Crypto bank high interest rate

[Icecreamarsenal]

I'm not here to shill for BlockFi but I can't help but notice that they have an 8.6% interest rate.
I'm considering putting some funds in there to take advantage of this; the downsides seem to be that none of this money is FDIC-insured and that the rates are subject to change.

Am I missing something here?

[HeadedWest2029]

I started investing with BlockFi this year.  I'd say the biggest concerns I see come up is 

1) the practice of bitcoin rehypothetication
https://www.investopedia.com/terms/r/rehypothecation.asp

2) The no FDIC or SIPC insurance for crypto exchanges

3) Security - exchanges get hacked all the time.  Partially mitigated by turning on 2FA, whitelisting your account to limit your stash getting withdrawn to a random wallet where there's no clawback possible unlike traditional banking, and the fact that Gemini and other reputable exchanges keep most of the coins in cold storage.

4) And in general, the balance sheet strength of the company to withstand crazy price movements or other black swan event.

On the plus side, they spread out their crypto to multiple custodians, including well-respected Gemini.
With Gemini, their stablecoin GUSD is tied to USD and audited by a New York company to ensure there's no funny business.  They actually have real dollars to match GUSD 1-1.

In terms of the capital stack, customers get paid 1st in the event of a catastrophic liquidation.

They are headquartered in the U.S. (I point that out because some of the other competitors are very coy about their locations & how you can contact them).

I'm not an expert on loan to asset type ratios, but it sounds like the people leading their lending program make sure their borrowers are overcollatorized and as of yet they've never had a borrower default.

To me, it seems the least shady of the numerous websites doing crypto interest accounts (Nexo & Celsius offer even higher interest rates and are often mentioned.  But there are ones that seem super duper shady to me like KuCoins in Hong Kong with outrageous rates and weird fees).

In short, I'm doing it.  I still want to know more about the company and listen to pretty much every podcast the CEO goes on.  I suspect the rates will go down significantly when the market matures and there is less arbitrage opportunities (like the spread between exchanges and the spread between crypto futures and market price), but for the time being I've put some of the "high yield" savings account into BlockFi

EDIT: shameless plug, if anyone wants to use my referral link https://blockfi.com/?ref=2759b0eb

[Icecreamarsenal]

Very thorough, thank you so much.
I may use this as a bond equivalent, and at least as a high yield savings account.

[effigy98]

6-8% yield on your crypto if you take the risk to let BlockFI hold it. You can also borrow up to 50% of the value of your crypto. Looks like a decent risk vs reward.

[maizefolk]

(MOD EDIT: Merged threads, dropped link to other thread)

It seemed strange to me that BlockFI seems to be paying much higher interest rates for "stablecoins" that are supposed to maintain a fixed value relative to the dollar and lower interest rates on thinks like bitcoin where there is presumably exchange rate risk for the lender.

[PDXTabs]

I'm not sure how they make money on stable value coins. They've stated publicly on multiple occasions that they make their money by loaning out coins to firms performing arbitrage, but again I don't know how that would work with a stable value coin.

https://podcasts.apple.com/ca/podcast/talk-your-book-investing-in-bitcoin/id1310192007?i=1000500465482
https://theirrelevantinvestor.com/2021/01/29/animal-spirits-crypto-as-an-emerging-store-of-value/

[Icecreamarsenal]

Another downside: 5 days for a transfer to clear, it seems.  Strangely illiquid or industry standard?  I dunno.

[HeadedWest2029]

Yeah, that's definitely annoying, though they're slated to have instant ACH ready in Q1 according to the CEO.

https://mobile.twitter.com/BlockFiZac/status/1356593986455146496

[daverobev]

I'm interested in the, er, interest rate available for all sorts of things like this - but the thing is, AFAIK, you're basically just investing in p2p lending behind the scenes.

I can't see that this is any safer than normal p2p, and you have massive price risk with the crypto itself on top.

Dunno. If something sounds too good to be true, it probably is, right? Of course there is money to be made, but I honestly believe it is 'greater fool' money. If you want to speculate a small amount on it, cool.

