TL;DR: BlockFi pays interest on your crypto deposits (6% on Bitcoin, 5.5% on Ethereum). But they also, and perhaps even more exciting, pay 8.6% interest on your USDC deposits, meaning a $10,000 deposit will earn more than $860 of interest in just 12 months. Read on to see my full BlockFi review.
The Good Old Days
If your financial journey started anything like mine, you used to be a big fan of high yield savings accounts. You could earn a decent rate of return (a whole 4.5% a year!), there was no volatility and the number in your account always went up!
Well that party ended with the Great Recession of 2008. Since then interest rates have been near zero. And except for a brief increase last year, they were reset to zero again in 2020. The Fed recently came out publicly stating they expect rates to stay near zero all the way through the end of 2023.
This might help the overall economy – but it actively deters you from saving money. There is now no way to put money in a savings account and earn any kind of return.
Let’s look at your current options:
Ouch. If you deposited $10,000 into the highest interest bearing account on this list at 0.75% interest, you’d earn just $75 of interest over 12 months . And this doesn’t even take inflation into account, which is aso close to zero at the moment, and would reduce the real value of your savings by more than the interest you earned.
There has to be a better way.
Forced into stocks?
You might be tempted to put that money into the stock market instead, chasing the average 10% annual return championed by so many index fund investors. I’m not going to argue that you shouldn’t use the stock market – it definitely has a place in your portfolio.
But I would argue there isn’t any guarantee of such returns. And to get that kind of return on average you must endure the 30% drops in your savings such as we saw in March 2020. With the markets now relying more and more on intervention from the Federal Reserve, rather than the prosperity of the American economy, things can only get riskier in the future.
Enter Digital Finance
So what are you to do?
Well, thanks to technology, the internet and truly amazing innovation there’s a new solar system of opportunity – digital finance.
We don’t need to go too far into the history of digital finance to get to the punchline:
You can earn 8.6% interest on your savings.
With BlockFi, that same $10,000 deposit will now earn you $860.05 in interest in just 12 months. Leave that deposit alone for 3 years? Over $2,800 in interest.
Oh, and you can earn a heck of a lot more on your savings if you introduce slightly more risk. More on that in a future post.
How even does this work?
You’ve probably heard of Bitcoin before. And what you probably heard was that it was digital money that is notoriously unstable and volatile. And you’d be right.
What you probably have not heard of yet is USDC. Which stands for USD Coin. USDC is a stablecoin – digital money that is pegged to a traditional currency. This means it’s value won’t change over time.
When you exchange 1 USD for 1 USDC, you’ll be able to redeem it at some point in the future back to 1 USD. It’s a new fantastic bridge between the world of traditional finance and the new frontier of digital finance.
Seems simple right? By taking price volatility out of the equation we can now store value digitally with confidence, and earn a great rate of return in the process.
BlockFi Review: Tell me how I get my 8.6% already
Ok, Ok. So if you deposit your USDC, there’s a highly reputable company (in traditional finance they would be a bank, but they aren’t a bank because we don’t need them in digital finance) that will offer you a savings rate if you choose to deposit your funds. That company is BlockFi.
I use BlockFi myself – for nearly a year now. To fully test out BlockFi I’ve made deposits in Bitcoin, in Ethereum and in USDC. I’ve made both deposits and withdrawals, which have been easy. And the part you’re interested in hearing about – I’ve been paid interest regularly and on time.
Making a Deposit on BlockFi
Making deposits on BlockFi can be very straightforward, or not as straightforward depending on which state you live in.
As a conduit between traditional finance and digital finance, BlockFi has to work within the rather arcane rules many states have that really demonstrate how little they trust you with your own money. For example, New York residents aren’t even able to open a BlockFi Interest account. But I digress.
In most states you can simply wire money (NOT ACH transfer) from your bank account to BlockFi. This is the fastest and easiest way. Once received from your bank, your funds will be immediately converted to stablecoins and start earning interest! One step and done.
In some states, such as the one I live in, you won’t be able to wire directly to BlockFi yet. If, after opening your account, you do not see the option to wire to BlockFi, you’ll need to trade your USD for USDC on your own, then send that to your BlockFi address.
In my Model Portfolio video I showed you how I convert my USD to USDC fee-free:
Withdrawing funds from BlockFi
Putting money in is all well and good. But what about when you actually want to use the funds and interest earned? The process is pretty straightforward.
BlockFi offers one free crypto (BTC, ETH) withdrawal and one free stablecoin (USDC) withdrawal each month. Since I see this as a savings account equivalent that is plenty for me as my transactions are pretty infrequent. I’ve never paid a fee to withdraw my money, and even if I did then they are quite reasonable.
When you’re ready to make a withdrawal you submit a withdrawal request, which is subject to a one business day security hold. I know this seems annoying, but it seems like a very good security measure to prevent any unauthorized withdrawals.
