BlockFi Crypto Interest Accounts: What Their Marketing Team Missed

source

In January, in one of my irregularly scheduled newsletters, I talked about how Mike Novogratz of Galaxy Digital is playing a “Heads I Win, Tails You Lose” game on the crypto world markets, on account of his firm’s $50m investment in BlockFi, the crypto lender. I likened BlockFi to a payday loan company, as they charge high rates on their Crypto-for-USD loans (10%), and the use cases they identify include paying home and car loans.

Yesterday, BlockFi announced the other side of that coin: They are now offering something called a “BlockFi Interest Account,” the first instrument to offer compounding interest payments in Bitcoin. The product’s page on their website features an Einstein “quote,” or anecdote, about compounding interest being the “most powerful force in the world.”

A press release on their website says

“The program has been in private beta since the beginning of 2019 and already holds over $10 million in assets from retail, corporate, and institutional crypto investors.”

and includes these figures, which also appear on the page for the new “BIA” product:

The first table represents how the 6.2% “industry leading” interest per year is paid out in monthly installments. The interest gets credited to BIAs on the first of each month, which means you couldn’t withdraw on February 28th and see your interest for the month of February…

The graph is hilarious to me because it uses fiat currency, which the BlockFi compound Interest is not applicable for, since the BlockFi Interest Accounts are all denominated in their respective cryptocurrency (Bitcoin and Ethereum are the only available currencies at the moment). Also, it uses a 20 year timeframe — twice the age of Bitcoin.

By the way. I have been researching mutual funds recently. There are now funds which use a “No Load, No Transaction Fee” model, meaning you don’t pay interest or a fee upon buying or selling. And, many of these mutual funds have performed far better in just 10 years than this chart shows. Now back to our regularly scheduled Crypto programming…

BlockFi left out a lot of information in their announcement for BIA.

I think every investor should have a full understanding of the products they are buying. The press release linked above, as well as the main page for BIA on their site, leaves out important information which is necessary for potential clients of BIA to appropriately judge the risk of their products, such as:

BIA accounts are not generally available, everywhere, as could be inferred from the press release saying “The BlockFi Interest Account is available to customers worldwide.” The ToS says, “ Crypto Interest Accounts are not available in the States of New York, Connecticut, or Washington, or in Cuba, Iran, North Korea, Sudan, Syria, or any other country to which the United States, the United Kingdom or the European Union embargoes goods or imposes similar sanctions, or any other jurisdiction which we determine we would not be able to offer crypto interest accounts for regulatory or policy reasons.”

(Tangent: they refer to these as “BlockFi Interest Accounts” AND “Crypto Interest Accounts” and I can’t be bothered to learn why…)

BlockFi may need 7 days in order to process and complete your withdrawal. (According to the ToS) Remember that this is a crypto-only investment product. And they want you to know that they may need a week to get it done.

BlockFi will be “rehypothecating” the crypto you send to them, or in other, less made up words, they will lend your Bitcoin or Ether out to other clients while you collect interest, on that crypto… which opens up a philosophical and also grating argument over whether this artificially inflates the total supply of Bitcoin. I don’t care if it does, but I think anyone depositing their crypto into a BIA should know that their crypto could be going towards a short trade, on Bitcoin. In other words; you’d be lending your Bitcoin to BlockFi, in the hope it appreciates, while they lend your very same Bitcoin to “Institutional” clients making bets on Bitcoin depreciating. BlockFi charges these borrowers 10%, which is steep, but could be pittances if their trades work in their favor…

…and it should go without saying, but some might miss this: if Bitcoin does capitulate, again, then your BIA will, too.

BlockFi doesn’t hold the keys.

Yes, really.

Which sort of doesn’t meld with this tweet from BlockFi:

The interest rate is subject to change.

Good thing they already printed the 6.2% figure in all the headlines, then!


Any investor who is serious about their due-diligence will read things like the Terms of Service, and the twitter feeds of the employees…but certainly not everyone takes it so seriously, and so could only be relying on a press release or “splash page” on a website for information on a new investment.

BlockFi’s website material and tweets from their main handle can be read to imply such not-true things about their new BIA product as: The 6.2%-per-year return is guaranteed; BlockFi is holding the private keys for the crypto which clients are sending them; BIA are available everywhere; and that, since you’re earning interest each month, you’re also collecting more wealth…which could not be the case, if either Bitcoin’s prices fall…or BlockFi goes away.

The opinions I’ve shared in this post are just that, and I am not accusing anyone of knowingly making misleading statements. The purpose of this post is to educate, myself and others. Hope you enjoyed!

(at)KyleSGibson

PS, here are some threads on the new BlockFi Interest Accounts, for more information and opinions: