11/28/2022: BlockFi Files for Bankruptcy
Their business model was never sustainable
BlockFi files for chapter 11 Bankruptcy today There’s no surprise here. BlockFi blamed the filing on the falling crypto prices and the FTX debacle but the truth is that their business model was never sustainable. It was also disclosed in the filing that Alameda Research defaulted on $680 million owed to BlockFi earlier this month. WOW! BlockFi’s top 10 creditors alone are owed close to $1.2 billion and the total amount owed is probably much larger. Chances are depositors will only get a very small fraction of their money back.
As previously mentioned, I regretted making an investment into BlockFi back in 2020. I was blindsided by BlockFi’s hyper growth and I thought the founders are not scammers and genuinely wanted to make BlockFi work. However, their business model was flawed from day one. They grew like weeds because they paid customers a very juicy ~10% on crypto deposits like USDC and ETH. As a crypto “bank”, their supposed business model is to lend the deposits to “institutions” at a much higher rate with supposedly very little risk as these institutions can yield farm at a 20+% return and BlockFi can make the spread on borrowing and lending rates. It turns out these “institutions” are basically 3AC, Alameda and LUNA/LFG, which are all bankrupt and defaulted on their loans. And the 20+% return on yield farming is mostly funded by venture capitalists. When the VC money eventually ran out, things started to fall apart. There are just not that many crypto projects who can productively generate 20+% IRR from their “investments”.
Customers deposited their money into BlockFi to make 10% but it looks like they will end up losing most of their deposits due to the bankruptcy. The “institutional borrowers” like 3AC, Alameda and LFG are now bankrupt. Venture investors are completely wiped out. It seems that everybody loses and nobody wins in the case of BlockFi. The CEOs of FTX and Celsius Network were at least living large and making themselves famous. But I have difficulty figuring out who the winner really is in the case of BlockFI. It’s tragic.
In the same vein, I believe Genesis is also completely screwed. They have exactly the same business model and the same “institutional borrowers” as BlockFi but with a bigger balance sheet. I don’t know how Genesis and its parent company DCG can possibly get out of this mess cleanly as Genesis is obviously and probably deeply insolvent. My bet is that we are going to see a huge downtick on crypto in the coming weeks when the Genesis/DCG saga unfolds and another tsunami of liquidations hits.