BlockFi is in deep financial trouble due to a very risky investment strategy in recent years. BlockFi’s interest rate product has been making losses for years, and customers have no safety net. What does the New Jersey company’s house of cards look like?
BlockFi, a house of cards that’s falling down?
BlockFi works like a bank, investing customer funds in high-risk interest products linked to relatively small crypto coins and protocols. The market values of these cryptocurrencies are many times smaller than bitcoin, making them even more volatile and risky.
The model: you attract money from customers (retail, institutions) and lock this money into these yield products. Part of the interest profit is paid out to its customers, and the rest is kept for itself.
But BlockFi’s operating results are alarming: even in the bull market of 2020-2021, the company did not manage to make any profit with its “core” interest product.
It is whistleblower “otteroooo” who makes the necessary accusations on Twitter, based on a leaked document from BlockFi. The document in question is about the company making forecasts for the future, but it also contains figures for the 2021 and 2020 financial years. We list the accusations from the Twitter thread.
BlockFi’s business is loss-making, and the lending ratio at BlockFi is very high. So reports the whistleblower:
- Operating profit for 2020 ends $63.9 million in the red, and losses for 2021 are $221.5 million. It is remarkable, because you would think that their model would actually make a profit in a bull market when everything increases in value.
- Only 3.4% of all cryptoassets (i.e., from customers) are stored in cold storage. That has a combined value of $467 million.
- But, BlockFi has a whopping $13,500 million tied-up in high-risk yield products. Such a distribution (~3% in cold storage versus 97% illiquid) of funds is very risky.
- This has consequences for you as a client. Because in the event of a ‘bank run,’ only 34 of the first 1,000 customers will be able to get their money back if every customer claims their assets now.
- Due to the sharp drop in the price of bitcoin, a large proportion of these assets are underwater. The whistleblower suspects that 80% are underwater at current market prices. This makes BlockFi a ticking time bomb with billions of dollars in assets over which it has no control.
To clarify, BlockFi has a different customer base than, say, Celsius. The latter aimed very dominantly at the private market, BlockFi has a mixed customer base. About 70% is still retail (individuals), but ~30% would be the corporate market (institutions).
Think professional investment funds, hedge funds, family offices, and financial advisors acting on behalf of a third party. It is unknown whether they also serve larger entities such as insurers, pension funds, and investment banks.
The whistleblower suspects that retail customers will suffer. In the line of potential creditors, BlockFi will also first try to compensate the circle around them and only then, Henk and Ingrid. The same pattern was visible at Luna Foundation Guard, the entity behind the now imploded stablecoin TerraUSD and its associated shitcoin Luna.
BlockFi has not yet officially responded to the allegations. It is unknown what customers have deposited at BlockHi on average, but from this earlier report, it would be an average of $50,000.
No safety net
In the leaked forecast, they expect sales to increase by a factor of three or four by 2023. The reality, however, quickly overtakes these forecasts. The value of the crypto assets on their balance sheet has evaporated. Financially, things are not looking good because their “core” product is loss-making too.
In 2021, BlockFi paid around $400 million in interest to users and institutions who lent their cryptos to BlockFi. But the income from interest products was $313 million. In short, a financial gap of $87 million, about $240,000 a day.
Also, in 2020, $14 million was lost with their “core-business”: attracting cryptos and, then lending them to risky yield farms.
In doing so, they hope to get a higher yield, which they have to pay out to the end customer. Worse, BlockFi’s books do not include an accounting safety net to cover future losses, a so-called “provision of credit loss” (POCL) in jargon. So that looks bad for existing customers.
BlockFi is not subject to a deposit system like a normal bank. The company is an umbrella for all kinds of companies that are based in tax havens or other ‘safe havens’ such as the Cayman Islands, Bermuda, Singapore, and England, but also the US state of Delaware, which enjoys a distinct position in the US jurisdiction.
Disclosures to the regulator SEC reveal a rather complicated corporate structure. The parent companies BlockFi Inc, BlockFi Holding UK Limited and BlockFi Lending LLC include the following entities:
- BlockFi Asia PTE. Ltd.
- BlockFi Cayman LLC
- BlockFi Holding UK Limited
- BlockFi International Ltd.
- BlockFi Lending LLC
- BlockFi Lending II LLC
- BlockFi Investment Products LLC
- BlockFi Services, Inc.
- BlockFi Trading LLC
- BlockFi UK Limited
- BlockFi Ventures LLC
- BlockFi Wallet LLC
- BV Power Alpha LLC
On 26 May this year, an application was submitted to the SEC to be allowed to issue shares. In the interim, that application was rejected by the SEC, which wants more information from the company. That plan now seems far away in the current bear market.
In 2021, the SEC issued a $100 million fine to BlockFi for its ramshackle interest rate product.
BlockFi cannot escape the bear market either. The fact that Zac Prince’s company has to economize is clear from this message that they want to let 20% of the staff go.
At the end of 2021, there was another flight to the front with the application for a bitcoin futures ETF with the SEC. Several US states including the home state of New Jersey and Kentucky, have banned BlockFi’s interest rate product. But despite these bans, BlockFi’s product could still be offered and promoted anywhere.
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