If you withdraw in the middle of the month, you’ll still be paid interest on the 1st of the next month for the number of days you had any funds on deposit. Just to keep the math clean this is why I try to schedule and withdrawals for the first of the month.
In the past, I have had withdrawals flagged for additional verification. I was immediately sent a link to confirm my identity, where I had to show BlockFi my drivers license and face just to really really make sure it was me who was making the withdrawal. It’s my guess this is more likely to happen if you request a withdrawal from a new computer or IP address, but that is just speculation on my part. You can view this as an annoying extra step, but I’ll take the extra layer of security.
BlockFi Frequently Asked Questions
This is always the first question I hear. And the same one I asked as well as I was doing my due diligence on the company. Well, just like a regular bank, BlockFi makes loans (digital loans in currencies like USDC, BTC and ETH) to institutions and corporations (not individual clients) and charges them interest.
Interest rates on these loans are a lot higher than you might be used to in the traditional finance space. But that’s actually good for you, as you’re paid a portion of those fees as interest. You can see their official answer here.
Yes, and no, but not in the way you’re probably expecting. There is no FDIC insurance in the digital finance world. As you might expect banks and governments aren’t the quickest to adopt new technology, especially those that quite literally threaten their existence.
But with BlockFi specifically (this isn’t true with a lot of other digital finance companies), they use a custodian to hold their funds that maintains a private insurance policy for the value of funds they have in their operational accounts. Additionally that firm is audited and regulated by the State of New York.
If funds were lost – would that policy actually work? Fortunately, it hasn’t happened yet. But it certainly is a risk you should be aware of.
1. The USDC – USD peg breaks. This would most likely happen if somehow there weren’t enough dollars in the bank to make sure every USDC in circulation was actually backed 1:1. I believe USDC to be best stablecoin option out there at the moment, with the simplest backing method that guarantees it’s value. But the peg could break.
2. A hack that drains customers funds. This is digital money. Anything digital can be hacked. And it’s certainly not unheard of for digital finance projects to lose funds due to either malicious hacks or coding bugs. BlockFi in particular has, in my estimation, done a lot more than most other companies to prevent this. They themselves fell victim to a social engineering hack that resulted in some customer data, but not funds, being exposed in 2020. As such they have more reason than most to prevent that from happening in the future. This is also why I have the whitelisting feature turned on in my account, so funds can only be withdrawn to addresses I specify at least 7 days in advance.
3. Counterparty risk – Just like a regular bank, BlockFi needs to lend out funds it takes as deposits to other customers to generate a return they then pay you as interest. As with a regular bank, if a sufficient number of those loans went unpaid, your deposits might be at risk. But most of BlockFi’s loans are overcollateralized, meaning the value of the collateral borrowers must deposit in order to get a loan is greater than the value of the loan. So in a default situation, BlockFi would be able to call in the loan and see no loss of principal.
Any individual or business worldwide – with the exception of New York State residents. Additionally residents of some states might be able to open and use BlockFi accounts, but not wire directly to them. BlockFi is acquiring money transmitter licenses state by state and adding capabilities as quickly as possible.
BlockFi frequently makes changes in the interest rates they offer. Since I’ve been a customer they have not changed the interest rate offered on stablecoins, in fact the CEO, Zac Prince, has mentioned he sees that rate remaining stable for quite some time.
They do make more frequent tweaks on the interest rates offered on cryptocurrencies. BTC has gone down, ETH has gone up.
You can always see the current rates BlockFi offers here.
Interest is paid out on the first day of each month. One little known feature of BlockFi is you can choose which currency you’d like to be paid interest in. In other words your 8.6% interest could be paid out to you in Bitcoin. Or your Bitcoin interest could be paid out in Ethereum. There is an additional 1% administration fee for this feature.
I think it’s safe to say the risks are greater than if you were putting the money in a savings account. Largely this has to do with the “newness” of this technology, rather than any inherent safety issue. It’s also one reason rates are higher than the traditional financial system.
With interest rates near zero, a heavily manipulated stock market, and a Federal Reserve committed to overshooting their inflation target of 2%, we’re forced to explore new ways to increase the value of our savings without adding a lot of risk.
Digital finance offers us one such path. Yes it’s relatively new, but offers performance unavailable from traditional channels.
Should you put your life entire savings in the equivalent of a digital savings account? Absolutely not. Does it offer a very attractive rate of return given the risks?
You can register for a BlockFi Interest Account here.
Disclaimer: Finance Astronaut may be compensated if you end up opening an account and depositing funds with BlockFi. This is gravy for me, helps fund my coverage of digital finance, and in no way influences my recommendation. I put my own funds to use in testing and using and products I mention on Finance Astronaut.