Why I decided not to deposit my Bitcoin for passive income on BlockFi

in LeoFinance3 months ago (edited)


BlockFi is company and a platform that offers services like earning interest on deposited cryptocurrencies, borrowing cash, and buy or sell crypto. What caught my attention was the ability to store my Bitcoin on BlockFi and earn interest on it on monthly basis. While interest rates change on market conditions, the rates they are offering seems really good. For the first 2 Bitcoins the interest rate earned is 6%, and 3% for the any amount above that. They even offer higher interests for other cryptocurrencies and stable coins, and interest rates go as high as 8.6%.

This post is not intended to be review of BlockFi or any kind of financial advice. This is simply my personal decision making process and overall thoughts about holding Bitcoin. I have been hodling and accumulating Bitcoin for a few years now. When I keep seeing some traders mentioning BlockFi as an option for passive income for Bitcoin holders, I had to consider this option. At first, I didn’t pay too much of an attention. As my understanding about Bitcoin kept evolving and my investment strategy kept changing from a short term trader to temporary holder and now to almost a perma hodler, it seemed right to consider various options of storing them.

Before this massive bull run of Bitcoin and crypto in general started, when Bitcoin was at or above 13k, close to the end of last year, I was considering to sell all or some of my Bitcoin by the end of the year. When it got to 16k, my intention to sell became more serious and ask friends with who I talk about crypto on discord, and who are also part of Hive community for advice. I was told selling at that time was not a good idea, it was better to hodl as long as I could. Then 19k happened. At this point I was almost sure I was going to sell at least one Bitcoin. But friends again said, “Don’t do it. You waited this long, wait a little bit more.” I took the advice and didn’t sell. They ended up being correct. Don’t tell Tuck that I said that! Bitcoin broke the previous all time high of 20k and kept gaining 1k everyday afterwards. Rest is the history. Now Bitcoin is about 50k, something I couldn’t even image could happen in such a short time.

The reason I am telling this story is because, at the time for me Bitcoin was a short term trade that became a longer term hodling investment. I didn’t even know I was a holder, until I faced the reality of selling or not. I haven’t considered Bitcoin for passive income, like earning interest by lending on BlockFi or other similar platforms. I did have thoughts that if there were some services like options for stocks, that would be great thing for Bitcoin. If you invest in stocks long term, you can issue options for a higher price and have an income options strategy. I thought something like this would suit well for Bitcoin, especially those who hodl long term. However, my plan wasn’t to hodl Bitcoin long term. Until now. In fact, I am contemplating on becoming a permanent hodler, and never sell them.

I haven’t really understood never sell concept before. I am not fully there yet either. Considering the ideas that Bitcoin is here not only to stay, but to become a commonly accepted economic reality and owners of Bitcoin having a real estate in a digital space are interesting to me. Institution and company showing more interest in Bitcoin as a store of value and an insurance against volatile fiat system makes me side with thinkers and visionaries who claim that Bitcoin has a real shot at replacing traditional assets and ways of storing value.

So, if I am to hodl Bitcoin permanently or for much longer time, it made sense to consider services like BlockFi offers. There are other companies/platforms that offer such services. I have heard more about BlockFi, so I thought why not? If I am going to hold Bitcoin anyway, who not have some passive income in the form of earning interest by lending it. Sounded like a good idea.

BlockFi seems to have a good business model, partners with companies like Gemini and Coinbase as custodians of the crypto assets, seems to have figured out security measures for assets held on their platform. They provide informative and detailed answers in their FAQ page. What really made not to go this route is the following from their FAQ page:

Digital currency is not legal tender, is not backed by any government, and the BlockFi Interest Account is not a bank account nor a brokerage account, and is not subject to FDIC, SIPC, or other similar protections. Interest rates, withdrawal limits, and fees are subject to change and are largely dictated by market conditions. This is not a risk-free product and loss of principal is possible.

This is not a risk-free product and loss of principal is possible. This defeats the purpose of being invested in Bitcoin. The whole purpose of hodling Bitcoin is to preserve value and build wealth. If there is any risk of loss of principal, especially for some small interest gains, this is a huge risk.

