How BlockFi is growing its 'bitcoin lending' business

Ben Ng March 09, 2020 12:59

Investments in cryptocurrency have remained broadly depressed through a prolonged "crypto winter" after 2018. While a growing number of crypto ventures and startups struggle for funding and survival, one of the business lines in the sector, crypto lending, has still managed to grow. 

Exemplifying such success is BlockFi, a New York-based startup that allows investors to take out loans using crypto assets, like bitcoin and ethereum, as collateral.

Founded in 2017, BlockFi has raised US$108.7 million since founding, according to Crunchbase. Its backers included billionaire tech investor Peter Thiel, Mike Novogratz’s Galaxy Digital Ventures, Coinbase Ventures, Winklevoss Capital, ConsenSys Ventures, SoFi and Akuna Capital, as well as Hong Kong-based token funds HashKey Capital and Kenetic Capital.

Working on familiar business lines of banks, BlockFi aims to help expand the cryptocurrency ecosystem with products that can act as a bridge for consumers who may previously have been hesitant to begin investing in cryptocurrencies, co-founder and CEO Zac Prince told EJ Insight in an email interview.

"Both myself and my co-founder Flori [Marquez] had personal experiences where we saw that the crypto market needed more built-out consumer financial products. I applied for a loan and found I wasn’t able to use my extensive crypto assets as collateral,” said Prince, explaining how the idea to establish BlockFi came about. 

"Despite the fact that they’re an investment of substantial value, I couldn’t use this asset as a financial tool and that really helped me realize how much work was still left to do in maturing crypto as an asset class.”

Focusing on financial products to help users do more with their crypto investments, BlockFipositioned itself in the initial stage as a retail non-bank lender that offers crypto asset-backed US dollar loans, and has since expanded to emerge as a go-to place for users to store their crypto assets and ascertain a high-yield return.

On the business line of lending, BlockFi holds clients' bitcoin and issues loans in US dollar, which can be as high as US$10 million for each loan case.

The startup has offered crypto enthusiasts a way to borrow cash without having to sell down their crypto asset holdings they believe would soar later. It also brings additional liquidity to borrowers who do not want to sell their virtual coins at depressed prices, as well as cater to big investors eager to borrow coins for short-selling.

Clients can deposit crypto assets and the firm lends funds for arbitrage, short-selling or market-making trades at rates ranging between 4.5 percent and 11.25 percent. It will issue margin calls if the price of the crypto collateral falls by 35 to 60 percent from the time the loan was granted.

Risk management 

While the prices of cryptocurrencies have been volatile and it seems risky to offer loans with crypto asset collaterals, Prince claims that BlockFi had recorded zero losses across its loan portfolio throughout its entire history of lending.

"We manage a lot of the risk by holding at least twice the value in collateral of what’s being lent out. And BlockFi also does a background check to ensure borrowers are well-qualified and don’t have any outstanding issues before being approved.”

Other than BlockFi, there are a growing number of startups providing crypto-backed loans that are issued in fiat currencies. The list includes Denver-based outfit SALT Lending, London-based startup Lendingblock, CoinLoan in Estonia and Nexo in Switzerland, among others.

BlockFi, which gained traction in funding, has expanded its business lines beyond crypto-backed lending. Last year, the firm launched a savings account wherein customers can deposit cryptocurrencies including bitcoin and ether, earn interest on that just like in traditional savings accounts. The product promises as much as 4.9 percent in annualized return for bitcoin, according to its website.

The BlockFi Interest Account (BIA) product onboarded thousands of customers in the first two weeks since launching, according to the firm. “We’re now paying out over US$1.5 million per month in interest to our BIA users,” said Prince.

However, skeptics have raised an alarm as the accounts are not insured by the Federal Deposit Insurance Corp. in the United States, which offers insurance coverage to deposits held by traditional licensed banks in case of default. Also, funds stored in BlockFi’s accounts can be used by the lender for its own purposes, and the monthly interest rates are subject to change at BlockFi’s discretion.

