Leah Zitter

Leah Zitter

BlockFi (Review)

November 19th, 2018

BlockFi Review

Summary

Secured lender BlockFi uses cryptocurrency as your collateral. If you would redeem your crypto for cash, you’d likely end up paying more for capital gains taxes (and, in some states, for federal taxes, too). BlockFi uses Bitcoin, Ethereum, Litecoin or Gemini’s GUSD for security. Once the balance of your loan is repaid, BlockFi returns your crypto.

BlockFi states that it operates under Article 9 of the Uniform Commercial Code, which governs secured lending, and that it files financing statements, or UCC-1 Forms, with its borrowers’ states. These Forms protect your security in case BlockFi defaults or bankrupts.

About BlockFi

New York-based BlockFi was launched 2017 by Zac Prince and Flori Marquez, two crypto-enthusiasts with a background in sales and business development as well as in portfolio management.

Early on, leading FinTech investors that included ConsenSys Ventures, Kenetic Capital, PJC, SoFi, Purple Arch Ventures, Lumenary, and Galaxy Digital invested millions in the company.

To date, BlockFi services 44 states, including California. It plans to add another two states and to expand to international markets, more specifically to India, Mexico, and South America, in 2019. The company is also designing prototypes for more lending products and working on expanding its range of digital currency to Ripple, Monero, and Bitcoin Cash, among others.

BlockFi Loan Offerings

BlockFi offers consumer and business loans, ranging from $5,000 to $250,000. Prince plans on yanking that amount to $2,500,000 in 2020. BlockFi applicants need caches of BTC, ETH, LTC or Gemini’s GUSD, worth at least $1,5000. Applicants pay BlockFi a 1-2% origination fee that depends on the applicant's requested loan amount, credit history, and location. BlockFi interest rates start at 8%, and also depend on the loan amount, credit history, and location. Loans extend over a 12-month term. Example: If you took out a loan for $10,000 with a 8.5% annual interest rate, you’ll pay BlockFi $70.83 per month (interest and origination) with balance paid by the 12th month.

BlockFi claims its rates are cheaper than competitors. BlockFi may have a higher origination fee, but, as the Table below shows, its overall APR is lower by, at least, five points from competitors, meaning you pay less over the duration of the loan.

On top of that, some lenders offer amortized loans that make you pay interest and principal every month, while BlockFi customers only pay interest during their monthly payments, with a lump sum at the end.

BlockFi Loan-to-value (LTV)

BlockFi calculates its loan-to-value (LTV) ratio as Loan Amount divided by Collateral Value. The LTV determines the amount of crypto collateral you need to provide BlockFi before receiving your loan. The company uses a 35% initial loan to value ratio to accommodate a certain number of trigger events and to provide its clients with breathing room in the event of market volatility. It caps its LTV at 50% but offers to change that rate depending on the customer’s needs.

How BlockFi Works

Borrowers drop their crypto assets of $15000 into a secure wallet run by a registered custodian called Gemini Trust Company, LLC. BlockFi wires their dollars to their bank account, while it holds their crypto assets in BlockFi’s Gemini address. For GUSD users, BlockFi sends the fiat to any wallet address they like. Come the 12th month, and borrowers either repay the balance of their loans, or BlockFi sells their crypto to cover their default.

Pro tip: Unlike competitors, BlockFi permits you to pay off your debt early, so you reduce your interest. You can also use USD (not only crypto) to repay your monthly interest.

BlockFi’s Application Criteria

BlockFi owners evaluate three core conditions:

  • That the applicant has least $15,000 in crypto assets.
  • That there are no liens on assets (for example, attorney liens, tax liens or Homeowner Association (HOA) liens).
  • That the applicant shows no bankruptcies.

These are the most important items. On top of that, BlockFi also considers KYC/AML details, like the applicant’s birth date, address, social security number, wallet public key, and bank information. For security purposes, BlockFi also wants the reason for your loan. BlockFi does not pull hard or soft checks on customer credit, so your credit score will not be affected.

BlockFi’s Loan Terms

If BlockFi approves your application, it gives you 35% USD of your collateral. So say you have $15,000 in crypto assets, BlockFi loans you anywhere up to $5,250. As an aside, BlockFi reports your loan performance data to major credit bureaus, which leverages your credit rating.

What Happens If Your Crypto Appreciates?

