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Today’s Not Boring is brought to you by… BlockFi
BlockFi is a new kind of financial institution. With BlockFi, you can use cryptocurrency to earn interest up to 8.6% APY (I’ll explain how below), borrow cash against your crypto holdings, and buy or sell crypto. No minimum balances or hidden fees. Tip: signup is smoother in the mobile app. Set up your BlockFi account today, and get up to $250 in free bitcoin:
This is a Sponsored Deep Dive on BlockFi.
Coinbase IPO’d yesterday to wild success. After touching $420.69 and going as high as $429.54, it closed at $328.28, up 31% from its reference price of $250. It peaked at a market cap of over $100 billion, and closed at $86 billion.
I’m more excited about BlockFi, though, and not because they’re sponsoring this post. It’s a more selfish reason, one that makes the sponsorship money seem like peanuts.
See, if BlockFi existed in 2013 instead of Coinbase, I probably wouldn’t even be writing this newsletter.
On May 16, 2013, when Coinbase was less than a year old, I set up an account and bought my first bitcoin. I forget why, but I just looked up when Union Square Ventures first invested, and that must have been it:
That was good enough for me. I bought 10 BTC on May 16th, another 15 on June 14th, and another 13 on July 12th.
That September, after quitting my job in finance, I flew my unemployed ass to Oktoberfest for a fun weekend with a few friends. On September 24th, after ten too many steins, I woke up in my Munich hotel room a little hungover and feeling dumb for spending so much on the trip and the night out... and made the stupidest financial decision of my life.
I just sold some of those silly bitcoin I’d bought, and bingo, free Oktoberfest. It felt like such an obviously responsible thing to do that three days later, I sold ten more, then I sold eight in October, five in November, and the last five in May (for a nice little 4x, I might add!).
I sold all 38 bitcoins for a total of $7,232. At current prices, those 38 bitcoins are worth $2,450,050. Gulp.
If BlockFi had been around at the time, I could have taken out a USD loan against some of those bitcoin and earned interest on the rest while they sat safely in my account. If BlockFi paid interest on bitcoin that whole time, like they do today, I’d have more than 40 bitcoin today, or over $2.6 million. Double gulp.
I’ve told you before that I’m an idiot, and I wasn’t kidding. But that’s enough self-chastising for one day. We’re here to talk about BlockFi.
Is BlockFi Legit?
BlockFi, which just announced a $350 million Series D led by Bain Capital Ventures, Pomp Investments, Tiger Global, and partners of DST Global, is building a full-fledged financial institution for crypto investors. BlockFi offers four products to retail investors:
- BlockFi Interest Account (at rates up to 8.6% APY)
- Trading Accounts
- Crypto-Backed Loans
- Credit Card
It also acts as a prime broker for institutional clients, with custody, financing, execution, and margin.
BlockFi is building SoFi plus JP Morgan’s prime broker desk, for crypto.
There’s a race going on among everyone in the financial services space -- centralized crypto companies like BlockFi and Coinbase, neobanks like Chime and Monzo, public fintech companies like Square and PayPal/Venmo, and large brokerages and banks -- to become the financial super-app, the place that customers go for loans, credit cards, trading, insurance, cash management, and more. BlockFi has a unique wedge: a growing suite of products that earn clients high interest rates and free crypto.
The first question anyone has when they hear about BlockFi is: “What’s the catch? 8.6% APY sounds too good to be true. That can’t be legit.”
I went DEEP to understand how they do it, and it’s legit. Essentially, BlockFi arbitrages the fact that traditional finance and crypto don’t like to deal with each other.
To understand how it works, we’re going back down the crypto rabbit hole. We’ll cover topics like bitcoin, stablecoins, DeFi, and CeFi, and basis trades. You’ve probably heard the terms, but probably, like me, didn’t fully understand what they mean. We’ll change that. At the very least, we’ll all sound smarter at our next party.
There’s so much to dig into here that it’s hard to know where to start, but we’re going to try:
- What Does a Bank Do?