"We have many regulatory and security safeguards so our users can feel safe in storing their assets with the BIA," said Prince, in response to the depositors' protection concern. Instead of FDIC insurance, Tyler and Cameron Winklevoss’s Gemini Capital is providing custody and insurance against cyber theft, he said.

"Client assets are securely deposited with our primary custodian, Gemini, a New York trust company licensed by the New York State Department of Financial Services, at a unique [crypto] wallet address.”

BlockFi now boasts more than US$700 million in assets under management, according to Prince. The firm grew revenue more than twenty-fold over the past year, even as cryptocurrency prices saw huge ups and downs since 2018. The average amount stored in the BIA is around US$8,000.

"At BlockFi, we like to say that we've had strong success even during the crypto bear market ... so we’re optimistic for the future. Whether crypto is soaring or falling, investors need flexible financial tools which allow them to do more with their holdings, and that’s what BlockFi provides,” said Prince, who spent time at Google and broker-dealer Orchard Platform, among other entities, before starting BlockFi.

Besides the “traditional” lending and savings services, BlockFi eventually hopes to offer an array of services similar to what other fintech platforms, like Robinhood and SoFi, offer.

Prince told EJ Insight that the firm is set to launch multiple features to become more than just a lender, including a native mobile application with a fiat on-and-off ramp. It is also working with banking and credit card firms on a new bitcoin rewards credit card which allows users to earn cashback in bitcoin, in a familiar way of existing cashback credit cards.

"Our upcoming products will be even more appealing for mainstream adoption and will help to make crypto more palatable for the everyday consumer,” said Prince, who believes the mobile app and the bitcoin rewards credit card will work to create a more seamless onboarding process for consumers not yet invested in crypto.

Focusing primarily on developing products geared toward attracting a mainstream audience, Prince says the firm’s long-term goal is to also “make these products available on an international scale to ensure that everyone, no matter where they live, has secure access to a stable currency and doesn’t have to use the local banking system which may not be reliable.”

Asia expansion plans

Launched in the United States in January 2018, BlockFi is now looking to expand further into the Asian market in the near future, with two Hong Kong-based investors HashKey Capital and Kenetic Capital being its backers, according to Prince.

“In the next few months, we intend to build out an office in Asia,” he said. “The Asian market is not only a great fit for us to continue to expand our retail consumer audience, but we also have great institutional relationships in the area which we’ll continue to grow.”

Stock markets in Asia tumbled in recent weeks due to concerns about the fallout of the coronavirus outbreak on the global economy. In contrast, bitcoin, the largest cryptocurrency by market cap, saw fresh investor support and recorded solid gains.

Its price rose as much as 43 percent from US$7,193 on Dec 31, 2019, to US$10,326 on Feb 12, 2020. As of March 8, it was trading at US$8,582, according to CoinMarketCap.

Prince believes bitcoin is “resilient and safe from changes like governmental policy and other external factors that can seriously impact a country’s domestic currency value, like coronavirus,” thanks to the cryptocurrency’s decentralized nature.

“In that sense, I would consider bitcoin a safe investment,” he said. “I think it’ll continue to grow in value as these benefits are recognized and also as the financial ecosystem around cryptocurrencies continues to be developed and begins to look more like traditional financial products.”

"Once there are simple, familiar channels for managing cryptocurrencies like easy to use apps, seamless credit card integrations and similar solutions, more consumers will feel comfortable investing in the asset class, and we can expect to see much more growth from there,” Prince said.

BlockFi is seeing growing volumes on its crypto trading product, which the firm attributes to increased adoption amongst the existing clients, rapid growth rate of onboarding new clients, and the bullish trend of the cryptocurrency market so far in 2020.

On the crypto market outlook this year, Prince said 2020 needs to be "the year of the consumer for crypto."

“Many average consumers are intimidated by crypto right now, so the industry is challenged to create products that make onboarding simple and can convince the everyday person that they intelligently invest in crypto and that it will help to build their wealth.”

– Contact us at [email protected]

BN/RC

Ben Ng

EJ Insight writer