[HeadedWest2029]

you're basically just investing in p2p lending behind the scenes

As someone who invested with Prosper, this is different.  P2P's big shortfall was it wasn't collateralized so if the person borrowing had a financial hardship there was no floor to protect against default.  This is more akin to borrowing on margin, where the borrowers have assets staked to their loan.  If there's a price drop and your loan to value drops to 70%, you get a margin call.  That's not to say there couldn't be some WILD swings, but on the plus side BlockFi survived the price drop in 2020 without any defaults.

https://blockfi.com/crypto-collateral-value

you have massive price risk with the crypto itself

This depends on how you play it.  If you are doing an interest account holding bitcoin, then yes.  You have risk in loss of principal.  But you can park it in stablecoins like GUSD which don't fluctuate any more than the dollar.  With the obvious disclaimer there is no government backed insurance for stablecoins like USD, nor will there ever.  I can't see the government competing against their own currency by insuring crypto.

[HeadedWest2029]

FYI - Gemini entering the game now
https://www.gemini.com/earn#calculator

Note: Loans from Gemini to their partners are uncollateralized (right now, they only lend to Genesis).  However, from my understanding Genesis loans to their partners are collateralized (to what extent, I'm not sure) and audited by Gemini periodically. 
https://www.gemini.com/legal/gemini-earn-program-terms-and-authorization-agreement#section-1-program-risks

[HeadedWest2029]

Pretty decent summary that gets at the heart of my original reply

https://blockfi.com/how-blockfi-handles-risk-and-security

Also, today I learned how many users there are on each platform (attached).  Didn't realize Nexo was so big. 
FYI - Nexo headquarters is in Europe, Celsius is UK, and BlockFi is in the U.S. 

[Dgmp]

Transferring money in BlockFi is a PiTA unless you wire transfer.  5000 a day limit with ACH.

I am planning to move my emergency fund / cash into it (100k) held in the Gemini dollar, and have the interest buy me bitcoin.

Have a listen to this podcast,  they lay out the arbitrage opportunities that i think are likely taking place that allows them to pay this high of an interest rate (much more but they are keeping half)

https://podcasts.apple.com/us/podcast/we-study-billionaires-the-investors-podcast-network/id928933489?i=1000508418830

[bwall]

2) The no FDIC or SIPC insurance for crypto exchanges

A Crypto bank is an oxymoron to me.

In the US, a bank is by definition FDIC insured. What's the big deal about FDIC, you may ask? Well, it's kinda like vaccines, we've had it so long we cannot remember what life was like before the FDIC.

Before the FDIC, a bank was just a business like any other, except it was in the business of loaning money. So, you could give them your money, but nothing would prevent the banker from taking your money and skipping town, other than his honor, integrity and the local sheriff. Or, if the bank were robbed, well, you were robbed too unless the bank covered the loss. And maybe they did cover the loss and maybe they didn't--it was beyond your control and generally up to the honor, integrity and business acumen of the bankers who weren't good at loss prevention as they'd just been robbed. Now the FDIC insures all bank deposits up to a certain amount (currently $250k) and thus makes banks safe for all depositors. The crypto ecosphere doesn't have anything remotely like the FDIC, to my knowledge. I'd love to hear otherwise if someone knows more than I do.

In the current interest rate environment, what is this company (masquerading as a bank) doing to offer 8.6% interest? Who are they lending to in order to generate such a return? Or, what are trading are they engaged in to offer such a return? What if BlockFI's investments fail? Will they still refund your money or simply say 'Sorry'?

To me, it's extremely risky and bound to end in tears.

If one is looking for 8% yield, then I believe Altria (ticker symbol MO) is a much safer choice. YMMV.

[Icecreamarsenal]

I'm not going to do the following, but what's to stop someone from taking out their HELOC at 3.25% and putting the balance in blockfi at 8.6%?
Other than the financial armageddon and the lack of FDIC insurance as mentioned above.

[daverobev]

I'm not going to do the following, but what's to stop someone from taking out their HELOC at 3.25% and putting the balance in blockfi at 8.6%?
Other than the financial armageddon and the lack of FDIC insurance as mentioned above.

Risk, that's all. Arguably better than borrowing to buy a truck. Same level as P2P - ok for a small amount, but be prepared to lose your investment. Actually probably worse than P2P, at least with that there are agreements etc in place.

To me, when you go and read all the blurb on the sites promoting this, it's all extremely positive - telling you what risks there aren't. But they aren't telling you what risks there are.

