TD₿: BlockFi and the Mystery of Finance by Zane Pocock
TL;DR The yield was always too low for the risk in these crypto interest-bearing accounts.
Hey Bitcoiners,
Yesterday, cryptocurrency lender BlockFi officially filed for Chapter 11 bankruptcy.
Once the darling of popular VC firms like Tiger Global, Bain Capital, DST, Pomp Investments, and Susquehanna, BlockFi has now become the latest casualty in the recent crypto credit contagion.
BlockFi came on the scene quickly when it launched its first product in 2018. It advertised its product as a way to earn “as high as 9.25% interest” on cryptocurrency deposited into its BlockFi interest accounts. This was despite the fact that the percentage varied from month to month and depended on the volume and quality of assets deposited in the account.
This misrepresentation of the facts put them in hot water and led to BlockFi paying $100 Million to Settle with the SEC and 32 States over its crypto lending business earlier this year, as its interest accounts were deemed by the SEC as unregistered securities.
But on top of this, in my opinion, BlockFi failed to properly communicate the risks involved with these interest-bearing products to retail investors and was not transparent about how it rehypothecated user funds.
Fellow Swan Zane Pocock explains, “When you deposit your bitcoin into a BlockFi Interest Account, you’re ultimately earning interest on the risk of BlockFi defaulting as an outcome of the decisions they make with your bitcoin.”
The truth is, the yields that BlockFi offered, even at their highest point, were way too low for the risk that retail investors were taking when they deposited their bitcoin in these accounts.
As it turns out, the team at BlockFi was rehypothecating the funds and making risky bets similar to ones that a hedge fund would make, which eventually blew up in their faces and led to their bankruptcy at the expense of their customers.
Now all of their clients’ funds will be tied up in bankruptcy proceedings for years, and many of these unsecured creditors will see pennies on the dollar when they do finally get closure. Alex Thorn laid out the extent of BlockFi’s woes below.👇
The truth is, the yield was used to attract retail investors and entice them into giving up ownership of their bitcoin and taking on counterparty risk so that BlockFi could use the bitcoin to benefit itself.
The moment an individual gave up custody of their bitcoin to BlockFi, they no longer held bitcoin. All they held was a risky IOU with an inexperienced lender.
A BlockFi user took on all that risk…for an extra measly single-digit yield. The real risk was that the counterparty would go bankrupt, as many individuals who held their bitcoin on BlockFi are just now finding out.
Zane Pocock wrote a piece in 2019 titled “BlockFi and the Mystery of Finance” that outlined the hidden risks associated with BlockFi’s interest-bearing accounts that proved prescient. (03/29/2019)
BlockFi was just one crypto lender, but plenty of others still operate today. Nexo, crypto.com, and Kucoin…all of them are still luring retail investors with the promise of yield to get them to deposit bitcoin on their platforms. Don’t give them your bitcoin! You are the yield!
It’s simple, but it bears repeating: Not your keys, not your coins.
Tick tock next block,
Sam Callahan
PS - If you’re reading this and you have not taken self-custody of your bitcoin yet, Swan will help you! Come to our upcoming free webinar this Thursday.👇
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“But where does the yield come from? - Allen Farrington, Bitcoiner and Writer
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