BlockFi: The Great Banking Disruptor?

A deep dive into the business model, opportunity, and competitive landscape

By Litquidity Capital Aug 30, 2021

Welcome to the inaugural edition of the LitCap Deep Dives, a new series where we’ll attempt to break down businesses in a fun and interesting way. We’ll dive into the history, metrics, business model, and opportunity of companies doing cool things and changing the game. Think of it like an investment memo but made public. Some may be sponsored and others might be me staffing Karl over the weekend to eat up his free time. This one is sponsored, but it's a pretty cool company I've actually been following for a few years and would have written about regardless (and even invested in... had I gotten the chance *cough cough*).

This first deep dive is an attempt for me to explain an exciting company playing in the nexus of cryptocurrency, fintech, and Wall Street.

That company is BlockFi.

You might be asking yourself “but Lit, you always troll crypto traders and Bitcoiners on IG and twitter, I thought you were an anti-crypto boomer”. 

Au contraire mon frère. I'm anti-Michael Saylor type Bitcoin maximalists who sound like possessed cultist scammers telling you to sell all of your possessions, stop eating food, sacrifice your grandma, and live on the streets to maximize the amount of cash available to buy Bitcoin. The people who get triggered at people asking sincere questions around valuation, adoption, comparison to other blockchains, etc. If you know, you know. 

Bitcoin, cryptocurrency, and blockchain technology are definitely here to stay and I think thoughtful education around the area is much needed (and severely lacking).

Hopefully y’all learn a thing or two here. Let's dive in.

BlockFi: Exec Sum

BlockFi is a crypto-native financial institution that was founded by Zac Prince and Flori Marquez in 2017. The company is bringing the traditional and new-age crypto industries together by offering banking products (loans, savings accounts, credit card), a dope app, and strong yields to its clients (in a world where traditional banks are basically paying like 0.0000001% in interest on checking/savings accounts).

The company has raised $450M to date from investors including Bain Capital Ventures, Tiger Global, etc. and is currently valued at $3B. 

Despite all the buzz around “decentralization” in crypto land, BlockFi is not decentralized. It’s a regulated firm with over 900 employees and is headquartered in Jersey City (whatup GS back office).

On the “TradFi” (Traditional Finance) to “DeFi” (Decentralized Finance) spectrum, BlockFi sits in the middle in what’s known as Centralized Finance (“CeFi”) along with the likes of Coinbase and Gemini. (More on CeFi in just a bit…)

Operating in the CeFi space allows BlockFi to “bank” the crypto community like a traditional financial institution would, but with the added benefit of having the human element that can mitigate risks and protect its clients in a way that truly decentralized protocols cannot offer. And we know there’s a lot that could go wrong with protocols that can be exploited or attacked... 

If you want to check them out and get up to $250 for opening up an account courtesy of BlockFi & Litquidity,click the button below:

We’ll now dissect BlockFi’s business model and explain their business model, the products they offer, and what the future looks like for BlockFi and the CeFi / Fintech space at large. 

Now let's get into the nitty gritty.

So… what exactly is CeFi? 

CeFi offers a blend between the traditional realm of finance (“TradFi”), such as retail banks, and fully decentralized crypto protocols that have no management teams, no support teams, and can be intimidating to non-tech savvy folks (“DeFi”). 

CeFi allows people to easily “on-ramp” onto cryptocurrencies by offering a very easy interface and user experience in order to buy and deal in crypto. BlockFi allows you to start buying and earning crypto without jumping through twelve hoops that your token “Crypto Nerd” friend has to walk you through step-by-step. (Ever tried buying SafeMoon without having any prior crypto knowledge?)

If you’re a “crypto curious” individual who wants to get into crypto but are intimidated by the whole ecosystem, CeFi and BlockFi can help you get your feet wet.

Is BlockFi legit?

If you've been following me the past few years, you know I hold my partnerships to a high standard and try not to peddle crap products that suck, don't work, are scammy, etc.

BlockFi is legit. Period. 

BlockFi has raised ~$450M to date and most recently raised a $350M Series D at a $3B valuation co-led by Bain Capital Ventures, partners of DST Global, Pomp Investments, and Tiger Global. BlockFi’s other investors include reputable Silicon Valley VCs and crypto investors such as Winklevoss Capital, Coinbase Ventures, SoFi, Paradigm, and more.