Events may happens that raise your crypto gain while BlockFi retains your assets. So, for instance, an airdrip or fork adds new tokens to your collateral. Or your digital currency appreciates during that time. In the first instance, BlockFi retains those tokens and returns them to you once your BlockFi loan is repaid. In the second instance, you have two options: Either, BlockFi leaves you the remainder once the loan is repaid, which means all it deducts is the value of the loan - the surplus is yours. Alternatively, you can ask for more USD.

BlockFi Margin Calls/ Liquidation

On the other hand, you may have a crypto margin call where your Bitcoin collatarel depreciates. BlockFi estimates the loan-to-value (LTV). If the borrower is below 70%, it gives them 72 hours to either replenish their crypto or to repay the loan and accrued interest (the loan balance). If borrowers fail to do one of either and their LTV reaches 80%, BlockFi sells a certain amount of their collateral to rebalance the loan to a 70% LTV.

Usability & Design

April, 2018, BlockFi paired with blockchain-based Bloom to expedite its service through the network's Bloom ID and Bloom IQ apps. Bloom ID provides ID verification, while Bloom IQ reports and tracks current and historical debt obligations and payment information that are tied to the user’s identity.

In contrast to banks and traditional finance institutions, where the credit-funding process typically takes as long as seven days, and in some cases longer, Bloom network helps BlockFi seamlessly evaluate and process loans within minutes. In contrast, too, to the traditional lending institutions that typically require hefty documentation and a cumbersome back-and-forth process, BlockFi uses Bloom to securely and transparently process data at far cheaper cost.

To elaborate, BlockFi’s online loan application takes less than two minutes to complete, and you get an answer by the next business day. (If your application is received within business hours, you can expect a decision within two hours). Once accepted, you’ll find your loan in your bank account within 90 minutes.

On top of that, Bloom’s network makes the entire UX and mobile system seamless and transparent for all users, including those unfamiliar with crypto. Bloom also gives them full user control with an automated notification system that alerts users if crypto prices precipitously decline.

BlockFi uses GUSD which enables BlockFi to offer loan options to customers outside the standard business hours of 9.00am-6.00pm and to do so on weekends, too.

Conclusion

Based in New York, BlockFi is a secured non-bank lender that offers USD loans to crypto-asset owners who collateralize the loan with their cryptoassets. BlockFi holds clients' Bitcoin and Ether with a registered custodian and issues loans in USD to their bank accounts. Currently operating in a beta launch, the company lends in 35 US states to retail investors and companies. BlockFi provides a fast, transparent and seamless lending process to credit-approved applicants who have at least 1,5000 in crypto value.

BlockFi is invaluable for those who want to hoddle their crypto while getting cash for that massive purchase. BlockFi is also an alternative to banks and traditional financial institutions that are averse to accepting bitcoin and slow to doling out loans. Unconventional lenders are not only more risk-averse but also extremely expensive, while unsecured loans cost you more. On top of that, with BlockFi, if your crypto value appreciates during loan term, the value of those holdings automatically increase and you get back more of your crypto than you invested. If you cash out on crypto, you miss out on gains.

A BlockFi loan can have a positive impact on your credit score, while gains that have accrued on your cryptoassets during your loan tenure are not taxable. Further, interest charged on a BlockFi loan may be tax deductible, depending on how you use the loan. March 21, 2018, HighYa reviews ran a capital gains tax calculation and concluded that with a BlockFi loan, you save at least $1,718, depending on where you live.

On a wider scale, ConsenSys managing partner, Kavita Gupta noted that BlockFi may not only scale crypto and make it more popular (thereby leveraging its value) but also reduce market volatility, since using cryoto as security may inevitably make it more mainstream. Those are the positives.

On the other hand, BlockFi only helps applicants who have accrued at least $15,000 in Bitcoin, Ether, Litecoin or GUSD. The company also saves you money only if you live in states that charge capital gains tax. (Of the nine states that don’t, you may save by redeeming crypto for cash). Finally, if you rely on traditional security like real estate, you may get lower loan rates with lenders who accept these.

BlockFi chief executive Zac Prince states BlockFi’s purpose is “to be the leading lender in the cryptoasset market and a leading provider of low cost credit globally”. Its hope is that, by doing so, it would subsequently popularize crypto. It’s only the very rich crypto-enthusiasts, however, who tend to have crypto assets worth $15,000. To expand its service and make crypto more available for the masses, BlockFi may want to consider lowering its loan terms.