The Rise and Fall of BlockFi

BlockFi Origin

BlockFi is a financial platform that allows retail traders to lend their crypto to earn a yield, or borrow against their crypto to get a fiat loan.

The company was founded in August 2017 by two people, Zac Prince and Flori Marquez in New Jersey. They raised their first round of $1.5M seed funding in February 2018, but rapidly grew over the years, raising over $1.3B in funding total as of late 2021.

Contagion

Early 2022 wasn’t great for BlockFi, as they were fined $100M by the SEC for violating the Securities Act of 1933 and the Investment Company Act of 1940. Per the terms of their settlement with the SEC they had to discontinue interest accounts for new customers.

But the worst was yet to come. In mid-May, Luna/Terra imploded causing a cascading liquidation/bank run across the crypto ecosystem. This led to some counterparties who had borrowed from Celsius, BlockFi, Voyager, etc to default on their loan payments.

When the large hedge fund, 3AC (Three Arrows Capital), blew up it left many counterparties in the red such as Celsius, Voyager, BlockFi, Blockchain.com, and Genesis.

Celsius halted withdrawals first. And is now entering into a potential bankruptcy.

Source

Then Voyager, which had a $600M loss with 3AC, halted withdrawals as well.

Source

Genesis, the most mature and sophisticated lending desk in the space, is rumored to have eaten a $500M - $1B loss. Basically, they had made so much money over the years that they could “plug” the hole.

Michael Moro @michaelmoro

3/Genesis can confirm that we carefully and thoughtfully mitigated our losses with a large counterparty who failed to meet a margin call to us earlier this week. No client funds are impacted. We sold and/or hedged all of the liquid collateral on hand to minimize any downside.

As panic spread, retail depositors clamored to get their money out of these services. While BlockFi met all withdrawal requests and were planning a new round at a $1B valuation, they soon realized an immediate capital infusion was necessary.

FTX came to the rescue with a $400M revolving credit facility and an option to purchase BlockFi for $25 - $250M depending on performance goals.

Source

The risks and rewards of lending Bitcoin

Lending/borrowing is one of the oldest and fundamental forms of finance.

When you lend out your Bitcoin, the return you earn is compensation for the risk you are taking with your capital. People lend their Bitcoin in order to stack more Bitcoin (especially with compounding returns) or live off the return.

Taking risk isn’t a bad or good thing. It’s inherent for any investment. An investor hopes they have appropriately sized the risk relative to the return. Risk captures the essence of capitalist/entrepreneurial.

“Risk is what's left over when you think you've thought of everything.” - Carl Richards

When you lend your coins you have to trust that the service evaluated counterparty risk properly, which includes: financials of borrower, collateral requirements, custody, etc.

Your keys, your coins.

Is the return that lending services provide worth it? This is subjective and up to each person to decide.

My thoughts

Over the last 2.5 years, I’ve personally experimented with different lending services in the crypto space. Here’s a spreadsheet I update once a month with my latest holdings.

To date, I’ve had $0 in losses.

This is due to me:

• Critically examining my counterparties: I only have my coins at Genesis, Ledn, and Anchorage (They have a great blog post on how they had $0 in losses). I also marked Voyager, Celsius, and others as red/don’t use due to glaring mismanagement issues. Also, if a lending platform provides a yield higher than market rate they are either A/ Taking on more risk or B/ Subsidizing the rate. There is no way around this.

Dan Held @danheld

Due to BlockFi's recent rate reduction, I'll be moving the remainder of my coins from there to other services next week (will give more details during my monthly yield tweet storm). Just not worth the risk.

• Staying up to date with the market: by monitoring counterparties, one could have easily avoided getting their funds frozen. For example, there were a handful of red flags from Celsius months before they went under.

Finally, I want to admit that I underestimated the stupidity and risk-taking behavior of these retail lenders (I mainly work with institutional only). While I thought they would have worked with the slightest tinge of maturity with their loan book, many decided to basically act as glorified hedge funds. We should actively push for more transparency (Like Ledn with “proof of reserves”), accountability, and integrity.

HODL,
Dan Held

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