October 2022 state of the crypto lending market

In light of the collapse of the crypto interest industry in November 2022, PROHASHING and author Steve Sokolowski are commencing litigation against multiple lenders and individuals discussed in these articles. These posts are outdated and will not be updated due to the ongoing legal actions. You should not rely on the information presented here. PROHASHING and the author are no longer able to respond to comments and support tickets regarding crypto interest companies.

Last updated: October 1, 2022

Introduction

It's been three months since I last wrote that fleeing to Genesis for safety was a good idea until the market shook out, and it's been almost two years since I first started publishing data about crypto lending firms. On June 20, 2022, PROHASHING and I signed three-month term loans with Genesis to get through the initial chaos, with the goal of reevaluating on September 20. Now that the dust has settled, I conducted another 100 hours of research, starting on September 15 and lasting through September 30, when I committed to the last of several year-long loans.

In this post, I'll provide an update on the current state of the crypto lending markets. I'll review what has changed since the June 2022 crash, and since most lenders stopped offering service to smaller US customers. I'll begin with a summary of my findings, and then provide a comprehensive review of what I learned during my recent research.

Overview of current findings

Companies are moving away from open-term lending. Dramatically higher returns can be gained from year-long loans. Rates have declined at Genesis to unacceptably low rates for some coins. Below, I explain in detail why the risk of open-term lending never justifies the return at a rate of 1% or below.
BlockFi currently offers the best risk-reward ratio for lending. BlockFi's financial strength is significantly better than the rumors that circulate on twitter would suggest, but the company is poor at marketing. Additionally, it cannot be ruled out that BlockFi not only offers the best rates, but is outright in the best shape of all lenders - including Genesis, Ledn, Nexo, and the others.
Genesis (and Gemini, which lends exclusively to Genesis) probably remains the least likely lender to fail, and can justify slightly lower interest rates through its strong loan book. Further, if Genesis were to become insolvent again, Digital Currency Group has a lot more money to lose before Genesis would go bankrupt. However, in the past, Genesis has made catastrophic errors in judgment in the June 2022 crash which cost an unfathomable amount of money, and which far exceeded errors made by any other lender.
Ledn cannot be recommended at this time. The company did not share any information about its financials when asked, has taken over two weeks to create a "transparency report" similar to BlockFi's, and that report is still not available. My opinion may change if Ledn does share such a report.
Nexo continues to be non-recommended because it refuses to do business with US customers, even accredited investors. Nexo is under investigation by multiple states for never obtaining money transmission licenses to operate there. Since US financial regulations are among the strictest in the world, it should be a red flag, even for international customers, when a company doesn't do business in the US or is unable to comply with licensing requirements. Additionally, Nexo's tokens are a disaster waiting to happen, should they collapse in price.
All companies with "company tokens" are non-recommended due to the ease at which those companies can manipulate their books by misvaluing the tokens.
Celsius's fate should not inform current decisions. Celsius appears to have been insolvent for years before it failed, and was likely a Ponzi scheme from the beginning. CEO Alex Mashinsky will likely face criminal charges. Surviving CEOs Zac Prince, Michael Moro, and Adam Reeds are not criminals.
The fact that there is imperfect public information available to have extremely high confidence of the actual risk involved in lending suggests that there is some incentive to take the highest offered rate, which further trends towards recommending BlockFi. If the probability of failure of the lenders is actually equal or even the opposite of what was concluded, it would be suboptimal to lose possible interest by depositing at a firm that is being incorrectly judged to be safer.
The surviving companies are in great shape. One doesn't need to have inside information to understand this statement intuitively - if they hadn't had strong books, they would have already failed in June.
Right now is a golden opportunity. Lending to these companies right now likely has the least risk that crypto lending has ever had, and interest rates are the highest they ever have been.
Depositors should view themselves as "sharks," as if they were on Shark Tank, use the same information that the sharks do in making decisions about where to deposit, and consider themselves invested in the company's future.

Methodology

In June 2022, PROHASHING lost about $250,000 in deposits in the failure of Celsius. Much of the money at Celsius was debt the pool owed that was denominated in altcoins. Within five minutes of receiving the E-Mail, Chris immediately transferred an equivalent amount of money to exchanges to purchase the altcoins that were in the Celsius account, as holding dollars could have resulted in disastrous losses were those coins to quickly rise in price. This action required us to contact Genesis to withdraw funds, and they immediately wanted a call to assure us that business was continuing as usual. I took advantage of the chaos and made a snap decision to triple our interest rates with Genesis by locking in 3-month loans. These loans expired on September 20, 2022, so we spent two weeks researching the state of the industry.