- What BlockFi Does
- Stablecoins and 8.6% APY
- Grayscale Bitcoin Trust
- The Race to the Finance Super App
- The Offer
After doing the research for this piece, I moved some of my money into stablecoins on BlockFi, and transferred all of my (much, much smaller than 2013) bitcoin holdings to BlockFi from Coinbase. Yesterday, I was on a YouTube livestream with Ben Carlson talking about the Coinbase IPO, and unprompted, he said that he’d done the same.
If you want to check it out for yourself, sign up with the Not Boring link to get up to $250 in free bitcoin when you fund your account.
If you’re still wondering what BlockFi is and how it pulls off such high rates, keep reading. There’s a lot to learn. Let’s start somewhere obvious…
What Does a Bank Do?
Banks make money in three main ways:
- Net Interest Margin. Customers deposit money. Banks lend that money out to other people and businesses at a certain rate, pay depositors a lower rate, and keep the difference.
- Interchange. When you use a credit or debit card at a store, the store pays your bank and its bank, typically as a percentage of the transaction and a small fixed amount.
- Fees. Banks charge customers money when they overdraft, take money out of an ATM, and for all sorts of other things.
For our purposes, Net Interest Margin is the most important. It’s the spread between what banks pay on deposits and what they earn on loans. Let’s do the math on a mortgage as an example.
Right now, the Annual Percentage Yield (APY) on a standard Bank of America bank account is 0.01%. Let’s assume they can lend money to a homebuyer on a 30 year fixed rate mortgage at 3.0%. Bank of America’s Net Interest Margin is 3% - 0.01% = 2.99%.
It’s not that banks want to pay next to nothing on deposits. It’s just that with low rates across the board, banks aren’t able to pay much more and make enough net interest margin to pay for overhead and still generate enough profit to keep shareholders happy. When they could lend money at a higher rate (30-year mortgage rates were 18% in the early ‘80s), savings accounts paid higher rates too.
Banks would love to pay high interest rates on deposits. Banks compete with all of the different things you can do with your money -- buy a house, stocks, or crypto, pay off loans, travel. The higher the interest rate, the more likely you are to keep your money sitting there. More money sitting there means the banks can lend more means higher income for the banks. Given the low rates they earn from borrowers, they just can’t.1
BlockFi, however, can.
Founded by Zac Prince and Flori Marquez in 2017, BlockFi is a crypto-native financial institution. But while BlockFi is for crypto investors, it’s not decentralized. It has over 700 employees, a headquarters in Jersey City, and is regulated. On the spectrum between a traditional financial institution (“TradFi”) and a Decentralized Finance (“DeFi”) protocol, it falls somewhere in the middle. Like Coinbase, it’s what’s known as Centralized Finance (“CeFi”).
To a client, BlockFi looks and feels like an online bank. When I set up my account, it felt very much like setting up a regular online bank account.
- I signed up, verified my identity, and waited a day for everything to get approved.
- Once I was in, I connected to my bank account via Plaid and deposited money via ACH.
- The money hit my account instantly and BlockFi converted it to GUSD (a stablecoin).
- Without me doing anything special or crypto-y, it’s now earning 8.6% APY.
- With Flex, I chose what currency I get interest paid in. So I deposited in USD, converted automatically to stablecoin, and get 8.6% interest paid out in ETH.
- Then, I transferred my BTC from Coinbase. It took about two minutes, and now I’m earning 6% APY on that, in bitcoin. (Rates vary by coin deposited)
Within two days of starting the process, I now have a meaningful amount of my net worth in BlockFi. I wouldn’t recommend it if I didn’t trust it for myself. And it was easy.
That familiar bank feeling with backend crypto superpowers is by design. Early BlockFi clients were crypto natives (they had to be to use a new crypto-based product during crypto winter), but the company is making a push to attract crypto-curious clients, kind of like us. They want to be the on-ramp for millions of people to get involved with crypto.
A couple of interesting things happened in the setup process:
- It Felt Like a Regular Bank. BlockFi’s on-ramp to crypto feels smooth and familiar.
- Crypto Superpowers. I transferred a good chunk of money from Coinbase to BlockFi in minutes, not the hours or days it would take to send a wire or transfer money between accounts. BlockFi thinks that instant settlement gives it a big advantage over traditional financial institutions.
That combination of ease and power is working.