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Pretty stacked roster of funds backing it. 

They're crushing it in their KPIs as a 4 year old company. See below for a few of the big ones:

  • $50M monthly revenue (up from $1.5M last year)
  • $15B of assets on the platform (up from $1B last year)
  • 0% loss rate across its lending portfolio (big banks would lick their chops at this)

On top of all of this they’ve built out a team with experience in managing risk at traditional financial institutions, so it’s not their first rodeo.

They offer four primary products to retail investors (which resemble traditional bank offerings) and are quickly becoming a full-fledged financial institution for crypto investors. 

The four offerings:

  1. Interest Accounts
  2. Trading Accounts
  3. Crypto-Backed Loans
  4. Credit Card

We’ll dive into each of these and explain why they’re compelling.

1. Interest Accounts

As everyone here can confirm, traditional bank savings accounts offer complete dogsh*t in savings rates (even though some banks still refer to them as “high yield” accounts). Not only will these low rates yield you less than the price of a basic Midtown lunch per year, you’ll also be outpaced by inflation (yes, even the non-transitory kind) so you’re really coming out behind on parking your money at the TradFi banks.

BlockFi is flexing hard on the traditional banks with their Interest Accounts offering. They offer up to 8.0% APY on stablecoin (i.e. tokens pegged to a currency like the US dollar), 4.5% APY on Bitcoin deposits, and can pay the interest in USD stablecoin OR the crypto asset of your choice (so you can earn crypto while you save crypto - see meme below). 

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Remember, this is a pretty new concept to get paid interest in an asset that fluctuates relative to the US dollar. If you got in early, that’d obviously be a significant appreciation over time. So not only are you earning interest on your money, your interest is appreciating (or depreciating if we slip into another bear market).

I know y’all like charts so it’s time for a “Power of Compounding” example to show you how BlockFi wins in the long run. Let's start with a theoretical $100k deposited into BlockFi's interest account and compare it to a traditional big bank (like Chase, BofA, Wells Fargo, etc.):

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Kind of a no brainer, right?

So I know you’re probably asking yourselves: “How tf are they able to offer these rates when banks can’t? Why tf has my cash been getting eaten alive by inflation at my regular bank? This some mf bs”

Here’s how they're able to offer these rates: 

1. BlockFi is not FDIC insured. If they get wiped out, so does your money. As you’ve heard since the beginning of time, “higher risk = higher reward”. Now that’s not to say that BlockFi is walking into a chop shop where you’re virtually guaranteed to be out of your money. They take risk seriously though, with a strong risk management team and strategies in place. 

Watch this video with the company’s Chief Risk Officer Rene van Kesteren, a former Managing Director in Equity Structured Finance at Bank of America Merrill Lynch, to understand how they think about it:

2. They lend out money at higher rates than banks. This one is a little more nuanced. If you’re familiar with retail banks, one way they earn money is through lending out money and collecting fees and interest on that. 

Where do they get the money to loan out? Customer deposits. 

How do they attract customer deposits? Offer them interest on their cash balances sitting at the bank. 

How are they able to offer interest on those deposits? Lend out the money at a higher rate to a borrower, pay interest to customer deposits, and pocket the difference. This is a really basic way to explain Net Interest Margin. 

Now that we got that out of the way, here’s how BlockFi is able to offer higher rates than traditional banks can...

BlockFi is running a ~10% average weighted APR on its retail loans as of early 2021 (according to The Block) and is able to offer higher APYs to clients while still maintaining a healthy spread. So higher rates to borrowers allows them to pass through higher interest to client deposits and still allows them to pocket the margin. 

To dive a little deeper, these rates are not directly tied to crypto prices, they’re based on the availability of good ol’ arbitrage. BlockFi is capitalizing on highly profitable basis trades on bitcoin futures that hedge funds are running and are willing to lever up on to amplify their returns. Traditional banks won’t lend hedge funds the money to run risky crypto futures trades, so BlockFi is essentially stepping in to fill the void (a lucrative void, at that). Here’s a primer on basis trades if you want to dive deeper into that. 

To keep it high level, it’s an arbitrage play that isn’t instantly closed out because

  1. Large institutions aren’t able to simply go onto crypto exchanges and scoop up crypto
  2. Traditional banks don’t like lending money for crypto trades

BlockFi fills this gap and funds the loans through deposits onto their platform.

