It’s a bad time to be a good saver. Banks are flush with cash and simply not willing to pay you for your deposits. In the low rate world, you’d consider yourself lucky to have a savings account yielding 1%, but that’s not even enough to make up for inflation. So, what are your alternatives? I’ve previously discussed how to build your own “high yield” savings using laddered bond portfolios, but this option might still leave you wanting.
Is there really nothing else? Well, enter: BlockFi.
Who is BlockFi?
BlockFi is a cryptocurrency exchange and financial institution that allows you to deposit, trade and borrow crypto. BlockFi is not technically considered a bank but performs similar functions.
The company was founded in 2017 and has quickly grown into one of the largest financial services firms in the crypto space with $1.5B in assets on its platform. To date they have raised over $100M in funding and are backed by some of the best-known names in the venture investing including: Valar and Morgan Creek Capital.
What are their Services?
BlockFi offers 3 core products:
- BlockFi Interest Account (BIA)
- Trading
- Crypto-backed loans
BlockFi enables users to earn interest on their crypto and take out loans in USD using their coins as collateral. The trading capabilities include many common currencies including: BTC, ETH, LTC, USDC, USDT, GUSD, PAX and PAXG. Together these features allow you to easily manage your crypto assets in one location.
BlockFi Interest Account
The BIA is BlockFi’s signature product and allows crypto holders to earn interest. The interest rate you receive depends on the type of collateral. BlockFi’s current interest rates are as follows:
- BTC Tier 1: 6.00% (for 0 to 2.5 coins)
- BTC Tier 2: 3.20% (for over 2.5 coins)
- ETH: 4.50%
- LTC: 5.00%
- PAXG: 4.00%
- USDT: 7.00%
- USDC: 8.60%
- GUSD: 8.60%
- PAX: 8.60%
You can see that you have can earn substantially more interest through a BIA than any traditional bank in town. How can this be? How can BlockFi afford to pay such high rates?
BlockFi functions like a bank in the sense that it makes money through net interest margin which is the difference between what they pay in interest to depositors and the rate they charge for loans. Crypto investors need access to dollar liquidity to pay for expenses but are reticent to sell assets that they think have the opportunity to appreciate in the future. Banks generally don’t recognize crypto as a legitimate asset class and hence substantial demand exists for lending. This allows BlockFi to lend to out dollars at very attractive rates and consequently pay a premium to attract deposits.
Crypto Backed Loans
BlockFi’s crypto backed loans allow you to borrow in USD against your coins on deposit. In this way, a loan from BlockFi is similar to a margin-based loan backed by stocks or other financial assets that you can get through any brokerage firm.
The minimum loan amount is $5,000 and the maximum loan to value (LTV) is 50%. This means that up to 50% of your eligible collateral can be loaned out.
For example, say you deposit 2 BTC into BlockFi. Bitcoin’s price as of 11-11-20 is ~$15,000 which means you have $30,000 in eligible collateral. A 50% LTV implies that you can take out a loan against your assets of up to $15,000. If instead you only needed $5,000, then your effective LTV would be ~16.66%.
It’s *very* important to understand your LTV. Cryptocurrencies are notoriously volatile and your deposits can quickly fall outside the maximum 50% LTV. When the value of your assets reaches 70% LTV you will receive a margin call and will need to deposit additional collateral or be forced to liquidate a portion of your position to pay the loan down (not a good situation).
BlockFi advertises that you can get a loan for as low as 4.5% with a duration of 12 months. Unless you have significant assets it’s unlikely that you will get such a low rate. Rates I’ve observed are generally closer to 10%.
Why BlockFi is the New Savings Account
If you’re in the market for a savings account, it’s likely that you do not want to be taking much risk so you might be asking yourself, “How can I take advantage of the BIA interest rates without exposing myself to the risk of holding a currency like Bitcoin or Ether?” The answer is: stablecoins.
Stablecoins are digitized tokens worth $1. My preferred stablecoin is US Dollar Coin (USDC) which is sponsored by Coinbase; the largest US based crypto exchange. USDC is issued by regulated financial institutions, backed by fully reserved assets, and redeemable on a 1:1 basis for US dollars. USDC is truly a digital dollar and not cryptocurrency.
BlockFi offers an 8.6% yield on USDC deposits making it a very attractive location for your savings. You get the benefits of high interest without the volatility of crypto. But there are some other risks worth considering.
Is My Money Safe?
Money at BlockFi is not as safe as it might otherwise be at a traditional bank. This is because BlockFi’s custodian, Gemini (the firm that actually stores your assets), is not insured by FDIC or SIPC. If BlockFi fails, there is no guarantee that you’ll get your money back.
Gemini does, however, take measures to protect your funds. Gemini keeps the majority of the assets it holds in cold storage (i.e. offline) to keep it safe from hackers. Client funds are also placed ahead of equity in the capital structure which means that in the event BlockFi fails client funds are returned (to the degree possible) before shareholders get paid out.
Furthermore, Gemini is a New York trust company regulated by the New York State Department of Financial Services (the premier financial services regulator in the world). Gemini is also SOC 2 Type 1 compliant indicating that independent auditors have certified the firm has having met a high standard for internal controls and processes.
So How Do I Start?
- Open an account with BlockFi.
- Wire in USD
- Trade USD for USDC
- Start earning 8.6% interest
Done! It’s really pretty easy!
In today’s low yield world, investors are going to need to become more sophisticated and creative. BlockFi offers an innovative solution for what to do with your old savings account.
Until next time, thanks for reading!
-Aric Lux.