That research included reading publicly available articles about the organizations, asking questions about the companies' financials to their employees, negotiating rates, and, in the case of Ledn and BlockFi, video calls with the CEOs of those firms.

Private information

All of the information presented on this page is based upon publicly available data. However, several of the companies shared private information with me. All of the private documents reflect positively upon them, so it is a mystery to me why they require non-disclosure agreements. Some of the terms in these agreements are egregious and reflect negatively upon them, such as how Genesis prohibits its customers from disclosing its rates.

As is publicly reported, all of the companies have seen large decreases in the size of their loan books. Contrary to intuition, however, a smaller loan book with the same amount of equity means that the company is in better financial shape. Public reports that include assets under management but not member's equity don't provide an accurate representation of the actual financial state of a company. All of the companies I investigated don't seem to fully recognize that there is a lot of money out there waiting to be borrowed that isn't flowing in now, and which may or may not flow in once full financial data is released. Therefore, releasing even the worst possible news can at worst scare away customers who are already unwilling to deposit, but at best can garner deposits from those customers who see that things aren't as bad as they once feared.

BlockFi is leading the charge on changing these opaque lending practices with their "transparency reports." My view is that if BlockFi continues to expand the data that it publishes publicly, other companies are going to be forced to follow suit or lose customers.

Being a "shark"

I approached this latest round of negotiations by treating it as if I were a "shark" from "Shark Tank." Most people by now understand that being a depositor at any crypto lender is exactly the same as what the "sharks" do - the fate of your deposit is determined, in part, by the success of the company. Most of the deals in "Shark Tank" are riskier because they involve equity, but there are many deals that involve loans. While most of this document is aimed at simply presenting information I learned, the one concrete suggestion I will make is that you should consider yourself as invested in the company's success if you make a deposit there. Inquiring about the loan book is not sufficient; a holistic view of profitability, employees, software stack, and overall business outlook should be taken.

Consider whether the company's management is comprised of good, ethical people. Consider whether the company has laid off enough employees to survive through downturns. Consider what programming languages and technologies the companies are using. Consider whether the company's other business lines, like the trading that most firms offer, are profitable or a loss leader.

Part of being a shark involves assessing whether the interest rates being paid to you by a company exceed the company's risk of failure in a given year. There are many factors that can be considered in such a calculation, and you and I will probably disagree on many of them. However, it should be obvious that the risk is not lower than 1% under any circumstances. Remember that taxes need to be paid on the interest - in my case, I pay a total tax rate after Federal, State, local, and sales taxes of 51%. A net interest rate of 0.49% implies that the company would have to be expected to survive for longer than 202 years to justify depositing money there. The biggest banks haven't even been around that long. During the COVID-19 pandemic's early days, Bank of America, one of the largest banks in the world, had around a 1.25% credit default swap yield.

Do not "trust your gut" when deciding where to deposit. Studies show that intuition generally leads to poor decisionmaking, except in a very specific set of circumstances: where one has experienced similar situations many times before, and the future is predictable. In the case of crypto lending, neither of those facts is true.

When one does research in the mind of being a shark, one gains a feeling of confidence. At first, reading about this stuff leads one to change his or her mind constantly. You will know you have enough information to make a decision when your opinion of what to do slows and then stops changing regardless of how much additional information is found.

Clawbacks

One of the more important revelations to come out of the June shakeout is the possibility of "clawbacks." In bankruptcy cases, open-term depositors who withdrew fewer than three months before the bankruptcy is declared can be sued to return money, on the grounds that they were unfairly prioritized above other creditors in the same situation. In this case, the "same situation" would be that of other open-term depositors who chose not to withdraw. The assessment of clawbacks was the main reason why PROHASHING chose not to take any action when it was clear that Celsius was about to fail. In some cases, clawbacks have been very successful at recovering funds; 75% of all the money ever deposited into Bernie Madoff's fund was recovered from people who had withdrawln decades earlier and thought that they had moved on.

