaying this information to customers so soon after the breach. However, the cause of the breach is cause for some concern.
At this time, it appears the hacker was able to gain access to an employee’s credentials and circumvent their two-factor authentication via a Sim Swapping attack. This indicates that BlockFi employees are allowed to use SMS verification as a method of authentication. SMS authenticaiton is widely considered to be insecure.
As long as SMS is included as an option for two-factor, we’ll continue to see attacks like this.
It’s so insecure, in fact, that BlockFi does not allow its own customers to use SMS verification as a second factor on their own accounts. It’s puzzling, then, why they allow their employees (who arguably have even greater access than any individual customer does) to use SMS as an authentication method.
While BlockFi works with some of the best crypto security in the world (Gemini Custody), BlockFi is not insured. In fact, their website actually states that “your Crypto Interest Account is not a checking or savings account, and it is not covered by insurance against losses.” This alone could mean there is significant risks associated with the products that BlockFi offers. Before diving into this company, we recommend doing your research on platforms similar to this platform that do offer insurance in some form. This may not be an issue for you if you’re not particularly pressed about traditional insurance– after all, we’re dealing with a pretty non-traditional industry.
Review by: Jordan Tuwiner