It's greater fool with no actual utility (at least if you buy an overpriced condo in Toronto, you own a condo in Toronto...).

[Dgmp]

Yes.  There is risk.

However, BlockFi seems to be backed by and partnered with some legitimate companies.

They provide services for fidelity, are backed by Winklevoss and coinbase —- places that have so far proved out to be legitimate and trying to be regulated and not the Wild West. 

That being said —- I’d be retired if i put all my investments in here at 8%.  I won’t be, but willing to accept risk of parking my cash here.  To each their own, and good luck!

[maizefolk]

That being said —- I’d be retired if i put all my investments in here at 8%.  I won’t be, but willing to accept risk of parking my cash here.  To each their own, and good luck!

This is a side issue about a hypothetical, but to keep in mind that when comparing interest rates and the 4% rule (or similar percent withdrawal rules), the interest rates are before inflation while your own spending (and the outputs of most withdrawal rate studies/simulations) are after inflation.

So over the super long term you'd probably need to reinvest 1/4-1/3 of your BlockFI interest income in order to sustain constant post-inflation spending in retirement. Of course, this isn't unique to BlockFI, the same point applies when people talk about the interest rates of bonds or CDs and what'd take to retire.

[HeadedWest2029]

The crypto ecosphere doesn't have anything remotely like the FDIC, to my knowledge. I'd love to hear otherwise if someone knows more than I do.

No, there isn't.  The United States government isn't going to issue insurance for a competing currency.  If that's a deal breaker, this isn't for you.

In the current interest rate environment, what is this company (masquerading as a bank) doing to offer 8.6% interest? Who are they lending to in order to generate such a return? Or, what are trading are they engaged in to offer such a return?

If you are genuinely interested, this is explained in this video.
https://www.youtube.com/watch?v=SYMF2yjn8TQ

What if BlockFI's investments fail? Will they still refund your money or simply say 'Sorry'?

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. 

Keep in mind the retail borrowers get margin called.  This is no different then borrowing margin in the stock market.  If the LTV reaches 70% you get a warning and you must fix it within a few days, if it gets to 80% they start liquidating whether you like it or not.  This happened in past crashes with BlockFi and so far the margin call system hasn't failed.  The institutional borrowers are whales.  We're talking Fidelity, Susquehanna, and other multi-billion dollar enterprises with decades of market making experience...in other words, due diligence.  You can't have a few million bucks and become one of their institutional borrowers.  You have to have huge assets and tons of experience to get into that program.

I'm not going to do the following, but what's to stop someone from taking out their HELOC at 3.25% and putting the balance in blockfi at 8.6%?
Other than the financial armageddon and the lack of FDIC insurance as mentioned above.

I'm taking out 2.5% margin from a brokerage and getting 8.6% with BlockFi.  So I don't think it's crazy, but I'll bracket it by saying I have bonds & cash I could uses to pay off this margin quickly if things go tits up with BlockFi or rates increase at the brokerage or decrease at BlockFi.  And I only put in an amount at BlockFi that wouldn't be ruinous if things go sideways.

Risk, that's all. Arguably better than borrowing to buy a truck. Same level as P2P - ok for a small amount, but be prepared to lose your investment. Actually probably worse than P2P, at least with that there are agreements etc in place.

Answered above, but no, it's not worse than P2P in my opinion.  Prosper / Lending Club were uncollateralized loans.  I saw so many loans disappear after 120 days of no payment from the borrower with no recourse.  BlockFi overcollateralizes loans from retail borrowers.  Their CRO comes from the banking world and has never had a default in banking or with BlockFi with institutional borrowers who have a treasure trove of assets. 

[Wintergreen78]

Does Block FI have a prospectus or anything equivalent to a prospectus about their account? I see a bunch of articles on their web site, but nothing that looks like a self-contained complete explanation. On this page I see a short statement: https://blockfi.com/how-blockfi-handles-risk-and-security

In order to pay our clients crypto interest on a monthly basis and to meet withdrawal requests on a timely basis, we engage in a number of activities, including (1) keeping a material amount of digital assets available for withdrawal with third parties such as Gemini and Fidelity; (2) purchasing, as principal, SEC-regulated equities and predominately CFTC-regulated futures and (3) applying risk management to the lending activities in the institutional market.

So they hold reserves, invest in equities, and trade CFTC-regulated futures. That sounds like a mutual fund to me, which has risk if their trades don’t work out.