Clawbacks are complicated in cryptocurrency because the Celsius case has yet to play out, and therefore, there is no precedent so far as to whether the clawback lawsuits will seek coins or dollars. Given how long the case is going to take, a ruling that clawbacks are due in coins is going to result in pain and foreclosures among those who panic sold their withdrawln coins for dollars when the market begins to recover.

However, a depositor who takes out a term loan is not in a similar situation to other creditors. If the loan is repaid when the term ends, and the money is repaid in the normal course of business, it would be difficult for the bankruptcy administrator to argue the term loan is in the same situation as all the open-term depositors who found out bad news and ran for the exits. Because of the possibility of clawbacks, open-term deposits should be viewed as equally risky as a 3-month loan with a fixed withdrawal date.

Clawbacks make open-term loans, which are already at abysmal rates, an even worse deal. A better idea to improve the risk-reward ratio is 3-month loans. At a minimum, consider making a series of 3-month loans and deciding before the term expires whether the money will be needed in the next 3 months, or to renew for 3 more months. This information may change in the unlikely event that the Celsius case does not result in clawbacks.

Ledn

I would have liked to recommend Ledn in this document, but I can't right now because I don't feel confident enough given the information currently known about the company. That statement shouldn't be taken to suggest that I believe Ledn is involved in unethical activities; on the contrary, I believe they are trustworthy. When I met with Ledn's co-founder and CSO, Mauricio Di Bartolomeo, he discussed how Ledn lends to companies engaged in market-neutral trading strategies and didn't lose any money during the June 2022 panic. Ledn also publishes a "proof of reserves" that is audited by Deloitte, whereas the statements I viewed from the other lenders were unaudited.

The issue I have with Ledn is that the proof of reserves is only a defense against companies like Nexo, which have a large number of company tokens on their books. Token-based companies should not be a serious consideration for anyone, and while the proof of reserves does place Ledn indisputably above those disreputable companies, it only trumps concerns of falsification of records. Few would suggest that BlockFi, which is attempting to register a new product with the SEC, or Genesis, which is adhering to the strict New York BitLicense requirements, are falsifying their financial statements.

Instead, contrary to BlockFi and Genesis, Ledn has not published "transparency reports" or disclosed how many of their loans are collateralized, how large their loan book is, or what its members equity is. It is true that BlockFi's transparency report is vague on the type of collateral possessed, but we at least know how much they have. Without knowing both the collateralization ratio and the ratio of loans to member's equity, we have no idea whether a company is at risk of failure from a single lender or even whether it has a buffer in the case of a mistake, such as an employee's sending money accidentally.

I'd love to discuss more about Ledn and probably recommend the company, but decline to do so until they release more data. The information bar for depositing has risen significantly since June, and basic information about a company's loan book is a requirement, not an option.

Dollar lending

Dollar lending has become unattractive for many people, because the open-term rates being offered by the lenders are too low given current and projected Federal Reserve interest rates.

It used to even be the case that one could make a significant profit either by borrowing or not paying back dollars owed to banks, and lending it to cryptocurrency lenders. Last year, for example, I used stocks as collateral to borrow $100,000 to pay taxes, rather than withdrawing that money from Genesis. Since then, I've been able to earn thousands of dollars on the spread between Genesis's rate and Wells Fargo's rate. Now, however, since the Genesis rates are falling and the Wells Fargo rates are rising, I expect that two more rate hikes from the Fed will lead to my withdrawing the money and paying the loan off.

While I forget who I asked, an employee at one of the lending firms explained to me that there was a mechanism where dollars could be obtained for buying coins through a trading scheme involving futures contracts, and that this scheme had not been workable in the past, which is what has led to the higher rates in the past. With T-bond yields around 4%, I would personally not lend to any company offering less than 5%. Remember, with stablecoin lending, there is the borrowing risk and the token issuer risk that both need to be considered, and the spread between the government debt yield and the lender yield is what matters.

Stablecoin lending is already worthless for borrowing money and lending it into the cryptocurrency system. At current Fed rate hikes, it will probably be unattractive in all circumstances before the end of the year, unless the stablecoin rates return to the 8% or 9% we saw in 2021.

ETH staking

When I was negotiating my year-long loans for ETH, I spent two full days looking into the economics of ETH staking. What I found convinced me to lock in high rates now, rather than waiting for staking withdrawals to become available.

