BlockFi is a cryptocurrency financial services platform, providing a range of products including interest-bearing (but notably not FDIC insured) accounts, consumer cryptocurrency loans, and a cryptocurrency trading platform. BlockFi also lends cryptocurrency to companies and institutions. Borrowers must provide collateral (in the form of their own cryptocurrency, typically in excess of the amount borrowed), which is liquidated in the event of a default.
Notably BlockFi is backed by institutional investors including Fidelity, SoFi, and Coinbase.
Adventurous investors may find BlockFi an interesting way to experiment with investing in the Cryptocurrency ecosystem, but should be aware that compared to many other alternative investments, there is scant regulation, and the underlying ecosystem is still in its infancy.
Is BlockFi legit?
Yes, BlockFi is “legit” in the sense that it is a legitimate, registered business and a legitimate alternative investment opportunity for individual investors. That does not mean is without risk. BlockFi is not a bank, and money deposited is not FDIC insured.
Types of investments BlockFi offers
According to BlockFi, most borrowers are “over-collateralized”, meaning that they must put up more than the amount they wish to borrow, in the form of cryptocurrency. For example, if someone wanted to borrow $1,000, they might need to provide $2,000 worth of Bitcoin (or another currency), which is held as collateral. If the borrower defaults, or if the value of Bitcoin drops significantly, it’s liquidated and paid out to investors. The specific amount of collateral varies by cryptocurrency, but for example the stated LTV (“loan to value”) for a Bitcoin loan is 50%, meaning a borrower can borrow up to 50% of the value of the Bitcoin collateral they deposit.
For their interest-bearing product, BlockFi is primarily targeting long-term cryptocurrency investors (known colloquially as “HODLERs”) who want to earn interest on their cryptocurrency holdings.
What do you get when investing with BlockFi?
When you invest with BlockFi, the cryptocurrency you deposit is lent out to borrowers, and similar to a bank (though to be clear BlockFi is not a bank), BlockFi maintains enough reserves to meet the day-to-day withdrawal requests from investors. From the BlockFi website:
When clients send crypto to their BlockFi account or purchase additional crypto within the BlockFi Interest Account, that digital asset is replaced with an obligation to return the same amount of that crypto plus any interest earned. In order to pay our clients crypto interest on a monthly basis and to meet withdrawal requests on a timely basis, we engage in a number of activities, including (1) keeping a material amount of digital assets available for withdrawal with third parties such as Gemini, BitGo, and Coinbase; (2) purchasing, as principal, SEC-regulated equities and predominately CFTC-regulated futures and (3) applying risk management to the lending activities in the institutional market. The credit risks to these institutions are mitigated by credit due diligence and/or collateral (such as cash, crypto, or other assets).
How does BlockFi make money?
There are no fees charged to investors, though there are fees to withdraw your cryptocurrency from BlockFi.
Potential returns and cashflow
The interest rate earned on your investment varies, though BlockFi currently advertises an 8.6% APY. BlockFi pays interest monthly (investors should note that all interest payments are made in cryptocurrency, not in dollars).
Breadth of offerings on BlockFi
Investors are not able to select specific borrowers or specific investment pools. BlockFi automatically assembles the investor pools and manages the allocation to borrowers.
Regulatory framework and due diligence expectations
Compared with investments offered through regulatory frameworks like Reg D or Reg CF, investments through BlockFi are very loosely regulated, and investors should be aware of the risks involved. While BlockFi often uses similar terminology to a bank, they are most assuredly not a bank – money you deposit is not FDIC or SIPC insured.
BlockFi is required to comply with standard KYC (“Know Your Customer”) laws, and they also provide annual tax forms (both to investors and the IRS).