How Does BlockFi Make Money? Business Model of BlockFi


How Does BlockFi Make Money

BlockFi is a popular crypto-based fintech platform. The company has a wide variety of revenue streams that utilize crypto to provide customers with everyday financial solutions.

BlockFi primarily makes money via interest on crypto loans. The company also makes money from spreads, withdrawal fees, and crypto mining.

Founded in 2017 by Zac Prince and Flori Marquez, BlockFi was created to provide users with familiar financial services by using crypto as an asset. Prince got the idea for this company when a bank rejected one of his loan applications because he offered to provide crypto as collateral.

Unlike traditional crypto sites, BlockFi isn’t a platform where users can exchange crypto. Instead, its goal is to provide everyday financial services like credit cards and personal loans by leveraging crypto as an asset.

What is BlockFi & How Does It Work?

BlockFi is a crypto-based fintech platform that provides trading and loan services to a global userbase. It offers a comprehensive suite of crypto-centric financial services in addition to seamless integration with existing crypto wallets. In recent years, the platform has exploded in popularity — going from 10,000 retail clients in 2019 to over 225,000 in 2021.[1]

Before using the platform to make trades, users must sign up with their current ID documents and address. BlockFi used to provide their BIA (BlockFi Interest Account) to both US and foreign users. But following a US Security and Exchange Commission (SEC) enforcement action in February of 2022, new BlockFi Interest Accounts can no longer be created by US customers.[2]

Foreign users can still make a BIA account and accrue interest on their crypto deposits. Existing US BIA customers will also be paid interest on their deposits. As a BIA account holder, customers can modify their interest payout preferences via the mobile app or desktop web app.

BlockFi is the only crypto fintech company that lets users choose which cryptocurrency or stablecoin they wish their interest to be paid in. For example, someone with a Bitcoin deposit can choose to receive their interest via PAX Gold, Ethereum, USDT, USDC, and many other options. Money can be deposited to accounts via wire transfer in fiat currency or crypto transfers.

BlockFi has a security feature called ‘allowlisting’, which is similar to whitelisting. In the unlikely event that a user’s BlockFi account is hacked, the hackers can only send crypto to their whitelisted addresses. Once a user has set up their BlockFi account, they can buy and trade a wide range of cryptocurrencies.

With BlockFi’s repeat trade feature, users can automate their crypto portfolio. It allows them to repeat a certain crypto purchase at a frequency of their choosing. The frequency can be set to daily, weekly, or monthly.

The company also offers a loan service that pays out US dollars to a user’s bank account using their crypto deposit as collateral. Annual Percentage Rates (APRs) can vary depending on the loan-to-value (LTV) ratio. Higher LTV results in a higher APR. With a 50% LTV, users will need to deposit twice the amount they’re borrowing as crypto.

The company has long been the subject of regulatory action. In 2020, the SEC charged BlockFi with violation of the registration provisions within the Investment Company Act of 1933. According to the SEC, BlockFi failed to register itself as a security or investment company. The fintech company was forced to pay a $100 million settlement fee in addition to halting its interest-based loan services in several states.[3]

 

Business Model of BlockFi

BlockFi’s business model is centered around providing loans backed by crypto to individuals and financial institutions. The company attracts users by providing a one-stop solution for all their crypto trading needs, in addition to unique loan opportunities with low APRs.

BlockFi differentiates itself from a traditional fintech company by investing almost exclusively in crypto and being available to a global audience.

The company makes its revenue from a wide variety of sources. These include interest on loans, spreads, and transaction fees.

BlockFi provides close to double-digit interest rates on stablecoins. Because of these interest rates, crypto investors are likely to purchase a significant amount of stablecoins and store it in their BlockFi Interest Account.

These stablecoins are assets that BlockFi can then use to provide loans to financial institutions. Through this process, the company generates revenue while simultaneously returning value to customers.

BlockFi attracts customers with its transparency, low minimum trade amounts, and intuitive user experience. The company’s interest account, which is available only to customers outside the US due to SEC regulations, allows users to accrue interest on their crypto savings. This encourages new users to create a BlockFi account just so they can passively grow their crypto investments over time.

The rapid withdrawal process and low spread also encourage users to transact more frequently on BlockFi. This generates a wide pool of loyal customers who use the platform for the majority of their daily crypto trading needs. Users can seamlessly link their crypto wallets from other platforms with BlockFi.

This results in higher conversion rates since users don’t feel tied down to any single platform. The extensive security measures implemented by BlockFi help reassure users that their investments are safe and protected from fraudulent actors.

Given the highly comprehensive security systems employed by BlockFi to prevent fraud, withdrawals on this platform can take slightly longer compared to rivals such as Celsius. The increased security also means that BlockFi can only provide a limited number of free withdrawals each month. They currently offer only one free monthly withdrawal.

BlockFi’s biggest competitor is Celsius, as they offer similar services. Celsius pays out interest on a weekly basis, while BlockFi pays interest once at the start of every month. BlockFi provides one free withdrawal per month, and charges for subsequent withdrawals.

In contrast, Celsius provides unlimited free withdrawals. The drawback is that its withdrawal security isn’t as robust compared to BlockFi. BlockFi withdrawals are supported by a complex social security framework that combines two-factor identification with multiple selfies and what’s known in cybersecurity as Know Your Customer (KYC) documents. These are identification like driver licenses or passports.

