3 min read

Is Blockfi Facing Solvency Issues?

Is Blockfi Facing Solvency Issues?

Blockfi is a cryptocurrency exchange that provides lending and borrowing services for private individuals and institutional customers. Blockfi's main retail service allows crypto holders to deposit cryptocurrency, such as Bitcoin, and earn up to 8.6% APY paid daily. How does Blockfi generate that return you might ask?  

How does Blockfi Generate Interest to Depositors?

According to the Blockfi website (https://blockfi.com/earn-bitcoin) they "generate interest on assets held in Interest Accounts by lending them to trusted institutional and corporate borrowers. To ensure loan performance, BlockFi typically lends crypto on overcollateralized terms (similar to the structure of our crypto-backed loans). Furthermore, BlockFi’s automated risk management system monitors positions 24/7, leveraging the same trusted risk management system used with BlockFi’s crypto-backed loans.  BlockFi has the ability to terminate a borrow in a timely fashion and also manages reserve balances to facilitate client withdrawals from Interest Accounts."

"BlockFi client funds are structured to be at the top of the capital stack, senior to BlockFi equity and BlockFi employee capital. This means BlockFi’s business and client incentives are aligned and BlockFi would take a loss before any client would. BlockFi implements very thoughtful risk management practices and technology to mitigate the risk, but you should not view the BlockFi Interest Account as a savings account or brokerage account with FDIC or SIPC insurance."

Should you Deposit your Bitcoin with Blockfi?

An anonymous group at https://ditchblockfi.com/ claims Blockfi, which has an estimated $1.8 billion in customer assets invested in Grayscale Investment’s GBTC, is facing potential solvency issues associated with the negative premium on  GBTC shares.

According to internal documents posted on the internet, Blockfi packages their user deposits and acquires GBTC shares with them. After the restricted shares become tradable in 6 – 12 months they are sold to capture the premium the stock traded at.  However, GBTC is now trading at a discount to NAV resulting in a large loss to Blockfi, estimated at $232 million by ditchblockfi.com.  

Does Blockfi Provide Unsecured Lending?

Ditchblockfi.com reports there are an estimated $2 billion in unsecured loans on Blockfi's books, in opaque private contracts that are not disclosed on BlockFi’s website or Terms of Service. As we all know, successful trading firms have a history of defaulting on under collateralized loans. Could a single, $100M loan fail and wipe out Blockfi? Maybe not, but in market turmoil could multiple loans fail putting Blockfi under serious pressure?

Meanwhile, to shield itself from the potential losses that may be incurred as a result of its business practices, Blockfi states in its terms and conditions that in times of “extreme market conditions” withdrawals may be halted permanently. However, using this clause to expose Blockfi, the Ditchblockfi team suggest that this may have been “built-in for market conditions that would cause their unsecured borrowers to default on their loans, causing Blockfi to be unable to pay out on deposits.”

Should you Deposit your Bitcoin with Blockfi?

Ask yourself, is it worth risking the complete loss of all your Bitcoin on deposit for an additional 6% yield? Consider the risks Blockfi might be taking and do your homework. Whether its a failed GBTC trade, users inability to quickly gain access to funds when needed, or its lack of transparency  for its users, investors haven't kept quiet about their concerns for Blockfi and its future. Time will tell how things play out.

After writing this article and pulling all my Bitcoin from Blockfi, they announced new lending rates.  If you deposit more than 1 Bitcoin the interest rate has been reduced to 2%.

External Resources

Dropping GBTC Premium: Anonymous Group Claims Blockfi Facing Solvency Issues Due to Exposure to the BTC Trust – Featured Bitcoin News
An anonymous group claims Blockfi, which has $1.8 billion in funds invested in Grayscale’s GBTC, faces potential insolvency issues.