At the moment, cryptocurrency investors can do very few things with their crypto assets. BlockFi is helping to change that offering loans with cryptocurrencies as collateral. This opens multiple opportunities for investors, but it still carries some risks.
What Is BlockFi and How Does It Work?
BlockFi is a New York based company that specializes in crypto lending. Simply put, the company offers loans with cryptocurrency as collateral. Therefore, as long as you have crypto, you can take up to 50% of its value in cash.
The loans are simple and straightforward. However, you need to understand that this definitely isn’t the cheapest type of financing available.
The minimum amount of a BlockFi loan is $5,000. This means that you must have at least $10,000 worth of crypto to use as collateral in order to get it. There is also an origination fee of 2% and interest rates that range from 4.5% to 9.75%.
You only need to pay interest on this loan for a year and then you can repay the body of the loan in a single lump sum. You can also refinance it at the end of the year. However, this will be quite costly.
Please note that these cryptocurrency-backed loans have several unique features:
- The maximum LTV (loan to value) is 50%.
- If the value of your crypto collateral falls below those 50% due to its volatility, you must offer more collateral or repay the loan.
- In the aforementioned situation, the loan must be repaid in full within 72 hours.
Are BlockFi Services Safe to Use for Startups During the COVID-19 Crisis?
Nothing is without risk in business, especially now that the world is descending into a global economic recession. The coronavirus crisis brought volatility to financial and stock markets, as well as crypto. One only needs to take a look at bitcoin price to see how unstable it is. Many holders of this and other popular cryptocurrencies consider selling because of all the uncertainty.
However, selling crypto right now can be a huge mistake. This exact volatility, as well as the drastic growth of digital payments use, might elevate cryptocurrencies to a new status. There is now a real chance that crypto will get close to fiat currencies in status. There is even some talk that the USD might fall as the global reserve currency and be replaced by a cryptocurrency.
Those things are but rumors and suppositions now. But even they are enough to show that getting rid of your crypto isn’t the best move. And BlockFi enables you to retain these assets yet get some liquidity anyway. From this point of view, BlockFi loans are definitely safer than selling.
Other Risks Involved in BlockFi Loans and How to Deal with Them
Of course, BlockFi loans are subject to the same risks as all other loans. With this particular type of lending you need to accept the fact that should your chosen crypto crash, you might default on the loan. However, this type of risk is unavoidable when dealing with cryptocurrency assets by default. This inherent volatility is also the reason why crypto might boost your fortune overnight.
There is also the matter of interest rates. They aren’t low, although BlockFi offers some of the lowest rates on the market. Note that standard payments are interest-only and there is a loan renewal option. These increase the risk of getting caught up and accumulating a huge debt.
You should be able to avoid this type of problems by developing a smart loan repayment schedule. Also, you should set up an emergency fund or create some other plan to pay off your loan fast. This way, you will be able to protect yourself in case the volatility turns against you.
Due to the clause about repaying the loan within 72 hours in case of the crypto crashing, it’s essential to keep some of your crypto assets in reserve. Think about this before you take out a loan so you are prepared for everything.
If you don’t have enough crypto on hand, start building up an emergency fund of cash immediately. BlockFi now offers a way for customers to purchase cryptocurrency directly from the company via a wire transfer. At this particular time, when volatility is high, this service allows you a great opportunity.
Another thing to keep in mind is that BlockFi is a startup in an unregulated industry. This entire niche is rather new and therefore murky. The company has shown itself to be trustworthy so far and has rather positive reviews.
A Word of Caution on Alternative Lending
Many types of alternative lending are available now, and BlockFi loans are one of them. This type of financing plays an essential part in the economy, especially during a crisis. The coronavirus recession brought the global lending industry to a halt. It’s nearly impossible to get a traditional loan today, unless it’s part of a program like the PPP. Therefore, alternative financing is the only solution for many businesses.
However, you must never forget the dangers of these loans. Not all of them are equally risky, but all of them are rather poorly regulated. This leaves a lot of room for corruption and scams. And because of the lack of regulation, you have little chance to defending your rights in court.
The most dangerous of alternative lending types is payday loans. They are outright predatory. The fees are so high, you might end up paying the loan amount twice over because of them. They also have extremely unfavorable terms. For example, the lender might charge an early repayment fee or forbid early payments altogether. Therefore, you will have no choice but to pay out exorbitant interest rates in full.
BlockFi loans are, thankfully, not like that. You can pay off this loan early and interest on it isn’t insurmountable. However, it’s still imperative to develop a repayment plan before you actually apply for the loan. This might make you reduce your ambitions about the amount of money you should take.
Never forget that being realistic is imperative if you want to avoid being swallowed by debt during a volatile recession.