i.e. how I’ve been earning 8-9% of my cash in a ‘savings account’

Note: Behind the curtain of running the YMF blog, I often plan and write blog posts a few weeks in advance of posting them. This normally operates just fine, until February 14th 2022. On this day, BlockFi (the brokerage I’m about to talk about) settled with the SEC (Securities and Exchange Commission, the governing body here in the US that regulates the trading of securities (i.e. stocks and maybe crypto?!?)) and as part of that settlement, had to shut down the interest bearing account although only for new customers, existing customers like me are ok, but they do plan to apply for a new type of crypto interest account approved by the SEC in the future. Phew, so all that to say, as of about a week ago this information has changed, but I had the post ready, I think it’s a cool story and who knows what’ll happen here in the end.

Background

This might be one of the crazier posts I’ve written, and honestly I held off for quite some time writing this article as I felt it was too far out there of a topic to write. I’m not one to get too risky with my money, I’ve always been a ‘play it safe-ish’ kind of an investor. However in 2021 I did get pretty deep into crypto including multiple brokerages, staking, and mining. I also got signed up with BlockFi, a site that allows you to earn interest on your crypto. I’m still low key expecting any day for the site to get hacked or turn out to have been a ponzi scheme but hey when you set low expectations they’re easy to achieve!

In this post I wanted to share my experience, some of the risks but also why I keep doing it. I would like to do a disclaimer saying that this is a risky investment. I’ve spoken before on how most of my money goes into target date retirement funds through my 401k, then most of the rest goes into index funds, and then <5% goes into ‘riskier’ investments. BlockFi involves crypto, which is risky, and BlockFi is essentially taking your crypto (risk) and lending it out (riskier) and paying high returns. I don’t have a ton of crypto, and only a portion of that is invested with BlockFi. Final disclaimer – I am going to include a referral link, whereby we’ll both get $10 in Bitcoin if you sign up using my link. As you’ll learn, I am still putting money (a small amount all things considered) into BlockFi on an ongoing basis.

The good part

If you’re into crypto or getting into it, or new, you’ll quickly learn the phrase “HODL”. HODL stands for hold, i.e. holding your crypto. Crypto has proven to be quite volatile over the years, and in tough times the rallying cry amongst crypto enthusiasts has been “HODL”. It originates from way back in the days of bitcoin when a typo from a passionate bitcoiner announced to the world that ‘they were not selling and they were hodling”, hence HODL. I often say that your money should work for you, and so if you are HODLing your crypto, you might as well earn on it. That’s where BlockFi comes in and they will pay you monthly interest on your crypto for holding it with them.

Although the interest rates have varied over time, as of right now (Feb 2022), you can earn: 4.5% on your Bitcoin, 5% on your Ethereum, 2.5% on your Chainlink and 8.75% on your stablecoins. Like I said, if you’re going to just hold onto your crypto, it could make sense to earn while it sits there.

I hold most of my crypto in bitcoin, and was very intrigued to earn 4.5% on my bitcoin. However, I feel like I stumbled into a hidden gem with the stablecoins – it’s essentially a savings account that is paying 8.75%. I don’t know about you but my regular savings account pays basically nothing, and my ‘high yield’ savings account pays 0.5%. If my cash is just sitting there, I might as well earn all that I can on it. Stablecoins are meant to be stable – meaning they are going to be worth $1 for 1 unit of the crypto.

Although cash doesn’t make up a large portion of my portfolio…an 8.75% interest rate is super high. I like to track my investments against a 8% benchmark, which is a historical return for what the stock market has done. I’m beating my own benchmark without any of the ‘risk’ – it’s a stablecoin that I can withdrawal at my leisure for an equivalent amount of USD.

The risky part

I’ve thoroughly enjoyed my experience with BlockFi, I’ve loved earning crypto on top of my crypto. However, there are quite a lot of risks that I’d love to cover with you.

