A few days back, I talked about how to earn interest in Bitcoin, and based on our research BlockFi, came out as a widely used and trusted product. In the crypto-verse, an undisputed rule is “You are your bank”, and services like BlockFi, raises a lot of questions, as we are literally lending our Cryptocurrencies like “Bitcoin” to a 3rd party, to earn interest.
Without a doubt, using a platform like BlockFi and Cryptocom is riskier than storing crypto in our wallet, and hence it should not be seen as the same thing. These platforms are typically an investment instrument, which offers you a lucrative interest rate on your crypto holding.
Before we move ahead, I have one important question for you:
What do you think is the future of the cryptocurrency market?
If you believe cryptocurrencies offer better financial governance than the current financial system, then you may agree that it has to bring some of the good parts of the traditional financial system.
But there are many questions which remain:
- How safe is BlockFi?
- Is BlockFi a scam or a legitimate service?
- Can we trust BlockFi with our crypto assets?
- How are the team/people behind BlockFi?
- What happens if BlockFi shuts down tomorrow or worse get hacked?
- Is BlockFi the best option among its current peer?
- How easy or tough it is to use BlockFi?
- How does BlockFi make money?
Just like you, even I was curious and skeptical before I started using BlockFi.
However, it definitely makes sense as services like crypto banks like BlockFi, Crypto.com are going to be there. They are definitely going to fuel the next wave of crypto adoption, by creating more use cases for cryptocurrency assets.
However, for you, it is of utmost importance to learn thoroughly about these platforms before you use them. In the traditional sense, you would definitely take a recommendation for picking a bank and will avoid shady banks. Similarly, in the world of “Crypto banking”, you need to follow the same principles.
Now, in this long and detailed review of BlockFi, I’m uncovering everything about BlockFi, that you should know. Also, since I’m a user of this platform, I will keep updating this detailed research, so that it stays updated. I will timestamp the new updates at the bottom of this article.
So, without further delay, let’s look at another promising product of the cryptocurrency world, right here at CoinSutra.
What is Blockfi:
BlockFi is a crypto lending and borrowing platform and was started in August 2017. The company is one of the pioneers in crypto banks.
You can use BlockFi to:
- Earn interest on Cryptocurrencies
- Take a loan against your cryptocurrencies
BlockFi offerings: Main features
BlockFi currently offers three products, which are:
- BlockFi Interest Account (BIA)
- Crypto backed loans
Let’s understand all the offering in detail:
1. BlockFi interest account:
Just like how you keep money in your bank account to earn interest, BlockFi interest account lets you earn interest in many supported cryptocurrencies. This is idle for those who have been holding cryptocurrencies like Bitcoin, Ethereum for really long. Rather than letting your crypto idle, one you can earn up to 8% APY interest.
Note: Interest is paid out at the end of the month. You can see the current interest rate on this page:
There are a few interesting things that you should know about BIA :
Tiered interest structure:
For Bitcoin, BlockFi offers tiered interest structure. For the first 5 BTC, you earn 6% and balance above 5, you will earn 3.2% APY. (The interest rate is subject to change)
Interest Payment Flex:
This feature lets you pick the coin in which your accrued interest should be paid out. For example, you may be earning a 6-8% interest in Bitcoin, but you want the payout to happen in one of the supported coins such as ETH or PAX. The benefit here is, this will help you to diversify your portfolio. You can enable this feature by navigating to the Settings page of your account and visiting the “Interest” tab.
Similarly, you can simply use your fiat money (USD) to earn interest in crypto. This way, you will also be diversifying your portfolio and get exposure in Cryptocurrencies like Bitcoin, Ethereum without actually buying any.
Note: You can change your preferred interest payment type up to 48 hours before month-end. Do check with support if there is any kind of cost associated with interest payment flex feature.
Earn more interest than a bank account:
A lot of countries do not offer more than 3-4% as an interest rate. What you could do is, you can buy a stable coin like USDC from an exchange like Binance or Gemini, and deposit the same to BlockFi, and start earning more interest than a typical bank account.
Update: You can also directly wire the amount to BlockFi Wire purchases, which has a minimum limit of $10 only, to fund your BlockFi account directly. Your deposited fund will be available as a stable coin (GUSD) on the BlockFi account and will start accumulating the interest.
Of course, it has its own risk since BlockFi clearly mentioned on their website that “you should not view the BlockFi Interest Account as a savings account or brokerage account with FDIC or SIPC insurance.”
This reminds me of the popular crypto investment wisdom: “In crypto, You should only invest the amount you are ok to lose”. At least, until the point when services are not regulated like the traditional financial system.
