BlockFi went from a highly anticipated crypto startup with limitless potential to a bankrupt crypto lender. Just a year ago, the crypto lending firm was raising millions of dollars from big-name VCs like Bain Capital, Tiger Capital, Coinbase Ventures, Winklevoss Capital and Valar Ventures.
BlockFi, at the time, was marketed as a holistic platform that allowed cryptocurrency enthusiasts to access financial products ranging from low-interest loans to crypto reward credit cards. Users were able to trade 40+ crypto assets at competitive prices and store them all with the firm. It was the de facto institution to bridge retail users into the space with its intuitive interface and simple features.
In January of 2022, the firm was making close to $48 million ($33 million on lending, $11 million on trading, and $4 million on credit cards). During the time, BlockFi was raising funds at a valuation above $5 billion and raised $1 billion throughout its funding rounds. However, things took a drastic turn by July and August, the firm was making only $15 million a quarter, a 70% drop and with costs well above that..
We spoke with an insider and got a peak of what happened in the last year…
The beginning of BlockFi's end..
According to the BlockFi anon, the entire fallout began when BlockFi got involved with Alameda and Three Arrows Capital (3AC). This was early 2022, before the Luna and 3AC crash. During the time, BlockFi provided a loan to Alameda and FTX, worth $1 billion. This loan was used to fund daily operations at BlockFi since the firm had grown too fast, too soon. BlockFi, at the time, had 800 employees which meant operating costs alone were $20 million a quarter – an exceptionally high number given the revenue generated by the firm. BlockFi was on a tightrope as it had to juggle between high expenditures and obtaining more capital before the next series of valuation began. It did not look good.
BlockFi unaffected by Luna
The crash of LUNA was a big “uh-oh” moment in the crypto industry as everyone scrambled to see if they had any exposure. The LUNA moment truly caught many retail and institutional investors by surprise.BlockFi was unaffected, they did not rely on DeFi or similar practices as other lenders to earn their yield and did not lose anything to LUNA UST. It was clear, the bear market was here.
The Luna Contagion effects BlockFi's Creditors: 3AC
While BlockFi did not have any direct exposure to LUNA, one of its largest clients and debtors, 3AC, was liquidated. BlockFi was overcollateralized with 3AC and experienced ~$80 million in losses. While it was a small portion of losses compared to Celsius, Voyager and Genesis (some of whom had lent uncollateralized to 3AC) – it was enough to initiate a lot of rumors on social media accelerated by various non-friendly news agencies. Despite liquidating 3AC’s position over 10 days ahead of Voyager, the firm still faced a lot of problems both internally with cost runway and externally with marketing and PR. BlockFi’s issues from within exposed during a leaked call with a potential VC, on how to stay afloat amid falling revenues came to a head when receiving a new offer from crypto’s golden boy, SBF.
On FTX's $400 Million of Debt Financing
Just like many others have thought and believed, SBF was the knight in shining armor for many crypto firms during the LUNA collapse. When BlocKFi sought for debt financing – their main objective was to keep customer funds safe and ensure that the firm had enough to pay back its customers. SBF and FTX Ventures were one of the many VCs that was willing to provide BlockFi with the cash. When the executives at BlockFi spoke with SBF – many believed he had the customer’s interest at heart. Unlike the other VCs, the BlockFi anon insisted that SBF put “depositors ahead of shareholders”.
To BlockFi’s executives, “SBF seemed like he wasn’t in it for a simple 10x on his investment, but for something else.” An offer from Nexo was turned down as this would have put their shareholders higher up the credit ladder in event of any bankruptcy. In hindsight, attempting to buy Blockfi was just a part of SBF’s master plan and putting the retail public first was never truly Sam’s priority.
'BlockFi's Marketing Department Let Us Down"
While FTX’s downfall led to the eventual collapse of many crypto firms including BlockFi, the BlockFi anon did say that the overall marketing of the firm could have done a much better job post-LUNA/3AC collapse. A key issue was the firm’s inability to differentiate itself from other crypto lenders like Celsius and Voyager led to its demise. In comparison to its competitors, BlockFi suffered a fraction of their losses.