I know BlockFi as a company take many measure to make sure such things like loss of principal don’t happen. However, from the recent drama of Wallstreetbets and Robinhood stopping trades of Gamestop and some other stocks shows that traditional measure os securing customer funds are not completely secure. There may be unforeseen events that may bring large companies down, which may result at customers losing their funds.

So, I have decided no interest gains are good enough to take such risk, especially with Bitcoin. Perhaps I will reconsider my position in the future if there are some insurance features like FDIC and SIPC are available. Even then those only have limited coverage of losses.

These are my current thoughts on Bitcoin and using it as passive income by gaining interest on platforms like BlockFi. My understating and thoughts are always evolving. I may have different views in the future.

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I get, sometimes the prospect of having a bull on our hands can change our short term or long-term goals. Initially not many envisaged the bitcoin to come this far I mean that was a huge run and automatically crypto keeps evolving. I don't know about BlockFI but seems to me that it wouldn't really serve the long-term purpose since you're basically a holder now. Why not just put a little of your BTC into BlockFI? then long-term the rest?

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I forgot to mention the other side of my Bitcoin journey that shaped my decision. As I was hodling and accumulating, I was also spending a little bit here and there. Now, I have come to a conclusion that going forward accumulating more Bitcoin will be more difficult and it is best to preserve all I have. And using a little on BlockFi wouldn't really be worth it. From now I know, I hope and intend to just use fiat instead of spending Bitcoin for any other investments.

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Oh wow, I didn't know you were spending some few here and there, I guess for daily expensis and other investment prospects. how I wished you had personally decided to use fiat instead of btc it would have been worth it. Now I know Why you cant spare any for BLOCKFI, nevertheless maybe other long-termed better opportunities better than BLOCKFI might just be a reality soon, who knows? The game is changing.

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I don't know how the future of the Bitcoin will look like. I am leaning for it to be great. For that reason keeping the secure without trusting third parties and being distracted with small short term gains seems not worth it.

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Yeah at this moment best to keep it tight and minimal. Long time ago at maybe 18k I was happy taking short term profits.

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That's the main risk associated with lending platforms in crypto.

However, I've been following Celsius for a while and they are going to be launching a "customer insurance" where you can opt in to give up a small portion of your interest rate which goes in to a community insurance pot. So instead of 4%, you will take 3.5% and the 0.5% goes in to the pot in case. In the next quarter, they will be rolling this feature out and it will give more confidence about lending platforms.

I can give you a referral link and an additional code to use in the app that will give you $70 of BTC if you deposit $200 or more in there (and leave it there for 1 month). It's worth a shot and if you're unsure, you can always take it out after a month (no withdrawal fees). I like the weekly AMA with the CEO Alex Machinsky, always transparent and talking about developments. Worth watching to get to know a bit more.

Celsius did come up a lot when I was doing a little research. However, I didn't look into it yet. Thanks for the info, I will read up more on that. At this moment, I think I will just keep the custody of my Bitcoin and let it be. For any other additions though, it is good to know what options are available. I will let you know if I decide to use Celsius, for referral link. Thank You.

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Those 6% are paid exactly because "This is not a risk-free product and loss of principal is possible". IMO there are no riskless yield (and if someone says there is, you should run from that). The question then is whether 6% is a good enough price for that risk.
For me it is (for a flexible term, when I can withdraw whenever I want). My aproach is to diversify. About 50% of my portfolio is in hardware wallet (in BTC, earning no interest). The rest is diversified mainly between Blockfi, Crypto.com, Hive (yes, for me HIVE is more earning interest platform than blogging or anything else, because I'm not good at blogging and I don't understand anything technical).
BTW, in addition to those 6% (or 6.5% in crypto.com) I also got sign-up bonuses and latter referral bonuses for a few members of my family (I add that to the price that I get for the risk that I take). And all that adds on :) especially, when most of my referrals were ~10k BTC and I got paid in BTC :)

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I have been hearing more about Blockfi lately as well but I can't trust giving crypto to any third party site. Depositing crypto and earning interest is the easy part, its the withdrawal process that can be difficult. I would hate to wake up one day, locked out of my account or learning that the company has been shut down for some reason. Its not worth the risk. Too many exchanges have walked away with peoples money. There are also too many scams out there for me to feel comfortable.

