Mar 22, 2020
Transition to Blockfi as a custodian
When looking at startups, it is easy to admire the week over week growth during the good times. However there is a lot more admiration to be had when something goes wrong and the team is able to handle it well. When something doesn’t die after a traumatic event, it deserves a second look and a 51% collapse in the price of Bitcoin for a company that offers crypto backed loans as one of their products easily qualifies as a traumatic event. Impressively, it appears Blockfi went unscathed. “As a result of the team’s prudent actions during this period, our clients’ capital was saved and we also liquidated a smaller percentage (<10%) of our overall USD loan book vs. other market participants.”
If you are going to leave your cryptocurrency on an exchange then I would encourage you to think about storing it with Blockfi. Blockfi is a custodial solution to storing cryptocurrency much like popular exchanges such as Coinbase, Gemini, and Kraken. The major difference is that you can earn interest on any assets you store there. You are currently able to earn interest on Bitcoin, Ethereum, Litecoin, USDC, and gUSD.
Blockfi is able to pay out interest on your assets because it is able to lend it out to qualified borrowers like a traditional bank. Banks pay out interest on your checking and savings account by using your deposits to make loans to consumers when they want to buy a car, home, or other large purchase. You may be wondering what is stopping someone from borrowing my cryptocurrency and never pay back the loan which is a great question. The people borrowing the assets are larger institutional traders who want to gain exposure to the cryptocurrency market but can’t through traditional means.
The well known banks you probably bank at will put up collateral that is greater than the loan they want to take out. So if a bank wants to borrow $1 million worth of Bitcoin, they would put up $1.5 million worth of collateral to ensure you are made whole in the case of a poor trade. Banks will do this because cryptocurrency is highly volatile and volatility creates opportunity. Imagine being a trader on the New York Stock Exchange where a stock is moving 2% on a good day. Now think about the opportunities that exist when your favorite cryptocurrency is is moving 10% on a stable day.
The interest you earn gets paid out monthly. It is paid out in the same currency you deposit but Blockfi allows you to get paid out in the currency of your choice. So if you deposit $100 worth of Bitcoin and Ethereum, you’ll get paid out the current interest rate of 6% on your Bitcoin and 4% on your Ethereum. However if you prefer to gain exposure to one coin more than the other or a new coin all together, you can have both sets of interest paid out to the coin of your choice. So if you want to have that $6 in Bitcoin and $4 in Ethereum paid out all in Ethereum, you can. Or if you want to gain exposure to Litecoin, you can have it paid out monthly in LTC.
One major benefit to Blockfi is that you gain compound interest. Compound interest is the ability to earn interest off of your already earned interest. So if you deposited $100 worth of Bitcoin that would be interest free at most exchanges, you would have $106 at the end of the year at a 6% interest rate. At the end of the second year, you would have $112.36. That extra $0.36 is earned from the 6% interest rate on the already earned $6 as opposed to $112 with simple interest. It may not sound like a lot but that is 2 years with $100 for simple math. A large principle and longer time horizon can be seen below.
There is no minimum deposit or maximum deposit to get started. There also isn’t a minimum holding period. So if you need your funds back quickly you can pull it out without having to wait until the end of the month. The interest earned is pro-rata based on the amount deposited over the course of the month. If you withdraw your assets on the 15th of the month, you’ll earn roughly half of the interest you normally would during a month. The same reasoning applies if you added more mid-month. You would earn half of the normal interest rate on the starting amount and half of the normal interest rate on the new higher amount.
There isn’t a withdrawal limits for normal, everyday hodlers but there are restrictions put on people with larger deposits over $1 million which can be found here. You get one free withdrawal a month and then pay 0.0025 BTC or 0.0015 ETH after that. The additional fees are imposed by Gemini which acts as the custodial service for Blockfi. If you want to test the withdrawal system, I would recommend making a test transaction on the 30th, wait for your interest to be deposited, and then send the rest on the 1st or 2nd of the month to minimize the additional fees and your UTXO set.
If you still want to gain exposure to the interest rates but want to be able to sell at a moments notice to react to market conditions, Blockfi has a built in trading function. So if you deposit your cryptocurrency and there is a 20% increase or decrease in a day and you’d like to take some profits or limit your losses, you can easily convert your assets to gUSD which is a stable coin created by Gemini. The interest rates on gUSD at the time of this writing is 8% so you would gain a higher interest rate over the 6% or 4% fo Bitcoin and Ethereum respectively and then convert it back into the coin of your choice at a price you find suitable.
Security
I want to preference this post by saying that you should absolutely hold your own private keys to everything you own. Right now I look at Blockfi as the advanced step over your basic exchange as you can earn some interest but you should still treat it as an exchange and not leave more on it than you are willing to lose. Exchange hacks are common and provide little recourse for users when it occurs. However, I understand the fear and complexity of managing your own private keys and the appeal of leaving your assets on an exchange. That is completely understandable and you should use the security features available to you when using Blockfi.
In the settings, I would recommend turning on the two factor authentication (2FA). If you aren’t familiar with 2FA, it is a secondary layer of protection where you have to enter a code as well as a password. This prevents anyone with knowledge of your password from getting into your account as they will need to know your password and have access to your phone, tabet, or laptop. You might be familiar with an insecure form of 2FA that is sent via text message which is great. This is a more secure form of 2FA where you will need to use Google Authenticator or Authy. Make sure you securely keep a copy of the string of text when setting this up.
I would also recommend adding a whitelist withdrawal addresses IF you also happen to own a hardware wallet such as a Trezor, Ledger, or Keepkey or if your preferred exchange still unfortunately uses static deposit addresses. A whitelist withdrawal address is an address that you pre-approved to withdraw the funds to. Any other address will require a 72 hour hold to prevent theft. If you don’t own a hardware wallet, I would recommend buying one. If you plan to withdraw it to an exchange, make sure your exchange uses a static deposit address. A lot of exchanges use dynamic deposit addresses where an address will be assigned to you at the time of deposit as opposed to a static one that will always be yours. Dynamic addresses are used to enhance your privacy and are common but there are still exchanges that make things easier by setting a permanent deposit address for you. You can check by making a few deposit transactions and see if the address changes. You should still double check that is your deposit address at the time of withdrawal from Blockfi as things are always subject to change. If you set it to a dynamic address AND it changes, you might lose your cryptocurrency.
One last security note is that Gemini, the exchange Blockfi has partnered with to custody your deposits, is the only exchange at the time of writing to have insurance on both its hot and cold storage. Most exchanges including Coinbase, have insurance on its hot wallet but not its cold storage. This means that only actively traded funds in the hot wallet are insured but the dormant funds that are not being actively traded in cold storage are uninsured should something go wrong. For more information on Gemini and their security practices, you can go here.