As with all arbitrage plays however, they tend to get closed out as others swoop in to get a piece of the action. BlockFi’s rates will likely come down over time but that will require changes at the large traditional institutions (and we all know how slow those fossils move and how highly regulated they are...)

Even then, BlockFi will be able to diversify their business enough over the long run to not be reliant on these high interest accounts to attract clients. But for the time being, their high interest rates are a lucrative draw for users looking for relatively safe yield.

The way I look at it, if I’m going to have cash in the bank, I’d rather have it earning 8.0% on BlockFi vs. 0.01% in a Chase bank account.

2. Trading Accounts

It’s worth noting that BlockFi has recently come under regulatory scrutiny, with several states including Texas, New Jersey, and Kentucky issuing cease-and-desist orders. The states allege that BlockFi is violating securities laws by pooling deposits and lending them out to customers at a higher rate. To me, that smells like a load of horsesh*t, because that’s essentially the same thing traditional banks do… the only difference is that they’re unable to capitalize on the basis trade arbitrage. Once again, government regulation rains on a parade of something that customers actually benefit from. BlockFi has responded to these cases publicly and will formally present evidence to regulators to show how they’re operating within the law. You can read more about this here.

The way I look at it, if I’m going to have cash in the bank, I’d rather have it earning 8.0% on BlockFi vs. 0.01% in a Chase bank account.2. Trading AccountsBlockFi allows its clients to buy and sell 12 different cryptocurrencies. Their offering is similar to Coinbase and Gemini in that it’s an easy way to buy crypto and it’s centralized, but with fewer assets available than these exchanges. And that’s understandable right now because it’s not their core product but it’s got some positives compared to competitors and it’s a growing revenue stream for the company over time. 

The main difference here is that BlockFi offers lower trading fees than Coinbase. If you’ve used Coinbase, you know fees can be ~3-4% per trade, plus a spread on top (or 0.5% + spread for Coinbase Pro). BlockFi does not charge transaction fees, but it does take a spread that averages ~1%. Another advantage of BlockFi relative to the likes of Robinhood and PayPal is that you can actually move your crypto off the platform. If you’ve bought crypto on Robinhood, for example, you don’t really own your Bitcoin. You can’t transact with it. 

While not the cheapest option out there, like Binance or FTX that more experienced crypto types use, it’s a good alternative that's easier to use for crypto newbs with lower fees and it’s all under one roof like a traditional full-service bank. 

3. Crypto-Backed Loans

On BlockFi’s platform, you can take out one-year loans secured against your crypto if you’re looking to lever up for a big purchase but don’t want to sell your precious Bitcoin (or other coins for that matter). Rates for these loans are available for as low as 4.5% interest.

“How does a “crypto-backed loan” work on their platform?” 

BlockFi is able to issue loans with competitive interest rates while protecting their downside by HODLing onto your crypto as collateral. Their loans start at a 50% LTV (or Loan-To-Value for the uninitiated) which means you gotta put up 2x as much crypto as you’re looking to borrow. Want to take out a $50k loan? Gotta put up $100k worth of the crypto of choice. This helps BlockFi protect against huge downward swings in pricing (as we know happens frequently) by giving them a 50% cushion. If prices drop below certain thresholds, they’re gonna ask for more collateral just like a TradFi bank would. To get the best rate on your loan, you’ve got to lower the LTV. Simple risk / reward trade offs.

What’s impressive about BlockFi’s Crypto-Backed Loans offering is that they have not had to liquidate any clients even in prior sharp drawdowns (*big banks have left the chat*)

Quick sidebar: In my opinion, the way BlockFi handles their loans makes a strong case for CeFi compared to DeFi. CeFi companies actually have people you can reach out to in case there are questions / issues, which comes with slightly higher costs/fees but you pay for customer support, risk management, and the human element. On DeFi platforms, you’re on your own. If there’s a huge selloff or if you accidentally fucked something up, you’re shit out of luck. Also, check out this recent DeFi cyber-heist that led to hackers stealing ~$600M worth of digital tokens from a decentralized platform. 

Anyways, long story short: Their loan rates are great and they’ve got strong risk management protocols to avoid big messes.

