Cryptocurrencies burst into our collective consciousness with its meteoric rise in value in 2017, as well as its subsequent catastrophic collapse. As a millennial, I’m always interested in new technology and unbeknownst to readers, I do check in on the crypto-sphere from time to time to understand any new major developments in the space.
While I’ve always had a slight interest in investing in crypto, my main objection was similar to that of Warren Buffett’s.
Cryptocurrencies simply do not produce anything to allow me to value it objectively. Investing in crypto was essentially believing in the Greater Fool theory.
As such, it was with great interest when I read about BlockFi from the GMGH blog, which allows customers to earn interest on their crypto-assets. Intrigued, I did some due diligence on the service and here’s some of my thoughts.
Disclaimer: I’m not an expert on cryptocurrencies and I only know the basics. The crypto world is dangerous, please avoid if you do not understand the risks. For the purpose of this article, I’ll be focusing on the Crypto Interest Account and not its Crypto Loan service.
What is BlockFi?
BlockFi is a US start up that offers a wealth management platform for crypto-assets. It’s backed by well regarded investors and is classified as a secured non-bank lender.
It currently offers 3 services – Crypto Interest Account, Crypto backed Loans and, to a small extent, Crypto trading.
How does BlockFi make money?
BlockFi operates similar to a traditional bank by collecting assets as deposits and makes money off of these assets by 2 ways:
- Lending the crypto assets to traders / funds / market makers for trading purposes
- Net interest margin on crypto-backed loans to consumers.
Crypto-assets received by BlockFi are stored with Gemini, a cryptocurrency exchange, who acts as a custodian for the assets. Gemini is well known for its high levels of security through the use of cold storage facilities and deposit insurance. To learn more about Gemini’s security features, check it out here.
This is why I’m comfortable with holding crypto-assets with BlockFi.
Crypto Interest Account
The interest account works like a bank account. Simply transfer in your crypto assets and immediately start earning interest. Interest is compounded monthly at the following rates:
BlockFi currently supports Bitcoin, Ethereum, LiteCoin and 2 stablecoins – USDC and GUSD. USDC is Coinbase’s stablecoin and GUSD is Gemini’s version of stablecoin. Both are pegged to USD, effectively making 1 USDC equivalent to 1 USD.
As you can see, they offer quite attractive interest rates for your crypto-assets.
Of course, all investments tend to have risks. Here are my main concerns.
Other than stablecoins like GUSD and USDC, cryptocurrencies are highly volatile. As Warren Buffett says, they do not have intrinsic value. As such, their prices are largely governed by supply and demand (other than asset backed projects).
Please don’t be blinded by the high interest rates without caring about your buy price.
The other issue with cryptocurrencies is custody risks. Other than traditional concerns like the company closing down and running away with your money, online exchanges also face the threat of hacking that may cause you to lose your crypto.
That said, I believe the level of security offered by Gemini’s custody services is sufficient to quell these concerns. Do evaluate this yourself if you are not convinced.
As with any new financial product that threatens the existing financial system, there is risk of regulation by governments. This can come in the form of impediments and controls over how fast or whether you can convert your crypto-assets into fiat currencies. You may find yourself in a situation where you can’t monetise your crypto assets if countries take an adverse view to cryptocurrencies in the future.
With these factors in mind, I decided to open a BlockFi account to start investing a small portion of my wealth in cryptocurrencies and earn interest on these assets at the same time. My main interests will be in Bitcoin and to a greater extent, Ethereum.
I find the best way to make me learn more about an industry is to have skin in the game. And crypto is an area I’m interested in exploring. Now with a way to generate income on crypto, that is one less objection I have over the asset class.
Am I scared of losing my entire investment? Hell yes. Which is why I’m only investing a small portion of my net worth in it for now as an experiment.
Unfortunately, missiles from Donald Trump and Iran caused a spike in cryptocurrency prices. As such, for now, I’ll park my money in USDC until a better price is offered for these 2 cryptocurrencies. All the while earning interest in the process.
If you would like to open an account, here’s my referral link. I get a small fee on each referral I get. Happy earning interest!