BlockFi

Full BlockFi Review

BlockFi is one of the most renowned crypto lenders in the industry. BlockFi allows users to deposit their crypto assets (Bitcoin, Ether, Litecoin and a range of US stablecoins) and earn interest on their funds. They also give out loans to users who deposit cryptocurrency as collateral.

To make this process even more accessible they recently launched a mobile app (iOS/Android) allowing users to manage their funds on the go.

We recommend them if you want to earn interest on your crypto assets in a relatively hassle free and low risk way. BlockFi’s terms are flexible so you can withdraw your money from your BlockFi savings account or pay back your loan at any time.

In this review we’re going to explain how to use BlockFi, and clear up all questions you might have around the risks involved in lending your assets to BlockFi.

About BlockFi

BlockFi is a crypto lending company that was founded in August 2017 by Zac Prince. Zac, a passionate crypto enthusiast, had previously worked in the traditional lending industry and realized there was a gap in the market when he got rejected from every bank he reached out to, to take out a loan against his bitcoin holdings. No bank wanted to give him a loan since they had no experience with cryptocurrency and deemed it to be too risky.

Knowing that many other traders were in the same position as him, sitting on large bitcoin holdings and needing financing for their everyday purchases or trading, he set out to create a company that would pay out loans to users against users crypto collateral.

The company received a capital injection of $1.5m for its debut by well-known crypto funds such as Consensys and SoFi. Since then the company has raised two more investment rounds totalling close to $110million dollar. Notably, one of BlockFi’s investors includes Peter Thiel’s prestigious venture fund Valar Ventures, which backed firms such as Transferwise and N26.

How does BlockFi make money?

Like every lending business, BlockFi makes money from the interest it receives from borrowers. However, because BlockFi requires crypto collateral from its borrowers (as security for the loan), the loans are relatively low risk for BlockFi.

The money that BlockFi uses to pay out these loans to borrowers either comes from its own balance sheet or from the money other BlockFi users have deposited into their BlockFi savings account. In this sense, BlockFi operates very similarly to a bank that lends out users money and generates interest through its lending activities.

How does BlockFi pay interest?

BlockFi is able to generate interest for users who deposit their money into a BlockFi savings account because it lends out that money to borrowers. That’s why interest rates are variable and change quite frequently.

Ultimately, the interest rate is a function of supply and demand. If there is a lot of demand for loans but little supply from lenders, interest rates surge. Often the demand also depends on the crypto market conditions and whether traders identify interesting opportunities to allocate their capital. In these instances they turn to crypto lending companies such as BlockFi to get liquidity and pursue these opportunities.

Often, these interest rates are higher than in traditional financial markets. This happens for multiple reasons. First, crypto lenders address a global market. Investors in Asia or Latin America are willing to pay more for dollar denominated loans than investors in the US would, because a) it’s hard to get loans paid out in dollars b) loan terms are worse in their home countries. Secondly, there are significant profit opportunities available in crypto markets which translates to a higher risk appetite. Read our article on crypto savings rates for a deep dive into the topic.

What are the risks of using BlockFi?

Like always in finance there is no free lunch. Lending your money or borrowing money from BlockFi comes with risks. We think they are manageable but it’s important to understand them.

1. BlockFi could get hacked

Like every crypto company managing users’ assets, BlockFi is a lucrative target for hackers. If BlockFi would be hacked, lenders could potentially lose their deposits and borrowers could lose the collateral they deposited against their loan.

To offset this risk, BlockFi outsourced the custody of users’ funds to a company called Gemini. This is a common practice in the crypto industry and actually a good sign. Gemini is a New York based company (owned by the Winklevoss brothers) known for its strict adherence to regulation and compliance rules. Their main business is to store crypto assets safely for their clients. As such, assets are stored in cold storage (offline) and are insured by AON. Gemini is fully licensed and regulated by NYDFS and received a SOC2 Type 1 compliance audit from Deloitte. You can read more about Gemini’s security measures here. The fact that they are insured means that if they suffer a small scale hack, their insurance would cover up the losses resulting in no financial loss for customers.

2. Borrowers could default on their loans

As previously mentioned, all loans made by BlockFi are secured by collateral that borrowers have to deposit previous to taking out the loan. The value of the collateral always needs to exceed the value of the loan. This is called ‘loan-to-value ratio’ and BlockFi asks for a minimum loan to value ratio of 50% meaning that even if the borrower doesn’t pay back the loan there is enough collateral to pay back the lender. In other words, there is no reason for the borrower to run away with the money of the loan since BlockFi holds a larger amount of money back that they’d lose if they ran away.

However, any collateral asset can fall in value whether it’s a house or a crypto asset such as bitcoin. If the value of the collateral drops very quickly, to an amount below the value of the loan, the borrower would have no incentive to pay back the loan. To prevent this from happening, crypto lenders liquidate the collateral if it falls under a certain ratio. In BlockFi’s entire history, no borrower has ever defaulted on a loan despite very high volatility in the crypto market.

