What is BlockFi?
BlockFi is a crypto-lending and cryptocurrency exchange institution that allows users to earn interest on deposited cryptocurrency as well as use cryptocurrency as collateral for loans. The company was founded in 2017 in New York City by Zac Prince and Lori Marquez.
So, what can you do when you sign up for BlockFi? First off, you can invest in cryptocurrency! Once you fund your BlockFi account, you can use the trading feature to buy, sell, and exchange crypto, commission-free. The best part about trading with BlockFi is that you can immediately start earning interest on your investments; once you purchase a cryptocurrency, it goes straight into your BlockFi Interest account, discussed below. You can also set up automatic trades in order to buy or sell cryptos on a regular basis! BlockFi does not offer joint or custodial investment accounts.
One of BlockFi’s main features is its BlockFi Interest Account, or BIA. With the BIA, you can deposit your cryptocurrency and earn interest on it. With the Interest Payment Flex option, you can choose which cryptocurrency your interest is paid in. How does this whole interest payment thing work? Well, when you deposit some of your crypto into your BIA, BlockFi then lends that crypto out to borrowers, who pay BlockFi interest. Some of that interest is then passed on to you, the client! Interest is compounded daily and deposited to your account monthly, and there are no account maintenance fees or required account minimums. Here are BlockFi’s currently accepted cryptocurrencies and the current APYs on the BIA.
BlockFi also offers loans where you put your cryptocurrency up as collateral. You can secure a loan using Bitcoin, Ether, or Litecoin. In exchange for this collateral, BlockFi will lend you U.S. dollars, GUSD, or USDC. In order to take out a crypto-backed loan, you will need to post a loan-to-value (LTV) ratio of 50%. In other words, you can take out a loan that is no more than half the size of your current portfolio. If your crypto goes down and value and raises the LTV ratio of your loan, you will need to post more collateral in order to get the ratio back down. The origination rate for a crypto-backed loan is 2%, and the interest rate varies depending on how low your loan-to-value ratio is. (A lower LTV ratio is better.) Here are the current interest rates for crypto-backed loans:
BlockFi will be releasing the first-ever credit card to offer cash-back rewards in the form of Bitcoin. The BlockFi Bitcoin Rewards Credit Card, which will be released in the spring of 2021, will grant cardholders 1.5% back on every purchase, paid out as Bitcoin. The Bitcoin earned on purchases will be transferred to your BIA and start earning interest immediately. The annual fee for the card will be $200. You can join the waitlist for the Bitcoin Rewards Credit Card on the BlockFi website!
Who is BlockFi For?
BlockFi is great for cryptocurrency investors who want to earn a profit from their crypto without selling. Why wouldn’t you want to sell your crypto if it’s gone up? Because selling an asset that has increased in value creates a capital gain, which will be subject to capital gains tax. When you use your cryptocurrency to secure a loan instead of selling it, you avoid creating a taxable event while giving yourself the opportunity to make even more gains with the extra money you’ve been loaned. The interest you pay on your crypto-back loan can even be used as a tax deduction in order to reduce your taxable income for the year!
Want to get started investing in cryptocurrency but not sure where to start? Check out our guide to getting started with Bitcoin!
How does BlockFi Make Money?
BlockFi makes money in several different ways. One of these ways is withdrawal fees on BIAs. When you have a BIA, you are allowed to make one cryptocurrency withdrawal and one stablecoin withdrawal per month for free. But when you want to withdraw more than that, the following fees are applied:
Before You Buy
While BlockFi has taken many steps to ensure its customers safety and protect them from losing their cryptocurrency, it is important to understand the risks that are inherent with the type of business model the platform is running.
BlockFi is based in the U.S., which means it is subject to U.S. regulations. This should come as a relief to many investors who are worried about the looser regulations that apply to other cryptocurrency exchanges, many of which are based internationally. In addition to the regulations BlockFi has to adhere to, the company also chooses its borrowers carefully. When BlockFi takes the cryptocurrency in your BIA and lends it out, it chooses reputable borrowers and requires a high LTV ratio from them in order to execute the loan. This means that BlockFi takes extra steps to protect you in the event that one of their borrowers is unable to repay the loan provided to them with the cryptocurrency from your BIA.
While the U.S. regulations and reliable borrowers associated with BlockFi are a good step towards protecting customers, the biggest risk associated with putting money into a BlockFi account is the fact that it is uninsured. With most regular brokerages, your investments and uninvested cash are insured by the Securities Investment Protection Corporation (SIPC). This means that your investments and cash are protected in the event that your brokerage goes out of business. (It does not, however, mean that you are insured if your investments simply go down in value.) With most bank accounts, your deposits are insured by the Federal Deposit Insurance Corporation (FDIC). This means that your deposits are covered in the event that there is a bank run and your bank does not have the cash to pay out your withdrawals. While BlockFi acts as both a brokerage and an interest-bearing bank account for cryptocurrency, its accounts are not insured by the SIPC or the FDIC. This means that, in the event that the company goes out of business, you could be at risk of losing the cryptocurrency and cash in your BIA and your investment account. This risk should not be taken lightly and should be considered heavily before putting your cryptocurrency into a BlockFi account.
It is also important to keep in mind that cryptocurrency is an asset whose value can fluctuate constantly, which is risky when using it as collateral for a loan. While the current value of your cryptocurrencies may be enough to secure a loan with a LTV ratio of 50% or less, your crypto can always go down in value and reduce that ratio. A heightened LTV ratio will lead to a demand for more collateral, which can be a dangerous situation if you don’t have more money to deposit into your account.
BlockFi is an extremely innovative cryptocurrency institution that is expanding into spaces that have never before been explored. As long as you can look past the risk that comes along with putting your crypto into an interest account and an investment account that are uninsured, BlockFi can be a great way for you to grow your money. Oh, and don’t forget to join the waitlist for the Bitcoin Rewards Credit Card!