[effigy98]

So far so good. I have about 20% of my paycheck going into blockFI now. Loving the interest. I may go to 80% as my other accounts are already at FI targets. If I can get around 300k in there, that would pay all my bills in just interest. That will take at least a year.

[remizidae]

Check out the withdrawal fees before putting anything into BlockFI - they say they allow one crypto and one stablecoin withdrawal per month. After that and the fees vary by asset—  as little as 25 cents for stablecoin, as high as 0.0025 btc for bitcoin.

https://help.blockfi.com/hc/en-us/articles/360049343931-Are-there-any-withdrawal-fees-

[effigy98]

I'm not sure why I would need to withdraw more then once a month. $130 (current fee) is reasonable if I had to do 2 for some reason.

[SuperSecretName]

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. 
...
I'm taking out 2.5% margin from a brokerage

I've been listening to a bunch of interview with the CEO recently, and this is one of the main points that is convincing me.  I haven't invested yet, but have been thinking about it.  The fact that they would wipe out their entire company equity before any client losses says a lot.  That and they made it through the March 2020 50% fall without issues.

What's your LTV on that margin loan?  How much of a fall in the market would trigger a margin call?  Which broker?  I know IB has good rates.

[HeadedWest2029]

I'm doing it at Robinhood.  Not a recommendation per se.  if I was starting fresh I would do IB as well for the better rates.  I was just early on the Robinhood adoption and they dropped their margin rates in December and it just seemed easier to capitalize there versus wait on a transfer when rates are liable to change across brokers over time.  Robinhood allows different margin borrow based on if you are borrowing to buy more stocks inside of Robinhood versus transferring out as cash (or least it appears that way in my account).  I can take out roughly 65% of the account balance if I really wanted to as cash margin.  My required maintenance balance is roughly 25% of my equity holdings, but I'm 100% total stock market index funds and not in risky ETF's or meme stocks so I think that factors in the equation.

[bwall]

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. 
...
I'm taking out 2.5% margin from a brokerage

The fact that they would wipe out their entire company equity before any client losses says a lot. 

The thing it says to me is that they have nothing to lose. (Where everything = nothing, they can write pretty words for free). I might be a bit cynical. Lots of banks went bust in 2008/09 but that didn't make CDO's a good/better investment.

[HeadedWest2029]

I'll push back a little on this, but agree at the end of the day this is a private company and I don't have access to their balance sheet or corporate governance documents.
The CEO was interviewed yesterday here and it largely centered around customer questions about risk management https://www.theinvestorspodcast.com/bitcoin-fundamentals/btc013-bitcoin-lending-borrowing-w-blockfis-zac-prince-mark-yusko/
Highly recommend listening to the entire thing if you are interested in dipping your toe into BlockFi.

The size of assets on the platform is over $10 billion.  So I take that as $10 billion of assets at risk.  It's growing every week by a quarter billion...so massive growth.
There is insurance in place at custodians like Gemini, but BlockFi itself looked into insurance for it's lending activities but apparently it's crazy expensive.  He says in the interview it would eliminate all the yield, but he believes in the future insurance may be more viable in the future.

In terms of capital stack (which is discussed around the 49:20 mark), he said there is north of half a billion of equity that is junior to people who are putting their money into BlockFi.  Obviously $500 million is less than $10 billion. 

Also, they just had a series D offering where the company was valued at $2.85 billion and they plan on going public soon (I've heard before the end of the year), so there's definitely a huge carrot for them not screwing this up.  I honestly look forward to this because it would provide further transparency in terms of balance sheet strength and SEC regulations.

[bwall]

Great info, Headedwest. Let's play with those numbers some.

So.... $500million in equity on $10billion. .... that's ..... 5%, right? So, assuming this is what I believe a bank would refer to as "Tier 1 capital" BlockFI can sustain losses of 5% before being forced to pass them on or go out of business. If they're growing deposits at the rate of $1 billion per month, then this "Tier 1 Capital" percentage will shrink very very quickly. Keep in mind, everyone wants interest beginning from the date of their deposit, which might or might not be the date that BlockFI can lend it out again.