Last, but not least…

4. Credit Cards

I’m sure pretty much everyone here has a credit card so this should be incredibly straightforward to understand. 

BlockFi offers a credit card that lets you earn rewards. If this is a foreign concept to you, you’re ngmi

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What makes their card different? The BlockFi Bitcoin Rewards Card allows its clients to earn an unlimited 1.5% Bitcoin back on every purchase. You can earn 3.5% back in Bitcoin during your first 3 months (capped at $100 in BTC) and 2% on every purchase over $50k of annual spend.

This is ideal for a lot of y’all who want to dabble in crypto but are not quite ready to drop fat stacks to stack sats. You can be out at the club paying for bottle service and earning Bitcoin at the same time by running up your tab using your credit card, no sweat off your back. On top of the Bitcoin you earn from swiping your credit card, you’ll earn 4.5% interest in Bitcoin on top of those Bitcoin rewards (through BlockFi’s Interest Accounts - you’re literally earning crypto on top of crypto).

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If you’re a Bitcoin bull, this is pretty much a no brainer because all of the rewards will theoretically go to the moon eventually (obviously this isn’t a forward looking statement from me, it’s not financial advice, and not a guarantee of future performance, etc., y’all already know that…). Why not earn rewards that appreciate instead of airline miles that tend to get devalued?

The final thing here is that the card has no annual fees and no foreign transaction fees, which is a pretty good deal for a no fee card considering the potential upside of the rewards. Chase Sapphire Reserve and Amex Platinum (Chad and Becky staples) have been put on notice with their annual fees.

Check out the BlockFi credit card:

So that’s the full rundown of BlockFi’s core products. Now let’s zoom out and observe from a 30,000 foot view of the real opportunity that lies ahead for BlockFi. (Yes, that was intentional)

Fintech “Super Apps”: The Race is On

If you’re familiar with current fintech trends and the respective startup scene, you know there are hundreds of startups creating “financial super-apps” that are basically one-stop-shops for retail customers looking for loans, credit cards, currency exchange, credit tracking, trading, cash management, insurance, and more. It’s never been a better time to have options on where to take care of your personal financial needs. 

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BlockFi is another one of these companies but with the unique crypto-native twist and really attractive interest rates / rewards. 

While the startup space is pretty competitive, the list of publicly-traded competitors is also growing. You’ve got Square, SoFi, Coinbase, Robinhood, PayPal and more that are diversifying from their core offerings into a whole suite of financial services. To give you a quick rundown of the crypto offerings from competitors:

  • Square
  • Robinhood
  • PayPal 
  • Mastercard
  • Visa

Although I’m not under NDA and don’t have access to BlockFi’s product roadmap, it’s not hard to suspect they’ll continue to roll out a bunch of additional product lines that meet the needs of crypto holders and “regular” folks alike, all built on top of their crypto-native platform.

At the end of the day, BlockFi is betting that the digital asset space will do more to disrupt the existing financial system and have a significant advantage on understanding and embracing crypto infrastructure. 

If they’re WRONG, and cryptocurrencies implode, BlockFi’s not gonna have an easy time (and also recall that deposits on their platform are not FDIC-backed). 

If they’re RIGHT, their advantage propels them ahead of the incumbents who will need to catch up, build out products, and develop their crypto expertise. This will leave them to compete against other CeFi companies such as Coinbase and Gemini, with an inevitable “race to the bottom”. Spreads getting arb’d away, yields getting compressed, and higher customer acquisition costs. 

BlockFi’s success is capitalizing on their momentum, their massive VC backing, their first mover advantage, and 8.0% APY to attract customers in order to build the robust suite of services to emerge as the clear leader in this space over the long run. 

It’ll be fascinating to see how it all plays out.

Capitalism at its finest.

So you’ve made it to the end, here’s our treat.

BlockFi is offering Exec Sum readers up to $250 in free Bitcoin for opening up and funding an account. As I've already said throughout this article, it beats having cash losing out to inflation sitting in a Chase or BofA bank account. 

Check out BlockFi and start earning crypto the easy way. 

BTW - if you liked this inaugural LitCap Deep Dive, let me know what other companies you think would be cool to drill into. While this one was sponsored, they don't all have to be.

If you’re a company looking to tell your story, hit me up as well. 

Cheers,

Lit

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