BlockFi is currently in regulatory issues with 5 or so different states. There are a lot of securities laws in this country and those are good things IMO, they are meant to protect the average investor like us. Securities are regulated, meaning you have to follow certain rules and guidelines and register with the appropriate authorities. The crux of the argument here is that the 5 or so states that have investigated / shut down BlockFi in their state are saying that BlockFi is selling an unregulated security. BlockFi is saying that there are no guidelines for crypto securities so there’s nothing to register. The states are saying mmm don’t care…if it looks like a duck and quacks like a duck, it’s a duck. So that’s definitely a risk – but as of right now my state (Georgia) has no such issue so BlockFi continues to take and pay me on my crypto.

Crypto interest bearing accounts are not FDIC insured. I mentioned one of the reasons I love BlockFi so much is that I’m able to treat it like a savings account and earn 8.75% on my cash. However, one good thing to keep in mind with a savings account is that (at least here in the US), the government guarantees that the bank won’t lose my money. I have full confidence that my $100 will always be there and the bank won’t lose it. BlockFi (and other competitors like them) do not have those same guarantees so if BlockFi goes under or overextends itself, my $100 in stablecoins (or other cryptos) are not guaranteed and I’d just lose that money.

It’s not clear how BlockFi is earning that interest to pay me. Well, I say it’s not clear, it’s not crystal clear we should say. BlockFi on their site call out that they are rehypothecating my crypto, meaning they are taking it and lending it out or investing it or doing fancy derivates trading with it. Sure they do offer crypto loans and if I’m a bitcoin millionaire not wanting to sell my bitcoin, I could pay 10% on a loan using my bitcoin as collateral, then BlockFi pays me 8.75% on the dollars I’m loaning them. However I don’t think this is as big of a market as you’d think, I believe BlockFi to be loaning my bitcoin (or stablecoins) out to big trading shops or investment firms that are doing all sorts of fancy trading with it. It’s definitely risky and I as a user don’t have good visibility into who is using my bitcoin and if they are being safe with it.

Finally, I’ve really focused and enjoyed earning 8.75% on stablecoins, but I should call out that even stablecoins are risk in and of themselves. Despite saying they are 1:1 with USD, many are actually not audited to ensure this is the case. So the worry is that this random organization that isn’t audited is just taking your dollars and giving you crypto dollars and saying ‘trust us, it’ll still be worth $1’ when you redeem it. The notable example of this is Tether, there have been a few good in depth news stories on them if you’re interested in learning more. I will say that there are a few examples (including Gemini USD) that are publically audited to ensure for every 1 in a stablecoin of crypto, theres $1 in the bank. If you’re super nerdy like me, here’s a link to the actual audit where I verified this before investing in GUSD.

Crypto is risky. I said it at the beginning of the post but it’s a very volatile market. In theory it could all go to $0, it’s not government backed and in some ways it is just ‘magic internet money’. It only has value because we the investors say it has value so let’s hope everyone doesn’t wake up tomorrow no longer wanting to hold it.

My take

Crypto makes up a very small percentage of my portfolio, and the crypto that I lend to BlockFi is a smaller portion of that portfolio. It’s risky, but it’s not without reward. I’ve been a lender for about a year and so far it’s been good. Sure they’re being sued by 5 different states but none of those have been fully resolved (so you’re saying there’s a chance!) and BlockFi continues to pay me each month on my crypto. I had some ideas early on about putting a LOT of cash into stablecoins to earn 8.75% but I’ve since backed off on that, it just feels a bit too risky for me. I am however putting a little cash in each month or so, taking a risk for a big reward!

There are also a few other competitors (Celcius, Voyager for example) that will pay higher rates, but I’ve found BlockFi to be professional, and as best I can tell, legit. I also like that BlockFi is 100% US based (unlike some others) so I feel safer with a company here in the US operating (as best they can with crypto’s ever changing legal and tax landscape).

Present Day Note: Well the lawsuits were resolved and BlockFi is no longer offering their interest account to new customers. I however as an existing customer will keep earning as long as I keep my crypto there. I think this proves how legit BlockFi is – they are open and willing to work with regulators. Of course no guarantees on their ability to get a new interest bearing account approved but we’ll see! Shameless plug – I’m including my referral code once more. You can’t earn interest (as of right now), but they do have a regular wallet and a credit card which looks pretty cool.

All that to say – I’m happy and will continue earning (a little) crypto on top of my crypto!