I think the Basel II bank requirements state that Tier 1 capital for banks should be greater than 6%, and Block FI is close, at 5%.
Basel II also goes on to state that Tier 1 + Tier 2 capital requirements should be above 8%. So, Block FI is about $300 million short of 8%, if assists remain at $10b and do not grow. Again, this is assuming that the $500m is equivalent to Tier 1 capital.
https://en.wikipedia.org/wiki/Capital_requirement

Also, if insurance would reduce the dividend to zero, then that tells me that the insurance would be around 8% annually. That's some pretty expensive insurance!!! My next question is 'why is it so expensive?'. I don't have the slightest idea why.

To me, the biggest risk isn't BlockFI itself--it's who they give their money to. How many legitimate (and honest!) money managers gave their money to Bernie Madoff in good faith? They still lost money, even though they did everything right. So, BlockFI could be very well run, even exceptionally well run, but who are they loaning to so that they can provide 8% return to investors? This means that BlockFI must be charging 10% (or more!) interest.

Who would pay 10% interest in a zero-interest rate environment? Only a borrower who couldn't get money anywhere else at a lower rate. Which to me is an indicator BlockFI is engaged in low quality debt lending.

Added to all of the above, there's no deposit insurance, which means that BlockFI isn't a bank, just a company masquerading as a bank.

[MustacheAndaHalf]

Here's the answers I spotted:

https://coincentral.com/blockfi-review/

How is offering a 5.2% on BTC interest rate sustainable?
“The interest we are able to pay is based on the yield that we are able to generate from lending, which directly correlates to the market demand in the space (I.e. what rate institutions are willing to pay to borrow specific crypto assets, as it varies from asset to asset). We are bound by NDAs to discuss specifics (institutions, specific rates, etc).”

How about the 8.6% interest rate on Gemini Dollars? Can you talk about why Gemini?
“We are able to use stablecoin deposits to fund our consumer loans (average APR is ~10-13%) so we can afford to pay higher interest to GUSD / Stablecoin depositors.”

They also mention an SOC2 compliance audit by Deloitte, which was also reported on various websites related to crypto.  Not sure how to corroborate that, since Deloitte's website says nothing either way.

Things in it's favor: based in U.S., multiple rounds of funding, supposedly audited by Deloitte (can't verify that).  Compared to most crypto exchanges, that's pretty good.

I suspect all the high interest rates are teaser rates to draw customers in.  I wonder how they'll adjust the rates downwards without losing lots of customers?

[HeadedWest2029]

who are they loaning to so that they can provide 8% return to investors? This means that BlockFI must be charging 10% (or more!) interest.]who are they loaning to so that they can provide 8% return to investors? This means that BlockFI must be charging 10% (or more!) interest.

This is all answered in the pod and also upthread.  Basically, hedge funds, market makers with billions and billions and decades of experience (Fidelity, Susquehanna, and others I'm sure that have NDA's).  There's tons of arbitrage opportunities in crypto right now.  Price differences between exchanges, price difference between futures and spot price, hedge funds doing hedge fund things.  They've said in different interviews that their intuitional investors make somewhere between 10%-20% basically playing the arbitrage game and getting free money.  Whether that lasts as the market matures...your guess is as good as mine.   I think the insurance thing is mostly because no insurance company knows what the hell to do with crypto.  Traditional banking has a pretty well known risk profile and they probably just don't want to go near crypto.  If you are an insurance company and you insure it and it blows up...that's some serious career risk.

Who would pay 10% interest in a zero-interest rate environment?

Also answered in the pod, but prime brokers who provide capital to hedge funds aren't in the crypto game.  In lieu of that BlockFi stepped in and can charge 10% and they pay it because 20% is > 10%.  Retail borrowers are a different story, but the common thread seems to be people sitting on massive capital gains as early adopters that don't want to trigger taxes and are super bullish on bitcoin and don't really want to sell, but want to tap into the gains for life stuff.  I feel that's less defensible, but those folks are subject to tighter margin calls.

Thanks for the info on Tier 1 capital.  I had no idea if their ratio was bonkers risky or normal

[bwall]

who are they loaning to so that they can provide 8% return to investors? This means that BlockFI must be charging 10% (or more!) interest.]who are they loaning to so that they can provide 8% return to investors? This means that BlockFI must be charging 10% (or more!) interest.