In the further section, we will learn how BlockFi pays such a high-interest rate and how they make money. This will clear a lot of our doubts.
But for now, let’s look at crypto lending features…
2. BlockFi Crypto-backed loan:
As the name suggests, this feature lets you take a loan in USD, GUSD, USDC from BlockFi using your crypto assets as collateral. The LTV (Loan to value) is at 50%. That means you can deposit your crypto assets and take a loan up to 50% of its value.
Here is what LTV meant for your understanding:
A loan’s LTV (loan-to-value) ratio determines the amount of crypto collateral you need to post in order to take out a loan. This number only applies when you’re getting a collateralized loan. These types of loans require clients to give the lender an asset, in our case digital currency, to hold until their loan is paid off.
A lot of crypto investors and Holders use this technique to borrow funds when in need, rather than liquidating their assets. Another usage (which a lot of us are not aware of) is the tax benefits.
According to BlockFi guide on Tax treatment on crypto loans
- Cryptocurrency is treated as property by the IRS. Trades, sales, and purchases using crypto are taxable events, subject to short and long-term capital gains/losses tax treatment.
- Borrowing USD against your crypto assets with a BlockFi loan is not a taxable event. This means you can access liquidity while keeping the same level of ownership and upside in your crypto holdings.
- The after-tax cost of borrowing can be reduced if you use the proceeds of the loan to make certain types of investments.
In simple words, “ You don’t pay tax on a loan against an asset I own and haven’t sold.”
This is one way you could lower down your tax expense and less headache with crypto accounting.
The borrowing rate keeps changing, and currently, a BlockFi interest rate starts at 4.5%. You can learn more about their crypto-backed loan feature here.
3. Trading Terminal:
Crypto trading is a new feature that BlockFi has added in recent times, and it is useful when you wish to liquidate some crypto assets because of the increased price and want to park it in a stablecoin. You can further, buy back the asset (example: Bitcoin) when the price is low. This is idle for occasional traders, who want the comfort of: Earning interest and trading (Sell when the price is high, buy when the price is low). I have often used this feature, and as an end-user, I find this very handy.
However, the UX of trading terminal could be better. I would rate it 3.5 out of 5.
Alright, while you have learned about the top 3 offerings of BlockFi, it’s time to look at other important aspects of BlockFi.
BlockFi Fund withdrawal:
BlockFi fund withdrawal is not as easy as it’s peers and also includes a cost after the first monthly withdrawal. Let’s look at some of the notable points of fund withdrawal on BlockFi:
- You can withdraw funds (USD) directly to the bank account, as long as the amount is more than 5,000 USD
- For amounts less than 5000 USD, you can always withdraw in crypto-asset including stablecoins.
- The first withdrawal every month is free, after that there is a withdrawal fee of either 0.0025 BTC or 0.0015 ETH, charged by custodial Gemini.
I’m hoping BlockFi improves on their withdrawal process in the days to come.
How does BlockFi make money?
BlockFi makes money mostly by lending the crypto assets to other institutional counter parties for trading and lending cryptocurrency.
Some of these borrowers are:
- Traders and investment funds
- Over the counter (OTC) market makers
- Businesses that require an inventory of crypto to provide liquidity to clients
Currently there are no charges on trading, but I feel this could be a new avenue for them in future, if more user starts using their trading terminal.
Note: BlockFi has announced the upcoming release of their mobile app (iOS and Android). Will share more about it, when it launches.
BlockFi management and team:
When it comes to lending business, the solid management team and tight regulation ensure to minimize the risk. It seems like the team consists of 70+ members. The team consists of people mainly from the USA, Argentina, and Poland. You can learn more about their leadership role and vision/mission on this page.
Do check out this recent interview of Zac Price (CEO) to learn where BlockFi is heading:
One of the highlight of above interview is, BlockFi will be coming up with a crypto credit card.
BlockFi Funding rounds:
Based on information available online, BlockFi has raised funding 3 times so far. This is significant, as, with reliable investors, the trust automatically increases. This alone gives a winning edge to BlockFi, among its peers.