In early March, BlockFi announced a $350 million Series D that valued the company at $3 billion. Traditional venture/hedge funds Bain Capital Ventures, Tiger Global, and DST Global joined crypto-focused Pomp Investments as co-leads. At the time of the announcement, the company announced some eye-popping stats:
- $50 million in monthly revenue, up from $1.5 million a year earlier
- $15 billion in assets on the platform, up from $1 billion a year earlier
- 0% loss rate across its lending portfolio
- 50% month-over month growth
$50 million per month is an absurd amount of money for a company that’s less than four years old. It would be a great annual revenue number for a company that age. BlockFi generates revenue in three (soon to be four) ways:
- BlockFi Interest Account: Earn up to 8.6% APY on stablecoin deposits, 6% on BTC, and 5.25% on ETH.
- Trading Accounts: No fee trading of Bitcoin and other cryptocurrencies
- Crypto-Backed Loans: Loans on crypto balances as low as 4.5% APY
- Credit Card: Visa credit card with 1.5% Bitcoin back on every purchase (coming soon)
These look a lot like the ways that banks make money. Let’s break down each, saving the most complex for last.
BlockFi lets clients buy and sell cryptocurrencies. The product is similar to Coinbase in that it’s a centralized and easy-to-use way to buy crypto, but there are a couple key differences.
Coinbase Offers More Currencies. Because Coinbase’s business is all about buying and selling crypto, it offers a lot more assets than BlockFi. You can buy nine assets on BlockFi, and 44 on Coinbase. While BlockFi will add more assets over time, it’s not the focus of the business. Trading on BlockFi is really about giving people a way to build up crypto deposits that BlockFi can lend out, and it only offers trading in coins that it lends.
BlockFi Has Lower Fees. Coinbase makes most of its money by charging retail traders fees. Coinbase charges normal accounts 3-4% transaction fees per trade, plus a spread on top. That drops to 0.5% plus a spread for Coinbase Pro accounts. It nets out to a 1.25-1.5% take rate on retail trades. Institutions pay much less, around 0.05%.
In Coinbase and the cryptoeconomy, Tanay Jaipuria wrote:
Over 95% of the revenue that Coinbase generates comes from transaction revenue, i.e., commissions on trades from retail and institutional clients, so let’s focus on that. Digging one level further, Coinbase’s institutional trading volume makes up about 60% of total volume. However, Coinbase makes 95% of its transaction revenue (and 90% of its total revenue) from retail trading volume.
BlockFi does not charge transaction fees, but it does take a spread on trades that averages at around 1%. It’s cheaper than Coinbase, but more expensive than exchanges like Binance and FTX that are more powerful but harder to use, particularly for people new to crypto.
Importantly, like Coinbase, FTX, Binance, Uniswap, and other exchanges, but unlike non-crypto platforms like Robinhood and PayPal, BlockFi lets you move your coins in and out.
At this point, trading is a feature on BlockFi, not a full standalone product. It’s a way to onboard people to crypto and get them earning yield.
Bitcoin Rewards Credit Card
BlockFi is launching a credit card, with Visa, that feels like a regular credit card in every way -- you can use it everywhere -- except that it gives you 1.5% back in Bitcoin whenever you use it, and up to $750 or more in bonus bitcoin rewards.
This one is straightforward. Credit card providers earn an annual fee and interchange, and it’s up to them to use it in a way that attracts customers and strengthens the business. Traditionally, that’s meant points, miles, or cash back. In Ramp’s Double-Unicorn Rounds, I wrote that instead of points:
...it rewards them with better software. Better software drives more usage, which drives more revenue, which drives better software, and so on. The faster the flywheel turns, the further ahead Ramp pulls.
The same principle is at play here. Instead of points or cash back, BlockFi gives people bitcoin. It seems like a minor distinction, but it’s potentially massive, for two reasons.
One, they’re rewards that can increase in value over time. If you’re bullish on bitcoin, then you believe the rewards you earn will be worth more in the future. You’re getting long bitcoin every time you buy anything. (Of course, they can also go down over time).