For customers who want faster, more frequent withdrawals, Celsius might be a better choice. But for users who value security above all else, BlockFi can’t be beat. BlockFi is also reported to have a better customer service system with lower callback times and more personalized solutions.

BlockFi is a private company and does not release its financials. While the company is estimated to have annual revenue of around $147.8 million per year, it also has considerable expenses.[4] These include things like staffing costs, hosting costs, platform costs, and development costs.

Due to the lack of data on BlockFi’s financials, it is unclear how profitable the company’s business model is.

 

How Does BlockFi Make Money?

BlockFi makes money in five different ways. These include loans to financial institutions, crypto-backed loans, spreads, withdrawal fees, and mining.

As BlockFi is a private company, details about how much revenue they generate from these different revenue streams aren’t public.

Loans To Financial Institutions

BlockFi aggregates the crypto assets deposited by its users and lends them out to various financial institutions. This process is similar to securities lending, with fiat currencies replaced by crypto. It’s called rehypothecation and allows BlockFi to use collateral posted by clients for the purpose of generating yield.

They do so by providing loans to organizations like crypto exchanges, over-the-counter (OTC) market makers, crypto ATMs, and investment funds. These organizations then pay interest on their loans, which BlockFi uses to fund its operations and make a profit. Given the large demand for these types of loans, institutions are willing to pay higher interest rates.

The profits made by BlockFi are used to pay retail lenders interest on their crypto deposits. It’s similar in concept to how banks generate interest on savings accounts. But the interest rates are much higher with BlockFi Interest Accounts (BIAs) compared to banks.

 

Crypto-Backed Loans

A user can take out loans against their crypto assets, with an LTV ratio of 20 to 50%. The APR can be as low as 4.5% for an LTV ratio of 20%. Users can expect payments in US dollars to their bank accounts on the same day as BlockFi receives their collateral.

BlockFi makes money on the interest paid out over the loan period. Higher LTV ratios usually mean higher interest rates. Cryptos accepted for US dollar loans include Bitcoin, Ethereum, LITECOIN, and PAXG.

 

Spreads

BlockFi’s platform also includes an exchange and trading service in addition to their BIA and crypto-backed loans. Spread is the difference between the current market price of a crypto asset and the price that users buy or sell it for.

Even though BlockFi claims to charge zero commission fees, spreads integrated into the prices can account for up to a 1% increase in charges. At a large scale, the company can make a significant amount of money off these spreads.

 

Withdrawal Fees

BlockFi allows users to withdraw funds from their interest account or wallet at any time during the month. However, free withdrawals for stablecoins and crypto coins are allowed only once per month.

A convenience fee is charged on each subsequent withdrawal, and rates can vary depending on the crypto currency.

 

Mining

In 2021, BlockFi announced that they are partnering with Bitcoin mining company Blockstream which has a 300MW mining facility in the state of Georgia.[5]

By using Blockstream’s end-to-end mining colocation services, BlockFi bypasses significant infrastructure and research overheads. This partnership is also integrated with BlockFi’s supply chain and diversifies their revenue streams.

 

BlockFi Funding, Valuation & Revenue

BlockFi is currently a private company, and its financials aren’t available to the public. Right now, it is unclear what the company is valued at.

However, BlockFi raised $1.4 billion in funding over 12 rounds between 2018 and 2022.[6] Notable investors include FTX US, Investlink Holdings, Alumni Ventures, Empede Capital, and Rose Park Advisors. The company’s latest funding round was a debt financing round in June 2022, led by FTX US who signed an agreement for a $400 million revolving credit facility.[7]

BlockFi’s last disclosed valuation was $3 billion when it raised money through a series D funding round in 2021.[8] Since then, the company has raised more money. But it has provided no details regarding its valuation.

Annual revenue for BlockFi is estimated to be around $147.8 million.[9] But there is no official report to verify this. Given the recent crypto market downturn, it is possible that BlockFi could be making less than this figure.

 

Is BlockFi Profitable?

BlockFi is likely not yet profitable. The company is private and doesn’t disclose any details regarding its finances. Its annual revenue is currently estimated to be around $147.8 million.[10] This is significantly less than the estimated $500 million BlockFi was making when it was ranked America’s fastest-growing private company by Inc. 5000.[11]

The revenue alone is not a sign of profitability since BlockFi could easily be expending more than that in operating and expansion costs. The company has secured $1.4 billion in funding.[12] Which is likely being used to expand into new markets and introduce new services to bolster revenue streams.

 

Conclusion

BlockFi was founded on the premise that there is an increasing demand for crypto-backed loans and that the market is ripe for disruption by an innovative company.  

Since then, we’ve seen a number of other lenders enter the space—which is good news for all of us! It means that there are more opportunities for people to get access to loans in crypto, which means more options for borrowers and more competition for lenders.

As more people get involved in the cryptocurrency market, we can expect more companies like BlockFi to enter this space and provide innovative solutions for all kinds of problems that come with using cryptocurrencies as a form of payment or investment.

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Sources

  1. TechCrunch
  2. SEC
  3. BlockFi Interest Rates
  4. Growjo
  5. Blockstream
  6. Crunchbase
  7. Coin Telegraph
  8. TechCrunch
  9. Growjo
  10. Growjo
  11. Inc Magazine
  12. Crunchbase