This is all answered in the pod and also upthread.  Basically, hedge funds, market makers with billions and billions and decades of experience (Fidelity, Susquehanna, and others I'm sure that have NDA's).  There's tons of arbitrage opportunities in crypto right now.  Price differences between exchanges, price difference between futures and spot price, hedge funds doing hedge fund things.  They've said in different interviews that their intuitional investors make somewhere between 10%-20% basically playing the arbitrage game and getting free money.  Whether that lasts as the market matures...your guess is as good as mine.   I think the insurance thing is mostly because no insurance company knows what the hell to do with crypto.  Traditional banking has a pretty well known risk profile and they probably just don't want to go near crypto.  If you are an insurance company and you insure it and it blows up...that's some serious career risk.

Who would pay 10% interest in a zero-interest rate environment?

Also answered in the pod, but prime brokers who provide capital to hedge funds aren't in the crypto game.  In lieu of that BlockFi stepped in and can charge 10% and they pay it because 20% is > 10%.  Retail borrowers are a different story, but the common thread seems to be people sitting on massive capital gains as early adopters that don't want to trigger taxes and are super bullish on bitcoin and don't really want to sell, but want to tap into the gains for life stuff.  I feel that's less defensible, but those folks are subject to tighter margin calls.

Thanks for the info on Tier 1 capital.  I had no idea if their ratio was bonkers risky or normal

Prime brokers can get all the capital they want from the Fed at the Fed. funds rate of..... 0.25%. There are about 20 prime brokers in the USA, all household names to those who follow finance; Goldman Sachs, JPMorgan Chase, Bank of America, Citi, etc. I saw a handy list of them a couple of weeks ago, but can't find it now. Here's an example;
https://www.thebalance.com/what-is-prime-brokerage-4165497

So, I highly doubt that BlockFI is loaning out to prime brokers. I cannot imagine a scenario where Fidelity is paying 10% for money. Or market makers for that matter. Market makers generally have access to lots of capital at much lower rates, similar to prime brokers. Some companies in the crypto space might call themselves market makers, but in reality they're just speculators going very long or short.

Hedge funds would be willing to pay 10% or more. But, they can blow up from time to time and thus tend to be risky. Melvin Capital lost a cool $5blillion (over 50%) in January on GME, for example. Their short position on GME was a money printing machine since 2014, until it wasn't.

Retail investors using BlockFI as a margin loan might be willing to pay 10% or more. But what happens if the loans get called due to the volatility of crypto?  BlockFI had better have good controls in place, otherwise they'll lose everything as well. As an depositor, one has no way of knowing how good their controls are. Perhaps try to sign up for a loan with them and see how strict their terms are?

[HeadedWest2029]

Prime brokers can get all the capital they want from the Fed at the Fed.

Not talking about Prime broker / BlockFi relationship.  I'm talking prime brokers lending to hedge funds who are BlockFi's institutional customers.  So a hedge fund would normally have a relationship with a prime broker to borrow money, but when it comes to crypto the prime brokers won't lend to the hedge fund.  Enter BlockFi

Retail investors using BlockFI as a margin loan might be willing to pay 10% or more. But what happens if the loans get called due to the volatility of crypto?

You gotta listen to these podcasts.  You have good questions and seem interested, and honestly the CEO patiently works through these questions better than I could.  The margin call system is automated and operating 24/7 (as the crypto markets are) and worked in 2020 when there were 50% drops.  They also keep crypto on the sideline to facilitate liquidity so they don't have a situation where they have to margin call a bunch of people without enough buyers on the other side.  This is low on my list of concerns because their risk management team came from FinTech backgrounds, including their CRO who created margin call systems for nontraditional assets before coming to BlockFi.  Again, his word, but he's NEVER had a loss.  At BlockFi or otherwise.

CRO interview - https://www.youtube.com/watch?v=SYMF2yjn8TQ


In favor of you signing up for an account to borrow and see the LTV you get :)

[Icecreamarsenal]

I'm starting to put some more into blockfi and have reached low 5 figures.  Hopefully it doesn't go the way of BitMEX.

https://www.vanityfair.com/news/2021/02/the-rise-and-fall-of-bitcoin-billionaire-arthur-hayes?utm_source=pocket-newtab

[HeadedWest2029]

Indeed.  That's a wild story

One hundred times leverage available to retail traders and incorporated in Seychelles.

