Staking your Bitcoin

When you stake your bitcoin, you deposit your bitcoin to a third party that uses your bitcoin to generate returns. For this you are compensated, often in bitcoin as well, but some parties will also pay you in dollars or stablecoins. This is a good way to earn extra income on your bitcoin without losing any exposure to the price. This means that you still profit if bitcoin goes up in price.

BlockFi

One of the most well-known and respected parties that offers this service is BlockFi.

Risk/reward

The attractiveness of depositing your bitcoin at BlockFi is that you will get paid out in bitcoin, so you are slowly increasing your stack. You are earning extra income, while keeping full exposure to bitcoin. Below we specifiy the interest rates you can expect, althought they might be subject to change in the future. Now what about the risks? The obvious risk lies in the fact that you lose control of your keys/coins by depositing them to BlockFi. In this sense your main risk is similar to having coins on the exchange: counterparty risk. We can break down this risk in different subcategories. One obvious one comes down to the question whether BlockFi is a trustworthy party. This is an important question to ask and it's the same question that could prevent you from trading through an exchange in some lesser known country, even though the fees are lower. Next to that we should assess that apart from BlockFi begin legit or not, the risks their business model imposes on our holdings. For this we need to dive into the way BlockFi makes money.

Trustworthiness

The team of BlockFi is quite visible, both online as on television for example. One could effortlessly check their identies and resumes on the BlockFi website or on LinkedIn. This is quite normal in traditional finance, but less so in the crypto space.

Investors

BlockFi has some well-known backers, which pleads for their trustworthyness. Among the investors we find Three Arrows Capital, Morgan Creek Capital Management, Coinbase Ventures, Galaxy Digital, Susquehanna Government Products and Winklevoss Capital.

Business model

How is it possible for BlockFi to pay out around 5% on your bitcoin holdings?And what risks do they take to be able to compensate you for your bitcoin? One obvious method is by lending out your bitcoin for a higher rate to borrowers. BlockFi claims that it mostly lends out to institutions. This could range from hedgefunds and OTC market makers to bitcoin ATM operators. BlockFi succesfully managed to sail through the march 2020 Covid crash without losing any customer funds, but what would happen if the bitcoin price suddenly spikes? The borrowers would have to pay back (your) bitcoin, which might be way more expensive than at the time they borrowed it. For this reason it is important that BlockFi:

  • lends out the bitcoin to a diverse enough palette of borrowers
  • sets appropriate loan to value and margin requirements
  • manages liquidations and margin calls well
  • is able to hedge risks

The team says it does intensive due diligence with respect to borrowers, and given the liquidity of the bitcoin markets and the loan-to-value requirements for borrowers it seems to be very doable for them to adequately cover their risks.

On top of that BlockFi holds bitcoin on their own balance sheet as well, which hedges some of that upside risk. If we look at the numbers, it does seem like a solid business model. People can borrow stable coins for a 10%-13% interest rate while lending it out for 8%. With an origination fee and proper risk management this is a solid way to make money while providing a service towards both borrowers and lenders. BlockFi might also change its offered interest rates when deemed necessary. This is probably a good sign, since it means they are balancing their books.

What can you earn?

Currently the offered interest rates are as follows:

Currency Amount ** APY
BTC (Tier 1) 0 - 2.5 6%
BTC (Tier 2) > 2.5 3.0%
ETH > 0 5.25%
LTC > 0 6.5%
USDC > 0 8.6%
GUSD > 0 8.6%
PAX > 0 8.6%
PAXG > 0 5%
USDT > 0 9.3%

Go to Blockfi