With the cryptocurrency market as hot as it has ever been, several of the most established companies in the space have made plans to go public. Although most of the excitement has centered around Coinbase’s direct listing, especially because private sales have valued the exchange at approximately $100 billion, perhaps the more interesting company that investors should analyze is BlockFi.
Unlike Coinbase, which operates as an exchange for both retail and institutional clients, BlockFi is essentially a modern-day crypto bank (without insurance) that pays account holders significantly higher interest than traditional banks. It is able to pay such high levels of interest because it’s charging even higher rates on the lending side. As long as BlockFi continues to successfully capture the spread between the rates it pays and the rates it collects, it should be able to remain profitable.
Outside investors and venture capital firms have taken notice. Earlier this month, BlockFi raised $350 million through a Series D round co-led by Bain Capital Ventures. Based on that raise, the company is valued at approximately $3 billion.
So, all is well, right? Not quite. Despite the company’s strong business model and experienced leaders, there are significant risks that customers need to understand.
'Extreme market conditions'
Several analysts and influencers within the crypto space are excited about the returns that might be generated this year. In fact, according to the four-year cycle theory, this is the year where traders may once again experience the euphoria that occurred in 2017. Plan B’s stock-to-flow model suggests that bitcoin could reach six figures at some point this year.
If that does happen, there will likely be some wild swings on the way there, just as there were in 2013 and 2017. Networks will be congested, Ethereum gas fees will be outrageous, and trading platforms will become overwhelmed with the amount of traffic. While those are problems that traders can deal with, one issue they won’t accept is having their ability to withdraw suspended. But that’s exactly the risk that BlockFi lists in its interest-bearing account terms:
While some of those risks are expected, having withdrawals turned off due to volatility is problematic for a few reasons. Given BlockFi’s extremely limited selection of cryptocurrencies (BTC, ETH, LTC, LINK and stablecoins), customers may want to transfer funds to pursue trading opportunities elsewhere. In fact, during normal times it still takes more than 24 hours to receive a withdrawal and significantly longer on the weekends.
If a customer submits a withdrawal request on a weekday (Monday-Thursday) before 5 p.m. ET, the withdrawal won’t be processed until 8 p.m. ET on the following business day. If the withdrawal request is submitted on Friday, it won’t be processed until Monday by 8 p.m. ET. The weekend lag is odd considering that crypto trades 24 hours a day, 7 days a week. Why does it take so long?
BlockFi states that the delay is for a security hold, but each account is know your customer-verified at opening. Exchanges such as Coinbase and Kraken process transfers almost instantly, so BlockFi should be able to do so as well. This is where the company’s business model and risk management process come into question.
One of the main points highlighted in the company’s mission statement is transparency builds trust. BlockFi claims to communicate transparently in all aspects when it deals with teams, clients and investors. However, the company’s website doesn’t list many details on the risk management framework for managing assets. When asked about that on a recent “On The Brink” podcast, Zac Prince, BlockFi’s CEO, said the reason for that was nobody wants to read it. That’s not exactly true because customers with large account balances absolutely want to know whether their money is safe. Blind trust only goes so far.
Are Celsius and Gemini a threat?
Within centralized finance (CeFi), BlockFi and Celsius have been the most widely used services for customers wanting to earn passive income on their crypto assets. Interestingly, Celsius Network was recently valued at $3.1 billion by Alpha Sigma Capital, which puts it at about the same valuation as BlockFi.
Although both platforms operate in much the same way, Celsius does offer several advantages. The first advantage is withdrawals are processed on the same day. The second advantage is while Celsius pays interest on 39 coins, BlockFi only does so on 10 coins. In addition, earlier this week, BlockFi announced it would decrease interest rates for BTC and ETH. This will sting the most for crypto whales as large balances are most impacted. However, much like BlockFi, Celsius is not without risk. Last year, CoinDesk published an article detailing a few questionable practices in which the company engages such as giving out un-collateralized loans and re-hypothecating funds used as collateral.
Another important factor that customers may want to consider is that BlockFi pays out interest on a monthly basis, whereas Celsius pays out weekly. All else being equal, I’d much rather get paid four times a month and let that interest compound.
Until recently, BlockFi and Celsius were the main players in the CeFi lending space. But in early February, Gemini launched Gemini Earn, a program that will allow customers to earn up to 7.4% APY on their crypto assets. Although the program offers more coins than BlockFi, the rates are also significantly less. Given the low rates, Gemini Earn probably isn’t a threat to steal business away from either BlockFi or Celsius at this time. However, it could mean that existing Gemini customers who were considering using other services may opt to keep their assets with Gemini.
Not your keys
As BlockFi continues to inch closer to a possible initial public offering, it’s important to get a handle on what the company offers, what the risks are and whether competitors are positioned to steal market share. Although most investors are eager to earn passive income on their crypto, they should fully understand the risks of keeping crypto assets on a centralized platform like BlockFi.
There is a common saying in crypto that investors might want to take to heart: “Not your keys, not your coins.”