Yikes

[firemane]

I like the idea of it, but it sounds like it would be a bit of a hassle to use. One of my core values is low hassle. Seeing that I would either have to buy lite coin for the lower fees and send to them, then convert to the stable coin incurring multiple taxable events, or do a wire transfer may be nudge to it being a deal breaker for me, considering there is also some unknown risks associated with it.

[HeadedWest2029]

Seeing that I would either have to buy lite coin for the lower fees and send to them, then convert to the stable coin incurring multiple taxable events, or do a wire transfer may be nudge to it being a deal breaker for me

I don't understand this.  Are you saying you currently have Lite coin and would want to use it at BlockFi? 
I did none of this.  I just ACH'd USD in from my savings account and it purchased GUSD by default.  No taxable events other than interest at the end of the year.

[firemane]

Interesting. I read in the past that arch wasn’t an option and you could only transfer other crypto to it or use wire transfers for a fee. Maybe it’s worth checking out then as another diversifier

[Dgmp]

ACH is an option, but only $5000 in a 24 hour period.  ACH they say takes 3-5 days to clear, but my experience has been it takes a bit longer then that at Blockfi.

I deposited .5 BTC and it became immediately available in a few hours (Go Crypto).
I've deposited $20k in cash which became GUSD.  I have $25k more of USD that is in a "pending" status and will become GUSD when cleared.

MY goal is to get ~$500 in monthly interest that is paid in bitcoin.

You can see daily how much interest you have accrued which is pretty neat and dwarfs what this cash earned me in a savings account.

[chicagomeg]

I threw $100 into another company called Donut on a whim from an Instagram ad a few weeks ago. Mostly just to give myself some time to noodle on it & decide how much more I'm willing to put in to this concept. I'm not terribly impressed with the level of information they have available though, and they have this uber gimmicky UI that shows your interest out to 9 decimal places which drives me nuts. Going to do some digging on BlockFi, thanks for the info that's been posted so far.

[effigy98]

I think it is funny how many people bring up bitcoin does not generate dividends...

[billy]

I replaced my bonds in my portfolio to stablecoins on Celsius Network (I have a little bit in blockfi, but don't add more as Celsius offers higher interest), and I'm happy for the switch. I plan on firing in a year and my conservative position of stablecoin "bucket" will be full in a couple days. So I should stop contributing to my stablecoin position, and start just contributing more to VTSAX in my taxable broker account (all my retirement accounts are maxing out)?

Things I'm looking at is, interest is taxed as normal income, then again when I fire my taxable income will be very low after factoring in MFJ standard deduction. On the other hand long term realized capital gains tax will equate to no tax, and VTSAX has a higher expected return.

[maizefolk]

You folks are braver than I am. I'm fascinated to see how interest bearing crypto accounts play out. At the moment I cannot wrap my head around why stablecoins linked to the USD are generating so much higher interest rates than USD itself and that makes me nervous.* Remember how excited people got about the higher returns on LendingClub for a few years?

In any case, thank you for the people willing to put their actual money on the line to test these products out. Hope you continue to post with your experiences. 

*I can understand why loaning out bitcoin would pay higher interest than USD giving the independent inflation/deflation risk.

[HeadedWest2029]

I can understand why loaning out bitcoin would pay higher interest than USD giving the independent inflation/deflation risk

That has nothing to do with it.  It's simply demand based on the amount of return the institutional customers are currently able to get via arbitrage opportunities (whether it's bitcoin derived or stablecoin derived loans), often in a market neutral way.  One such way, was historically the premium to NAV on GBTC now trading at a discount.
https://ycharts.com/companies/GBTC/discount_or_premium_to_nav

If these arbitrage opportunities dry up, and I suspect they will over time as the market matures, the interest rates will necessarily go down.  But for now, it's essentially "free money".  Not that this accounts for all the lending activity.  The GBTC trust arb accounts for something like 5-20% of the lending activity.

Also, LendingClub / Prosper were uncollateralized loans.  Retail borrowing at BlockFi runs on a margin call system.  Institutional borrowing at BlockFi is done by mega hedge funds, not cousin Ron taking out a loan to consolidate his 20 credit cards.