- $1.5 million in seed funding: ConsenSys Ventures, SoFi, and Kenetic Capital
- $18.3 million in Series A funding: Led by Peter Thiel’s Valar Ventures, with participation from Winklevoss Capital, Morgan Creek Digital, Akuna Capital, and earlier backers Galaxy Digital Ventures and ConsenSys Ventures. Source
- $30 million in Series B funding: The Series B was led by Peter Thiel’s Valar Ventures with participation from repeat investors Morgan Creek Digital, PJC, Akuna Capital, CMT Digital, Winklevoss Capital and Avon Ventures. New investors included Castle Island Ventures, Purple Arch Ventures, Kenetic Capital, Arrington XRP Capital, and HashKey Capital. Source
The biggest risk with BlockFi:
Now, once you have understood what BlockFi is, and how it works, now it’s time to understand the biggest risk of using a lending/borrowing platform like BlockFi.
1. Counterparty risk:
Counterparty risk or default risk is what you are getting exposed to wherever you are lending your money to anyone. BlockFi is no different, as they work like a bank (borrowing and lending), where they lend money further to institutional, OTC desks to keep the wheel going. In such a scenario, you are putting your money into a total loss scenario, which you should be aware of.
If “Counterparty risk” is a new term for you, watch this one minute video to understand it better:
2. Withdrawal process needs improvement:
Another biggest complaint with BlockFi is its tedious withdrawal process. Unlike other platforms, they don’t offer instant withdrawal, and it could take 0-7 days for the withdrawal to happen. This is the biggest cons of BlockFi, that put a lot of sophisticated users away from BlockFi. Other platforms like Crypto.com, Celcius network, Binance lending does not have such withdrawal restrictions, and this is one area where BlockFi could improve a lot.
Maybe they could allow instant withdrawal of the “x” amount for an account with KYC done, and for larger amounts, they could follow the existing manual verification process to maintain the high standard of security.
3. Interest rate risk:
BlockFi interest rate fluctuates with time, and this is dependent upon many conditions. For example, if another competitor offers more favorable rate, and trust, the borrower might use the other platform. However, so far their rate is competitive and has not been a problem. However, based on market supply and demand, the interest rate, and borrow rate fluctuates every month or so.
If you understand the counterparty risk you are exposing yourself with lending, then BlockFi or similar platform is for you to earn extra from your idle crypto holding.
BlockFi alternatives and competition:
While this industry is new, and if you are planning to use a service like BlockFi to earn interest, it’s important to know about BlockFi alternatives and features they offer.
Now, I will limit the alternatives to only those competitions, who offer an easy to use interface just like BlockFi. However, one edge BlockFi has, it doesnot require you to stake any platform based token. Where as, the top 2 listed solution below, requires you to stake their platform based tokens to enjoy better rate.
Cryptocom is possibly the best alternative to BlockFi, as they have a rock-solid ecosystem of crypto products, includes a newly open crypto exchange. They also offer a Bitcoin debit card, which is the icing on the cake. One more advantage with the Cryptocom platform is, it supports a wide variety of cryptocurrencies. In terms of borrowing, BlockFi offers way better rates than Cryptocom. We may do a comparison in the time to come, but for now, let’s move to the second option.
2. Celcius Network:
The Celsius Network is a peer-to-peer lending company that facilitates borrowing and lending of cryptocurrencies. It offers interest rates as competitive as BlockFi and offers instant withdrawal. The trust factor is not as high as BlockFi, but this is another platform you should know about.
3. Binance Lending:
Binance is the world’s largest cryptocurrency exchange, and they added a feature called Binance Lending. This platform is idle for those who are into crypto trading, as you can park your crypto assets when you are not trading, and earn interest on it.
The interest rate is not as lucrative as BlockFi, but from the ease of use perspective, and lending not being your main goal, this is a good option. Here is a video that explains how Binance lending works.
Nexo is another platform which is worth exploring.
Review Conclusion: Is BlockFi Safe, legit and worth your time?
In the arena of crypto-based loan and crypto interest account, BlockFi is definitely in the top 3 charts. The platform is consistently innovating and adding new features, which makes it more usable with time. The platform is also well funded by well-known venture capitalists, which increases the overall trust.
Overall, if you understand the counterparty risk, the BlockFi platform is for you. My limited time experience with BlockFi has been smooth, and I hope to see this platform growing. One area where they could do really well is by improving the withdrawal feature, thus offering more power to end-user.
Overall, BlockFi looks like a reliable platform in this crypto lending and borrowing space.
Now it is your turn to share your experience with BlockFi. Let me know the following:
- What are the features you like about BlockFi?
- What new features do you want them to add?
More on BlockFi:
An award-winning blogger with a track record of 10+ years. He has a background in both finance and technology and holds professional qualifications in Information technolgy.
An international speaker and author who loves blockchain and crypto world.
After discovering about decentralized finance and with his background of Information technology, he made his mission to help others learn and get started with it via CoinSutra.
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