Where is BlockFi located?

BlockFi is located in New York and adheres to all applicable US laws. Notably, it is registered with the U.S. Department of Treasury Financial Crimes Enforcement Network (“FinCEN”) as a money services business (“MSB”).

As a result, BlockFi is subject to the Bank Secrecy Act, which sets out requirements to detect and prevent money laundering and terrorist financing. One of the policies implemented by BlockFi to comply with these regulations is “KYC” - Know your customer procedures which oblige every customer to sign-up with their real world identity.

How does BlockFi work?

Had enough explanations, want to know how BlockFi works?

1. Head to the BlockFi website and sign-up for an account

2. Fill out all your personal details, confirm your email address etc.

3. Identify yourself by uploading a copy of your ID

4. Click on “Deposit” and choose the cryptocurrency that you want to deposit

5. Send the funds to the address displayed by BlockFi

6. Wait for your crypto funds to arrive in your BlockFi account

7. Start earning interest on your funds or take out a loan

BlockFi dashboard & overall user experience

Overall, BlockFi is quite easy to use. They recently re-designed the website and gave it a very nice and minimalistic look. There are really only a couple of features so you find your way around very quickly. You can either “deposit” your funds, after which you immediately start earning interest or “request a loan”. As of recently, you can also convert your funds in BlockFi, for example swap your bitcoin to ether.

What seems a bit odd from a user perspective is that your funds are always displayed in dollar value. Normally, most wallets and exchanges display user balances both in crypto and dollar terms. Only when you go to the trade tab and click on the asset symbol, you'll see how much crypto you actually hold.

One thing worth mentioning about the BlockFi saving account is that while you can request to withdraw your assets from the saving account at anytime, it can take 1-3 days for BlockFi to process your withdrawal and send your assets back. In some cases rare cases they might even be asking to re-identify yourself via a selfie and ID upload to ensure that it's indeed you requesting the payout.

How do BlockFi Loans work?

To get a BlockFi loan, you simply need to click on the “New Loan” tab in the navigation bar within the BlockFi dashboard. Next, you will see a Loan Calculator where you can get a loan offer based on the amount you want to borrow and the collateral type you choose.

Note, that while there’s no minimum deposit amount for the BlockFi interest account, here’s a minimum amount to borrow. The minimum loan amount is currently $5000 US dollars.

Once you have entered these details, BlockFi will show you a summary of the loan offer including the interest rate, the amount of collateral that is required and the loan-to-value ratio. The loan-to-value (LTV) ratio is the ratio between the loan value and the value of your collateral. The maximum LTV that BlockFi allows is 50% meaning that if your crypto collateral is worth $10,000 you could borrow $5000 dollar. This ensures that BlockFi remains solvent even if you don’t pay back the loan.

As a last step you need to fill in how you want to get paid out. BlockFi offers stablecoins transfers in GUSD, PAXUSD and USDC, which arrive in your Ethereum wallet within minutes or bank transfer payouts. If you live outside the United States, BlockFi offers the option to payout via SWIFT bank transfer but that takes 4-5 days and can lead to a reduction in your loan amount if your bank charges fees for incoming SWIFT transfers. All in all, stablecoin transfers are an attractive option if you want to use the loan amount to chase opportunities in the crypto space (e.g buy more crypto) but less attractive if you want to use the money for a payment in the real world (e.g buy a car).

To summarize, to open a BlockFi loan you need to:

1. Go to BlockFi website and click on ‘New Loan’
2. Fill in your details (collateral type, loan amount etc.)
3. Enter your payout preferences
4. Review your loan offer and sign the loan agreement
5. Transfer collateral to BlockFi’s secure storage wallet
6. Wait for your loan payout via USD to your bank account or stablecoin to your wallet address of choice. Pay back your loan whenever you want

What happens if my crypto assets change in value during the loan?

If the value of your crypto assets change during the loan period, there are two possible scenarios.

Value increases: If the value of your crypto assets increase, you’re lucky. It means you crypto assets are now worth more and you were able to borrow against them. If you used the loan to buy more cryptocurrency, even better. This is called leverage in financial terms and allows you to buy more of an asset than you could without borrowing.

Value decreases: If the value of your crypto assets decrease under a specific threshold, you’ll need to add additional collateral to secure the loan. Else, BlockFi will liquidate a portion of your crypto assets to restore the required loan-to-value ratio. Rest assured, BlockFi keeps you informed if your LTV starts to near the 70% mark so you can take action preemptively. At this point, you have 72 hours to take action by positing additional collateral or paying down the loan balance.

Conclusion

BlockFi is one of the most legitimate companies in the crypto lending space. They are extremely professional which is underlined by the fact they have some of the most prolific VC's in the space backing them. We've tested the product thoroughly and have no concerns recommending BlockFi. The only flaw that we found were the 1-3 days withdrawal process where some competitors are faster. However, this should not be the most important criteria. Security and transparency are much more important and here BlockFi excels!