Yeah, it both sucks for those people and was entirely predictable. People talked about using BlockFi here and got roasted for it. Then, a few months later, this was posted as an explanation of how BlockFi offered those juicy yields:
Looking back at this 4/15/21 article is interesting.
This is a Sponsored Deep Dive on a company I’ve been wanting to dig into for a long time. BlockFi offers up to 8.6% APY on deposits, which is obviously tempting and also confounding. I’ve had so many text conversations with friends that go something like, “I want to do this, but it has to be bullshit, right? How does that even work? We need you to do a Not Boring on this.”
I’m happy to report that it is not bullshit, and I have the receipts to prove it.
[submitted too soon]
The first question anyone has when they hear about BlockFi is: “What’s the catch? 8.6% APY sounds too good to be true. That can’t be legit.”
Yes, indeed. That seems like a very good initial response.
I went DEEP to understand how they do it, and it’s legit.
Oh, phew, that’s a relief. I wonder how that works.
Essentially, BlockFi arbitrages the fact that traditional finance and crypto don’t like to deal with each other.
This is… what?
To a client, BlockFi looks and feels like an online bank. When I set up my account, it felt very much like setting up a regular online bank account. […] Within two days of starting the process, I now have a meaningful amount of my net worth in BlockFi. I wouldn’t recommend it if I didn’t trust it for myself. And it was easy.
This is all very bad!
But how again does the high-yield make sense?
There’s this tension in crypto: thousands of people have made millions of dollars by buying and hodling bitcoin, ETH, and other coins. On-chain, they’re very wealthy. But to actually use that wealth to buy things, they need to sell coins.
Yes, go on.
BlockFi solves that by offering USD loans collateralized by bitcoin at rates as low as 4.5% APR.
I see. So they’re letting crypto holders borrow money against their crypto. That seems like something they’d want. But something seems wrong. I just can’t put my finger on it…
The BlockFi Interest Account is normally where people start to give me quizzical looks, because BlockFi offers up to 8.6% APY on stablecoins and 6% APY on bitcoin.
Yes, this is it - how on earth is it sustainable to borrow at 8.6% and lend at 4.5%? That is the world’s worst banking model. It seems like the friends you’re talking to are quite smart.
Obviously, there is no free lunch
Obviously
Still… 8.6% is a lot. It beggars belief. I didn’t understand it at all, which is why I wanted to write this piece in the first place, to dive in and see if I could figure it out and explain it.
You’re doing a bang-up job so far.
Remember from earlier that banks want to pay high interest rates. It attracts deposits, which enable more lending, which makes more money.
That’s true as long as they lend at higher rates than they borrow. BlockFi apparently doesn’t (didn’t)!
Anyway, the column goes on to argue that BlockFi is engaging in arbitrage, but that doesn’t appear to be true, and I’m tired of copy-pasting.