BlockFi does look like a legitimate company and taking careful approach to avoid any situation where they won't be able to return customer funds.However, there is always that worst case scenario that nobody is prepared for. They do seem to acknowledge that but stating that loss of principal is a possibility.

I completely agree with you. For those reasons it is probably better to be safe now than taking any unnecessary risks.

Interesting, I have put my BTC in CELsious and even ETH. I am considering withdrawing it to my Atomic wallet soon, although afraid of those damn transaction fees.

Celsius is great, audited and custodied by Bitgo...but there is going to be chaos to sell assets in high peak times, and Celsius allows withdrawal of BTC to one selected whitelisted address, its not convenient.

Because, I put my crypto exchange address as withdrawal address, but many crypto exchanges during peak times freeze off, not cool. So, want to have BTC in my wallet and be free to send it to any wallet, rather than one whitelisted address.

I already took off many cryptos off celsius slowly, with AAVE and COMP I sold the proceeds to buy some big coins.

Also not your keys not your crypto, I have to remember that na... any way, let me now change the whitelisted BTC address in my Celsius wallet to my atomic wallet so I can withdraw them soon.

Also have to open up more exchange accounts, sucks...anyway, so much of these useless work!!

Can't be too greedy, have to get off and draw the limit somewhere so I get value out of my investments.

I don't know about Blockfi, but I think you should check out celsius and see what fault lines are there in the platform. You seem to be good in that sort of thing, so asked.

Thank you for sharing your experience with Celsius. Yes, sometimes things in crypto seem to get too complicated to even bother dealing with. I will read up more on Celsius when I get a chance.

Nice analysis but holding BTC in your own hard wallet is also not 100% secure.

One should not leave crypto on exchanges in general - not your keys not your crypto.

But if they are providing an attractive interest rate to compensate for the risk then the equation changes.

Paying interest as compensation for risk and for giving a custodian your money and accepting an IOU is the ancient and fundamental business of banking, something that traditional banks don't do any more in this fantasy world of zero or even negative interest rates and endless money printing.

But the fact that normal interest rates (within the normal range of interest rates for the last 4000 years) is being paid on BTC and other crypto is healthy.
It is the sign of a new banking system arising that does what banks are supposed to do: offer interest to attract savers and then lend out that money at slightly higher rates to quality borrowers.

Yes, you are right. I like to see these new alternatives to the traditional banking systems emerging. Perhaps over time they will get much better at what they do and will be able to provide assurances that remove concerns about potential loss of the principal assets.

I wonder if a Hive Power and Delegation mechanism can be duplicated in financial systems in the future. I like the fact when we delegate HP to someone else, we still have full control of the underlying assets without trusting any third parties.

Check out Nexo platform. They have insurance. I'm using them for more than two years.

I will add Nexo to a research list. Wow, looks like they offer even higher interest rates than BlockFi. Thanks for sharing.

It's all in one. Fiat bank, exchange, swap, loans, daily interests, free withdrawals....

@oldtimer the nexo platform is a wonderful platform,i love the way they handle loans and their interest rates is really cool...

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People trust BlockFi because BlockFi risks are lower

I think you are making the right decision. Maybe you could put a small amount in there, But then again, low risk, low gains.

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Your post is reblogged and upvoted by me. It is a good post. Thank you @geekgirl

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Get a 6% return but you risk 100%. Hmm... So, isn't like earn -100% to +6% return? MtGox should have taught us a lesson about custody of Bitcoin assets. I am expecting a pull back in the Bitcoin price. I will simply ride out the bear market. So much for conviction.

You don't have to put all of your holdings on BlockFi, you put a portion on it. Diversification seems to be the key to wealth maximization.

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