This post contains affiliate links. As an Amazon Associate I earn from qualifying purchases.
If you are investing with BlockFi, you can secure a loan using cryptocurrency as collateral! Holy smoke! Why would any respectable institution trust something as volatile as cryptocurrency as collateral? Are they a scam? Insane? Who are these people and to whom to they give loans?
What Is BlockFi?
BlockFi is a company that acts almost exactly like a regular bank, but for cryptocurrencies. Specifically, Bitcoin, Etherium, and Gemini (GUSD).
Unlike banks that use government-backed money (fiat money), BlockFi isn’t subject to the laws or protection of banks that are members of FDIC or SIPC.
If that is a put-off, keep in mind that BlockFi wouldn’t be the trusted entity that it is if it were to engage in devious practices. Between July and October of 2019, BlockFi paid out over $2MM worth of crypto in interest and bonuses.
Why do I think BlockFi is trustworthy? As of now, they offer services worldwide, including 47 U.S. states. It is currently the only independent lender with institutional backing from such investors as Galaxy Digital, CMT Digital, Akuna Capital, Fidelity, Morgan Creek Digital, ConsenSys Ventures, SoFi, Coinbase Ventures, Susquehanna and Recruit Strategic Partners.
In other articles, I mentioned that I use Coinbase, so if they trust BlockFi, so do I.
What Services Does BlockFi Offer?
I’m glad you asked. People looking for a trading platform may be disappointed with the relatively few digital currencies that BlockFi works with. However, someone looking for an interest-bearing account or a loan will be excited.
BlockFi Interest Account (BIA)
The BIA is what takes my interest. I had to say that. What I mean is, if someone invests their money in a BlockFi Interest Account they gain interest on their deposit. Simple enough, isn’t it?
The only downside for me is that I currently do not have any Bitcoin (BTC), Etherium, (ETH) or Gemini (GUSD). These are the three currencies that BIA works with. So, what should I do if I want to gain interest on my crypto?
Depending on just how interested I really am, it’s simple. I use my Coinbase account, which holds all my crypto except the BAT to transfer one currency into a different currency. Maybe I’ll turn my Litecoin (LTC) into Etherium.
I then make an account with BlockFi and set up a BIA with my Etherium as the holding. Now, instead of having LTC sitting around in a wallet doing nothing, I have ETH in an interest-bearing account!
Hmmm. We wonder though, what kind of interest? It’s nice that I don’t have to pay for BlockFi to hold my crypto, but I wasn’t paying Coinbase, either. Will the gain be noticeable? My heart was attached to my Litecoin. I gave that up for BIA. WHY??? Should I hold regrets?
First, compound interest is paid on the first of each month. Compound interest is pretty standard with most types of banks. Each month, the interest paid on my account is based on what is currently in the account.
Suppose I deposited 30 ETH. Each month the interest makes that account a tiny bit bigger. My first month’s interest will be based on the 30 ETH. If I don’t add anymore ETH, my account will still grow. Each month, the interest will be paid based on the amount of what is currently therein, not what I initially deposited.
Here is the rundown based on annual percentage yield (APY):
- BTC tier one, 0 – 5 BTC, 6.2 % APY
- BTC tier two, over 5 BTC, 2.2% APY
- ETH tier one, 0 – 500 ETH, 4.1% APY
- ETH tier two, over 500 ETH, 0.5% APY
- GUSD, any amount over 0, 8.6% APY
So, you tell me, given the current fiat value of these currencies, was my 30 ETH well-placed? Should I have used the stablecoin (GUSD) instead, keeping in mind GUSD holds its value as one coin = one dollar? I’m not good at math.
Crypto-Backed Loans (USD Only)
Okay, I mentioned I don’t trust myself with a loan for personal reasons. I believe BlockFi is trustworthy on their end. Here’s the scoop.
Just about any company who offers loans wouldn’t dream of lending real government-backed currency against Bitcoin, Etherium, or GUSD. The values of cryptocurrencies are far too volatile. They want cars, houses, land, or something else that has a fairly stable value.
Since BlockFi aims to bless the world with something different, they must take a different approach. They use what is called a loan calculator based on the value of the crypto you deposit.
First, there is a tiny form. Enter the amount of the fiat value, e.g., dollars, you want to borrow and the coin you are offering as collateral. The other side of the form will tell you how much of the coin they want in order to give the loan.
The minimum dollar amount of the loan is $5000. The example amount on their website is $25,000. The collateral required is 5.96 BTC. You’ll notice the current value of the BTC is significantly higher than the amount of the loan. So, just how much do you need those dollars?
Regardless of the amount of the loan, no credit checks are made and each loan is for 12 months. At the end of that 12 months, you have the option to either pay off the remaining balance or refinance.
There is no early payoff penalty. If you pay off the 12-month loan within a shorter time period the remaining interest on the loan is forgiven.
Before your loan is offered, you enter your information in a form that the website says will take you less than two minutes. You’ll be declined or approved, on average, within one business day.
If the value of your cryptocurrency highly increases during the payoff period it is kept in storage until the loan is paid. If the value has a serious decrease then you will have to add more currency to your account.
You can use your cryptoassets to make principal and interest payments any time. BlockFi intends to add a feature that increases the value of your loan if the value of your collateral jumps significantly.
Other Valuable Information
Your cryptoassets are stored with Gemini, a licensed custodian. I’ll cover Gemini in a future article; for now, you can examine it here.
BlockFi does not offer financial or tax advice. You should consider using the advice of a professional financial advisor if you have any doubts.
When you log in to BlockFi, the dashboard shows a Refer a Friend button at the top right corner of the page. If you click it, you’ll see your code that you can share on any site. The referral program is generous enough to merit your consideration.
BlockFi posts a monthly update on their blog. I’d keep a close eye on it. There are no foreseeable problems at this time.
BlockFi shows their contact information on their homepage, and there are buttons to click that will show you the people at the head of the company. They don’t try to hide anything. I haven’t noticed any red flags.
They have an affiliate program, of which I am a member. I humbly implore that if you decide to make an account with BlockFi, that you come back and make your account through my link. It will cost you nothing more, everything will be the same for you as if you joined BlockFi through just looking up their website. Many thanks!
What are you thinking about BlockFi? Does it sound worthy of your assets? Do you know anyone who uses BlockFi or another interest-bearing crypto wallet or vault? Let me know how you feel in the comments below!