Sure, there's some opaqueness there because BlockFi and hedge funds aren't going to lay out all their strategies for others to copy, but I'll take this bet all day, every day, over Lending Club.  Time will tell

[maizefolk]

HeadedWest2029, so if I understand you correctly, your model is that the higher interest rates folks are willing to pay to borrow in stablecoins pegged to the dollar vs the dollar itself have to do with the relative friction of borrowing from places like BlockFI vs borrowing in US dollars and converting those borrowed dollars into stablecoins?

[HeadedWest2029]

My understanding is hedge funds typically get loans from prime brokers.  Prime brokers by and large, will not lend to hedge funds or market-makers for cypto-based trading activity which leads to a cash supply shortage for these arbitrage trades.  I'm guessing if prime brokers were willing (or able? not even sure if they're legally allowed to) to provide liquidity in this market, they would go there instead and borrow in USD.  At least, this is what I've gleaned from listening to various podcasts.

[maizefolk]

Perhaps we're listening to some of the same podcasts? At least that sounds a lot like what Jeremy Allaire was talking about on Real Vision a couple of weeks ago.

So to repeat back to you what understand you to be saying this time, the issue isn't about friction in transferring US dollars to stablecoins but that the people who normally lend to hedgefunds aren't willing to loan to hedgefunds for cypto. So the interest premium at places like BlockFI actually has nothing to do with borrowing in stablecoins, but that the loans clients can take out are allowed to be used to purchase other -- nonstable coin -- cryptocurrencies?

[HeadedWest2029]

I believe that assessment is correct.  I guess there's minimally less friction because stablecoin is already stored at crypto exchanges where these hedge funds have accounts, but the interest rate isn't inherently a stablecoin story itself.  They (hedge funds / market makers) also get arbitrage profits from variations in crypto pricing between global crypto exchanges.  So the hedge funds could have accounts at multiple exchanges where bitcoin is priced at $55,600, $55,620, $55,700, etc.  And they just move money around.  Don't believe I've ever listened to Allaire.  Should I?

Some podcasts I've listened to with the CEO, Zac Prince
https://onthebrink-podcast.com/zac-prince-blockfi-2/
https://www.theinvestorspodcast.com/bitcoin-fundamentals/btc013-bitcoin-lending-borrowing-w-blockfis-zac-prince-mark-yusko/
https://awealthofcommonsense.com/2020/11/talk-your-book-investing-in-bitcoin/
https://awealthofcommonsense.com/2021/01/talk-your-book-crypto-as-an-emerging-store-of-value/

With the CRO
https://www.youtube.com/watch?v=8Mtyyf4RnUA
https://www.youtube.com/watch?v=SYMF2yjn8TQ

[maizefolk]

Given what you and I have already talked about, my guess is that you would find at least the particular podcast I listened to with Allaire would be a lot of review rather than new information.

Anyway, this mental model of why people are willing to pay much higher rates to borrow money which can be invested in cyptocurrencies than the prevailing interest rates for USD borrowing (which those same people aren't allowed to borrow at if they're going to use the loan for cyptocurrency transactions) starts to make sense for me. As you say, one potential outcome is that the places hedge funds would normally borrow from realize they are being unnecessarily conservative and start lending for these purposes and the stablecoin interest rates drop to be quite similar to the interest rates of the currencies they are pegged to. Another would be that it turns out the normal lenders were right to avoid lending money to finance crypto transactions (something blows up to the extent collateral and/or equity cushions cannot absorb and the lenders take a loss).

[Icecreamarsenal]

My understanding is hedge funds typically get loans from prime brokers.  Prime brokers by and large, will not lend to hedge funds or market-makers for cypto-based trading activity which leads to a cash supply shortage for these arbitrage trades.  I'm guessing if prime brokers were willing (or able? not even sure if they're legally allowed to) to provide liquidity in this market, they would go there instead and borrow in USD.  At least, this is what I've gleaned from listening to various podcasts.

Thank you for this succinct explanation, really gets rid of the technobabble and clears it up.

[SuperSecretName]

I can understand why loaning out bitcoin would pay higher interest than USD giving the independent inflation/deflation risk

That has nothing to do with it.  It's simply demand based on the amount of return the institutional customers are currently able to get via arbitrage opportunities (whether it's bitcoin derived or stablecoin derived loans), often in a market neutral way.

Not just institutions.  I borrowed tether to leverage up for a few weeks, and am paying about 50% APR. 0.15% Daily.  About $90 day/BTC.