However, the social media narrative wasn’t on their side, and everyone thought that BlockFi was on the same boat as its competitors. This ‘flawed perception’ of the firm initiated a bank run. Adding to the issue, the lack of relationships with other firms and institutions made it difficult to keep pace of withdrawals versus their fixed term loan book. According to the anon, ‘BlockFi believed they could have easily met all the withdrawals via calling back the term loans. However, with over $20 million salary costs per quarter and poor marketing meant BlockFi was in a difficult place leading to its collapse.”
"Celsius Was The Worst Offender"
As mentioned, BlockFi was not as exposed to the events compared to Celsius and Voyager. Celsius had $10 billion worth of customer funds and only $1.3 billion to cover, and Voyager had $1-10 billion of assets and liabilities with 100,000 creditors. BlockFi only filed for bankruptcy after the FTX saga.
Not to mention, Celsius was also active in DeFi and even lost $120 million in a BadgerDAO hack back in December of 2021. The BlockFi anon stresses that “Celsius was the worst offender of them all as they relied on illiquid assets to generate yields, and they were exposed when the bear market came around and users attempted to withdraw their funds.”
On the side of regulation, BlockFi KYC’ed all its clients and worked on a different spectrum from its competitors. Rather than opposing regulation, BlockFi embraced it as a lending leader in the US:
first to get a license to loan against Bitcoin as collateral
obtained Lending licenses at the State level
Money Transmissions licenses in the US
Money Services Registration at the Federal level
Federal + State settlements for BlockFi to register its interest product.
Celsius and Voyager, instead, often played with customer’s funds and it was an “open secret shared among crypto insiders.” Unlike the other players, BlockFi was cooperative with regulators and responded to fines and various changes in regulation. On top of all this, BlockFi did not have an inhouse trading team or a BlockFi token.
The anon speculates that BlockFi was targeted by its competitors – especially on social media. Given the link between Celsius and DCG, and DCG’s ties with CoinDesk and other media firms – it isn’t hard to add together what was happening in the background. The frenzy that was caused by Celsius and Voyager incited a bank run on BlockFi that it was not able to escape.
What's Next For BlockFi?
On November 28th, BlockFi filed for Chapter 11. After filing for bankruptcy, it was estimated that BlockFi had more than 100,000 creditors and liabilities close to $10 billion according to the filing. The biggest creditor is Ankura Trust Company with $729 million. The BlockFi anon mentioned that BlockFi is “still trying their best to recover the funds for its users” – which is why they’ve asked for time to “restructure’ despite filing for bankruptcy. For example, the firm’s credit card business is still intact and could perhaps be sold to another firm. “BlockFi also owns some SBF’s Robinhood shares as collateral that it can only sell after SBF declares bankruptcy.”
Unlike others who had a first in first out (FIFO) policy, BlockFi is looking towards a more pro-rata option to avoid “leaving behind” the Mom & Pops in Ohio who only listen to crypto news once a year falling victim to others taking out their funds. In our case: “up to 80% of the funds will be returned to the customers.”
Final Takeaways
The crypto industry is certainly not dead and gone. The anon believes that there are still a few sectors of the crypto industry that still have immense potential and have yet been fully explored. From decentralized protocols, DAOs, DEXs to cybersecurity and custody firms, these are only the tip of the iceberg of what crypto can truly bring and provide. Transparency, decentralization and self-custody is more important than ever.
If the past events have taught us anything, it’s that we must be more aware of scams and phishing. Not to mention, the growing importance of self-custody, and users learning to hold their funds themselves, not your keys not your coins. Crypto is the way to set yourself free and be truly bankless. Lastly, the reckless behavior of overleveraging by founders and retail have suggested opportunities but also a high amount of risk. “Loose money creates loose rules”, and that’s certainly why we need regulations in place to hold bad actors accountable. The crypto industry definitely needs more “adults in the room”, the lack of regulation makes it easy for “bad actors” to take advantage of the system. There are few “homegrown founders” like John from Run The Chain that genuinely hopes to build crypto better and bigger.
