BlockFi: A Possible Alternative to Low Yield Savings Accounts

I’ve been debating for a while whether to post this here because I will be discussing a much riskier, alternative investment. As someone who argues you should pretty much invest in diversified index funds and forget it (other than rebalancing), this is a bit uncomfortable. But I finally decided to post because many people have been asking if there are any alternatives to the very low interest rates savings accounts and CDs are paying, and I figure you can all do your due diligence to see if this might be right for you. I will include multiple caveats along the way, starting with this: this is a potentially risky investment and there is definitely the potential to lose money (50%, 70%, maybe even 100%). So, hopefully this disclaimer is clear :-).

I learned about BlockFi through the Animal Spirits Podcast. Michael and Ben first had Zac Prince (BlockFi CEO) on last November in this episode. They first discuss Bitcoin (BTC) and cryptocurrencies in general and then start discussing BlockFi specifically at the 16:20 mark. While I will try to briefly describe BlockFi below, you should definitely listen to this entire episode before deciding whether you might want to invest with BlockFi.

Because of the intense interest (pun intended) from listeners, Michael and Ben had Zac back on for some Q & A as part of Episode 180. Zac is on from 35:57 to 47:45, answering questions that listeners had submitted (as well as some from Michael and Ben). Again, highly recommend you listen to this before deciding to invest.

Finally, they had Zac back again at the end of January where the discussion was more about Bitcoin and crypto in general, and less about BlockFi. Still worth your time, but not as important as the first two.

So, what is BlockFi? Briefly (and overly simplified), BlockFi is a “fintech” company providing financial services. They have a retail side and an institutional side. The retail side allows you to invest money and buy and trade cryptocurrencies (like Bitcoin, Ethereum, etc.) and – the main point of this post – allows you to earn interest on what you’ve invested. The institutional side (which is what allows them to pay interest on the retail side) serves as a prime broker to large institutions (companies, endowments, etc.) who want to play in the crypto space but traditional banks won’t currently provide any financing for it. They have also recently added an institutional trading product. (Listen to the episodes, it explains it much better.)

The interest they earn from the money they lend to institutions allows them to pay interest to the retail accounts and they make money on the spread. Currently they can charge very high interest rates to institutions because there isn’t much competition and this is the only way for institutions to borrow for crypto purposes. This, in turn, allows them to pay very high interest rates to retail investors. They fully expect those rates to come down over time, but it will be a relatively slow process as the industry scales up.

So, what kind of interest rates? Well, it depends on which cryptocurrency you invest in. See the chart in the image at the top of this post for the rates on each cryptocurrency, but let me highlight that you can earn 8.6% on GUSD (a “stablecoin”, more on this in a minute) and 6% on Bitcoin (up to 2.5 BTC, then 3% after that). That interest is paid monthly and you have full liquidity (you can buy, sell, or withdraw at any time, with a turnaround of one business day or less). How in the world can they pay that high of interest, when even the best savings accounts are paying 0.5%? It’s because they are able to charge around 10% to lend dollars to institutions, and around 7% to lend crypto to them.

So what’s the catch? There are (at least) two major ones. This is not a bank (they are regulated similar to companies like Square and SoFi), so your money is not FDIC insured. You can lose money – perhaps most or all of it. And (most) cryptocurrencies (like Bitcoin and Ethereum) are very volatile, so this is not for the faint of heart. But this is where GUSD, a “stablecoin”, comes in. Briefly, stablecoins are designed to be, well, relatively stable, with the value staying very close to $1. The best ones (like GUSD) are regulated and have the same number of US Dollars in an audited bank account as they have issued GUSD tokens. There is no guarantee that they will remain close to $1, but with the backing of actual dollars in an actual bank, the volatility should be relatively low (certainly compared to something like Bitcoin).

All of the above is a very brief, simplified explanation, so please listen to those podcasts to learn more (and perhaps do further research). And another reminder that this is not like a bank account – it is much riskier.

So now the main point of this post. After listening to these podcasts and exploring around a bit, I decided to invest a small amount (currently $2,000) in BlockFi, moving it from my savings account (in four batches over the last couple of months as I became more comfortable). While I may decide to invest more over time, at this point I didn’t want to invest any more than what I would be okay with if it should happen to go to $0. While I obviously wouldn’t be happy with losing $2,000, it wouldn’t be life changing, so I’m okay with the risk (and I don’t think it will go to $0). 

All $2,000 is invested in GUSD, so I feel like it is relatively “safe”, and unlikely to vary much from $2,000. BlockFi has a “flex interest” option where you can choose to have your interest invested in the same currency you earned it with, or in another currency. My current setting is that when I receive interest (8.6% annual rate on GUSD) at the end of each month, I have it invested in Bitcoin. (I am currently the proud owner of 0.00021612 BTC :-). I have earned a little over $7 in interest so far, and have accrued $6.81 so far this month that will be paid at the end of the month (recall that I did not invest the full $2,000 initially). The amount I have in Bitcoin earns 6% interest (which also gets reinvested in BTC), but of course the value of Bitcoin is anything but stable. My rationale (rationalization?) is that BTC could lose 90% of its value and I still would be ahead compared to earning 0.5% on my savings account (assuming GUSD stays stable). At this point I am not using BlockFi to actively purchase BTC (other than with interest), but they do appear to be a good platform to do that, as they do not charge any fees, which apparently other crypto platforms do (there is still some spread of 0.5 to 1% when you purchase, but that appears to be less than other platforms, plus no fees). They are also about to launch a rewards credit card, where you’ll get 1.5% back on purchases, but paid in BTC :-).

Since I started this, BTC has skyrocketed by about 70%, so I’m considering switching the flex interest option back to GUSD. While I generally don’t believe in “market timing”, Bitcoin is a bit different and compounding at 8.6% in GUSD seems like a pretty decent alternative (given the assumption that GUSD will be relatively stable). If BTC then drops a lot (which it will), perhaps I will switch back. (I’m not selling my current 0.00021612 of BTC.)

So, with a reminder of the caveat that this is much riskier and more volatile than a bank account and that you can lose money, what are your thoughts on this? For those of you looking for an alternative to very low interest bank accounts, would you consider putting some of your cash into BlockFi? If you do decide to invest, you might consider using my referral code. Please don’t feel compelled to, especially if you think this was all just an attempt to get you to use my referral code – it wasn’t (I promise). I just wanted to share in case anyone is interested, but if you do use the code and deposit at least $100, both you and I will get $10 in BTC as a bonus (you have to leave the balance in there until at least the first interest payment to earn the bonus). But you can also just choose to sign up without using the referral code if you have any concerns. I hope if nothing else this has helped educate you a bit (like it has me) about some of what is happening in the fintech space.

Edit: I forgot one important point for residents of New York State: New York residents can’t participate yet other than to get a loan and rewards card (interest products are not allowed yet in New York per regulations.)

Update 2-24-21: New features of the BlockFi Bitcoin Rewards Credit Card were just announced.