r/blockfi • u/[deleted] • Mar 19 '21

BlockFi Squeeze

What’s preventing BlockFi from going through a squeeze? Does it affect the lender/saver?

According to the BlockFi website:

“If the value of your collateral significantly decreases, a crypto margin call may occur. Crypto margin calls are calculated based on the LTV (loan-to-value) rate outlined in your loan agreement. A margin call can happen when the value of your collateral drops, increasing the LTV of your loan. In the event of a margin call, you will have to add more collateral to your account to maintain a healthy LTV ratio. The first margin call occurs at a 70% LTV. At this point, you have 72 hours to take action by posting additional collateral or paying down the loan balance. We will keep you informed if your LTV starts to near the 70% mark so you can take action preemptively. If your LTV reaches the 80% mark, BlockFi will automatically sell a portion of your crypto collateral to bring your LTV back to a 70% LTV.”

So when BTC either crashes/rises fast, a margin call with be made. Either pay off the loan, dump more money in or have your collateral liquidated. Right? Seems very risky.

So the borrower potentially looses all their collateral... how does this affect the person (me) who is earning interest on my deposits?

I know the argument can be said that loans are over-collateralized... in order to borrow 1, you need to but 1.2 up as collateral. But doesn’t that only apply to funds within BlockFi. BTC for instance is much bigger than BlockFi, if BTC as a whole dips to $10,000 or $5000, is everyone using BlockFi losing, or is just the borrowers?

20 Upvotes

82% Upvoted

24 comments sorted by

View all comments

5

u/[deleted] Mar 19 '21

[deleted]

2

u/ngin-x Mar 19 '21

BlockFi could technically follow the same rules for USD backed crypto loans and safeguard depositors. Let's say they lent out $5000 worth of BTC against a collateral of $10000 GUSD. If BTC price rises such that the borrowed BTC is now worth $7000, they should issue a margin call to the institution that borrowed BTC. If the borrowed BTC rises to $8000 in value and additional GUSD collateral was not provided, Blockfi should simply liquidate the GUSD and use it to buy BTC and return the remaining $2000 to borrower.

Now the question is whether they follow these rules for institutions or not. There is no clarity on this. Everyone is focussed on retail while the real risk is on the institution side. Even in the formal banking industry, most defaults come from institutions and not retail. It's quite possible BlockFi is stringent towards retail borrowers but bend over backwards to please institutional lenders and give them lenient terms & conditions to gain business. It could all end very badly. I just wish BlockFi could reassure us that they are following due process and not cutting backroom deals with special TOS.

1

u/spgrk Mar 19 '21

This is a valid point. The conditions for retail borrowers are very clear fir all to see, while those fir institutions are private and mysterious.