BlockFi is a finance app that lets you earn compound interest on your crypto without having to lock it up.
If you've seen "high interest" savings accounts at traditional banks, the rates are basically 0%. BlockFi is trying to fix that and they let you earn up to 9.3% interest on your coins.
Of course, it comes with risks. However, a 9.3% interest rate was worth exploring so I started testing it. This BlockFi review shares my research, personal experience, and if the risk is worth the reward.
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BlockFi is a centralized company based in New Jersey, USA, but their interest account is available in most countries worldwide. At the time of this writing, they have never lost users funds since being founded in 2017. BlockFi is also backed by some big partners, they seem to be well regulated and they have multiple products such as a crypto credit card, crypto backed loans, a trading account and their famous interest account that lets you put your crypto to work.
Pros & Cons
BlockFi Interest Account
The BlockFi interest account lets you earn up to 9.3% interest per year on various cryptocurrencies like Bitcoin (6%), Ethereum (5.25%), Litecoin (6.5%), USDC (8.6%), and more.
You just deposit your crypto and on day one you start earning interest which will automatically be deposited into your account at the beginning of every month. Your crypto is not locked in a contract either. You can withdraw your funds at any time which makes BlockFi very interesting.
How Does BlockFi Pay So Much Interest?
BlockFi pays up to 9.3% interest which is way higher than traditional banks so how do they pull this off?
Here is the key information I found on BlockFi's website:
In summary, BlockFi is lending out your funds to companies and they are sharing that interest rate with us.
To mitigate risk, they have processes to keep the funds safe. The main one is overcollateralizing the loans. For example, to get a loan of $10,000 you must put $12,000 worth of Bitcoin which acts as collateral. If the borrower doesn't pay back the funds, BlockFi takes the collateral. If the value of the collateral drops in value, BlockFi can also issue a margin call for the borrower to put up more funds.
Overcollateralized loans are good in theory because it motivates borrowers to pay back the loan in order to get their collateral back and it will also reduce the number of companies taking out risky loans. If the borrower defaults anyways, BlockFi has the collateral as a backup.
What Are The Risks?
BlockFi says great things but what are the risks they are not advertising? Let's look at them.
1. It's a Centralized Company
Once you move your crypto out of a hardware wallet onto BlockFi you are no longer in control. BlockFi can shut down your account, disable withdrawals, or do whatever they like and there is nothing you can do. This is the risk with any centralized company whether it's BlockFi or a crypto exchange such as Coinbase, Binance, etc.
2. Your Funds Aren't Insured
Depending on your country, traditional banks usually insure your funds incase anything is lost. However, when it comes to BlockFI and crypto there is no insurance. If your funds are lost for whatever reason they are gone for good.
3. Bankruptcy Risk
This relates to being centralized but if BlockFi goes bankrupt or if there's a potential disaster scenario in the market, the whole ship could theoretically sink. For example, if BlockFi isn't doing overcollateralized loans like they promise and they take on too much risk, a crazy market crash could put the company under.
4. Cyber Attacks
Exchanges and platforms like BlockFi are vulnerable to hackers because they naturally have big targets on their back. There have been many hacks in crypto over the last decade and this is a risk with any crypto company.
In my research, BlockFi did have a hack in 2020. The hacker got access to an employees phone via SIM swap. The good news is no funds were lost and BlockFi has never lost users funds since being founded in 2017.
In theory, BlockFi could disappear tomorrow and be gone forever. However, they are pretty well regulated in the USA so I'd say this is becoming less of a possibility. It is the crypto industry though and we're just looking at all the risks here.
6. Extreme Market Conditions
Like mentioned in the bankruptcy point, an extreme market crash could destroy BlockFi if they are not doing overcollateralized loans like they promise or if they are not managing their risk correctly.
Good news is BlockFi did survive the massive March 2020 crash as well as the recent 50% crash that started with Elon Musk's tweets. This could have been ugly if they were not managing risk correctly so they have some things on their track record.
Lastly, BlockFI is a private company and we don't know what's happening behind the scenes. We don't know for certain who they're loaning money to, we can't confirm how overcollateralized the loans are and we have to put trust in their team. It's not that BlockFi isn't transparent, but we don't know everything behind the scenes.
Why Should You Trust BlockFi?
We've looked at the risks, now let's see the positives and why BlockFi might be trustworthy:
1. Overcollateralized Loans
If BlockFi is doing this on all of their loans that's a good sign and lowers risk dramatically. Another good thing is if the price of the collateral drops significantly, BlockFi will send the borrower a margin call to add more collateral.
Unfortunately, we can't 100% verify who the borrowers are or the exact details of these loans unless BlockFi shares it. In general though, we like overcollateralization.
2. Black Thursday Performance
According to Wikipedia, the March 12, 2020 crash was the biggest single-day fall since the 1987 stock market crash. Since BlockFi is relatively new we don't have a 50 year track record we can look back on so it's good to see they were tested in March 2020 and survived.
3. They Are Well Funded
So far, BlockFi has raised over $350 million in venture capital and they are backed by really big names. If anything goes wrong they have a bunch of VC's in their back pocket and can raise capital quickly. So far the funding has come from big names like Morgan Creek Digital, Galaxy Digital, Fidelity, Coinbase Ventures, and many more. These partners are putting a bit of their reputation on the line and gives BlockFi some legitimacy as well.
4. They Are Well Regulated and Licensed
BlockFi is based in the United States and shows all of their licenses online. It's good they're in the USA where there is lots of structure and legal procedures. Overall, there are more consequences for running away and stealing money versus some other countries.
5. Cold Storage and Security
Lastly, BlockFi has a cold storage policy and they say all funds are securely stored with Gemini. Gemini is a big name in the crypto space with over $20 billion under custody for many institutional clients.
BlockFi also states they do extensive background checks for hiring employees, they provide them cyber security training, make sure all company equipment is secure, they plan for disaster event scenarios and more.
Where BlockFi Shines:
Where BlockFi Falls Short:
The Bottom Line
Ultimately, BlockFi will not be for everyone. For some, it will be too risky, for others the interest rate will be worth it for a small percentage of their portfolio. You must decide what risk/reward is worth it for you but overall, I don't think anyone would recommend putting 100% of your portfolio in BlockFi.
Personally, I use BlockFi for a small percentage of my portfolio. It's a small amount that if it disappeared, it wouldn't be life changing. I like how BlockFi is well funded, backed by big names, based in the USA and more. However, I'm still cautious and not putting large amounts into it. You must make your own decision based on your investment strategy.
Hopefully this post was educational, thanks for reading!
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