Two, bitcoin rewards are an on-ramp. There are a lot of people who don’t want to spend their hard-earned cash buying bitcoin, or feel uncomfortable depositing money in an account and trading it for bitcoin. Those same people might be happy to just get free Bitcoin for doing something they’d be doing anyway. Once they do, it kicks off BlockFi’s money flywheel:
- Earn bitcoin
- Bitcoin automatically deposited in BlockFi account, BlockFi lends it out
- Client earns 6% on bitcoin holdings in bitcoin, building up the stack
- Client can take USD loans against that bitcoin
The bitcoin credit card is an on-ramp, a way to get the next 15 million people to dip their toes in crypto. It’s an on-ramp to BlockFi, too, and likely a low CAC one - who doesn’t want free bitcoin? Once they’re in the ecosystem, BlockFi can monetize them in all sorts of ways as it builds out more financial institution functionality.
There’s this tension in crypto: thousands of people have made millions of dollars by buying and hodling bitcoin, ETH, and other coins. On-chain, they’re very wealthy. But to actually use that wealth to buy things, they need to sell coins. That’s a problem, because selling triggers capital gains taxes in the US, and because most crypto-wealthy believe bitcoin will only keep going up in value over time. Historically, doing anything but hodling has caused major regret.
The internet is littered with cautionary tales. See: my ~$2.5 million Oktoberfest experience, or even more painfully, Bitcoin Pizza. On May 22, 2010, programmer Laszlo Hanyecz bought two pizzas from Papa John’s for 10,000 BTC. At the time, those 10,000 BTC were worth $41. Today, they’d be worth $645 million.
The examples are painful and comical, but it’s a genuine problem: there’s nearly $1.2 trillion in wealth tied up in a currency that people don’t feel comfortable spending.
BlockFi solves that by offering USD loans collateralized by bitcoin at rates as low as 4.5% APR.
BlockFi is able to offer competitive rates while protecting its downside by holding onto your bitcoin (or ETH, Litecoin, or PAXG) as collateral. Loans start at a 50% Loan to Value (LTV), meaning that you need to put up bitcoin that are worth twice as much as you’re borrowing. If you want a $100k loan, you need to put up 3.12 BTC, currently worth $200k.
If the price of bitcoin crashes, that gives BlockFi a 50% cushion. If the price drops below certain thresholds, it will ask borrowers to post more collateral. In the worst case scenario, it can liquidate some of your bitcoin to cover the loan. That said, even in the sharp drawdown in March 2020, it didn’t have to liquidate any clients, while DeFi protocols like Maker did. That’s good, because selling into a massive selloff is typically the worst thing you can do.
This highlights an important and obvious distinction between DeFi and CeFi: CeFi companies have teams of real people who can proactively work with clients to get ahead of issues before getting to the point at which a liquidation needs to occur. Protocols have dashboards and warning signs, but not customer support and risk teams whose job it is to avoid catastrophe.
Everything is a trade-off. DeFi protocols typically have lower fees and are more open and transparent. Many people believe in “not your keys, not your coins,” the idea that if you keep your coins in a centralized account, you don’t really control them. (Balaji made this point in an excellent Tim Ferriss Show interview.) Plus, one person’s comfort in having people on the other side is another’s discomfort in having people on the other side.
For BlockFi’s target customers and institutional partners, though, the trade-off can be worth it. BlockFi has a 0% loss ratio on loans. It’s the lower risk option.
BlockFi Interest Account
Up to this point, everything feels pretty normal: no-fee trading, credit cards with 1.5% back, and collateralized loans at 4.5% APR are things we’re used to. BlockFi just does it all with crypto.
The BlockFi Interest Account is normally where people start to give me quizzical looks, because BlockFi offers up to 8.6% APY on stablecoins and 6% APY on bitcoin. That’s an insanely high rate, and it makes a huge difference. Over 30 years, $100k at 8.6% APY turns into $1,188,214. At the standard 0.01% APY I earn at Bank of America, it turns into $100,300.
Obviously, there is no free lunch, and there is especially no free lunch over thirty years.
The biggest risk with BlockFi is that its accounts are not FDIC insured. If BlockFi gets totally wiped out, your money is gone. There’s a trade-off: for accepting more risk, you earn higher interest.
BlockFi takes that risk very seriously. Watch this video with the company’s Chief Risk Officer Rene van Kesteren, a former Managing Director in Equity Structured Finance at Bank of America Merrill Lynch, to understand how they think about it.