An In-Depth Review of BlockFi's Bitcoin Collateral Loan Product (Written Guide)

in LeoFinance2 months ago (edited)

An In-Depth Review of BlockFi's Bitcoin Collateral Loan Product (Written Guide).png

Collateralized loans are the talk of the crypto town these days. The ability to post your BTC, ETH or other cryptocurrencies as collateral to receive a liquid loan in USD or USD stable coins is an incredible feature that has a seemingly endless number of potential use cases.

Granted, with this feature comes a significant risk. I feel the need to kick off this article by saying:

Collateralized loans are the essentially the same thing as margin trading. If an investor does not do the proper research and does not pay attention to the loan-to-value ratio of their position, there is a significant downside risk to these types of activities. Please proceed at your own discretion and use caution with these products.


LeoPedia Video Guide to BlockFi Coming Tomorrow: I ended up turning this post into a video for the LeoPedia archives as well as the LeoFinance YouTube Channel Archives. The post-production of that is almost finished and you can catch it on 3Speak/YT/all major podcasting platforms tomorrow


BlockFi’s Loan Structure:

Source: Blockfi

I used the BlockFi loan product to collateralize Bitcoin, so I will focus on that product in particular. The loan structures for the other available currencies (ETH & LTC) work similarly to BTC.

Hybrid DeFi

Obviously, getting a loan through BlockFi on crypto collateral is not participating in DeFi. DeFi stands for decentralized finance and a BlockFi loan is through a centralized institution which means you're utilizing a centralized custodial service to store your crypto and issue out liquidity against it.

Given that, I believe we can classify these types of products as “hybrid DeFi” — while they aren’t decentralized in nature, they are still leveraging decentralized assets in order to gain liquidity.

Also, these products are competing with DeFi products. I believe that as the DeFi space continues to grow, we’ll see better and better products out of companies like BlockFi with more competitive rates, LTV offerings, etc.

Tax Advantages

I was listening to this snippet from an interview between Pomp, Polina and Zac Prince (Zac is the founder and CEO of Blockfi) and a great point was brought up about taxes. Obviously, I’m no tax expert, but I’ll paraphrase what was mentioned in the interview:

If you bought $1,000 USD worth of BTC and today it’s worth $9,500, you would have to pay $8,500 in capital gains tax if you were to sell that $9500 worth of BTC back into USD.

If, however, you deposit that $9500 BTC into a Blockfi account and take a loan against it, you don’t pay capital gains on the $9500, since you didn’t sell BTC but rather deposited it as collateral. Now if you turn around and utilize the liquidity (loan) that you got from BlockFi to invest in the stock market (for example), you can also write off the interest APR that you’re paying to hold the loan from Blockfi.

The downside to this is that you’re not actually selling BTC at the significantly higher price than you bought it for. If BTC falls after you take out a loan, then you may have to deposit more collateral and you wouldn’t have effectively captured the gains from selling at the heightened price. Depending on what you do with the loaned capital, you could bring those USD back into BTC and deposit that as more collateral. You then wouldn’t have the liquidity in USD, but you would have more BTC than you started with (effectively turning your BTC position into a leveraged margin trade).

Conclusion: Pros & Cons

While this isn’t DeFi and I personally prefer DeFi collateral products over centralized ones, I do believe that there is a great deal of value in using a service like BlockFi. Setting up my account on BlockFi was extremely easy and initiating the loan took less than 10 minutes. I also got the loaned capital deposited to my account the next day.

Pros:

  • Better management for margin calls
  • “More professional” system (customer support)
  • Third-party custodian
  • USD liquidity (wire transfer to a US bank account)
  • Interest-only payments

Cons:

  • Centralized
  • Counterparty risk
  • KYC
  • Geographical limitations
  • High APR Interest Rates (compared to many DeFi loan products)

In general, I look at this as an alterntative to many DeFi products out there. With DeFi, you get a lot of benefits but you also get a lot of negatives along with that. There are things to like and things to hate about DeFi - just as there are with BlockFi's loan product. Evaluate each loan product on their own merits and make sure that you're comfortable with the risk profile of each.


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I would not send bitcoins to the costodial service - "not your keys - not your bitcoins"

I couldn't say it better, but worth repeating : "not your keys - not your bitcoins"

I think DeFi would really be an amazing feature on a PoS protocol like Hive. Is LeoFinance looking at this direction in the near future? We already have stakes, all it requires is to have the stakes locked up against a powerdown for a certain time and then receive some liquid HIVE boosts. Pay your interest in HIVE over time and then unlock your stake after terms gets completed.

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nice tie, are you a prince ? (ahahahah, joke inside).