The economics of staking do not look positive in the long term. The first reason is that many proof-of-stake blockchains tend to settle at around 60% or 70% of the entire supply being staked. This figure is close to the current proportion of bitcoins that are rarely spent and sit in cold storage. ETH's current staking rate is 13%, which is undoubtedly limited because nobody knows when they will be able to unstake their ETH. I would expect that the "validator queue" that limits the input into staking will be 100% full almost all the time after withdrawals become available. After all, if you don't plan to spend your ETH anytime soon, why wouldn't you engage in risk-free staking? Another factor that will create more pressure in ETH staking is that there will also be an output queue, so people won't just be able to instantly withdraw an unlimited amount of money. This output queue will cause more money to get stuck in the staking system.

The reason the total value staked is important is because the interest rate paid declines as the staked value increases. While the staking rate was 5.16% on October 1, 2022, it is likely to decline into the 3% range in 2023, and settle in the 2% range thereafter. There are a number of factors outside the scope of this article that affect staking rates, such as the price of gas, and the idea that staking has zero risk, and almost all argue in favor that staking yields will disappoint. If you are interested in them, you can perform some Google searches for your own research.

The staking rate will serve as a floor for the loan rate that is the length of the staking queues, and that floor is going to fall during the coming months. Therefore, if you can lock in a high ETH rate now, like a one-year loan at 5%, do so.

Reminder: stay away from tokens

In multiple previous instances of this guide, I discussed the danger of depositing with companies that deal in company tokens, and reiterate that warning here. Nexo, Celsius, Voyager, and Crypto.com have or may get into accounting trouble because they comingle these tokens when calculating the value of their assets. In reality, these tokens would be worth nothing in the case of failure.

These tokens are also easy to manipulate by the companies' management. Transfers and huge trades of the tokens among insiders like former Celsius CEO Alex Mashinsky are common. While Celsius and Voyager had multiple other issues that contributed to their demise, some of their assets being denominated in company tokens didn't assist in their solvency. I would also assert that, in the unlikely event of bankruptcy, a company with BlockFi be able to pay out more to its depositors because none of its assets are stuck in worthless company tokens.

Now is the best time ever

Now is the best time there has ever been to lend cryptocurrencies to reputable companies.

For one, the rates are sky-high due to a lack of trust, the high number of people expecting a crash to $13,000 and shorting, and (to a lesser extent) the Fed's rate hikes. It has never been possible to be paid 5-7% for loans under natural conditions. Some companies did subsidize 6% loans in early 2021, but there was no borrowing demand at those rates and the companies were burning investor funds. Now, the rates are actually supportable because the borrowers are willing to pay more.

Second, it is likely that a long time will pass until the next bubble cycle. I don't think that the next cycle will result in a new all-time high, and it will probably be 4-6 years before new highs are reached. The main reason not to lock up money in fixed-term loans is to have it available if coin prices reach new highs. With the probability of a new high during the next 12 months likely as low as it has ever been, this is the best time ever to take advantage of long rates.

Third, the companies themselves are attempting to rebalance their loan books to prevent bank runs. To do so, they are offering huge incentives for long-term loans and allowing customers who want open-term loans to leave. As recently as a few months ago, the yield curve at Genesis was relatively flat, with year-long loans paying 1% more than open-term loans. Now, at all companies, the yield curve is much steeper.

Fourth, while many people did lose money in the crash, a majority of lenders lost nothing. The companies that did fail had a lot of media exposure, and news of smaller, unethical, companies' failures had a pile-on effect where it seemed like all the failures were of equal significance. The odds of losing money by depositing at an ethical company, while certainly not zero, were never as high as they would appear to be solely by reading the news.

Fifth, the rates are high partly because people don't trust companies, whether that assessment is accurate. If the general consensus becomes that the companies are trustworthy, the rates will crater. Therefore, the only time to really make money is now, when rates are high.

Finally, the environment is safer than ever. Both BlockFi and Genesis have spent significant effort cleaning up their loan books. Their survival itself without halting withdrawals provides information to evaluate company stability that wasn't available earlier in the year. Because the companies survived the chaos, a similar event would not be sufficient to sink them; something even more unprecedented would be required. Additionally, the "race to the bottom" of uncollateralized lending has been reversed - in the past, a borrower would seek the firm that required the least collateral, which incentivized firms to make lower collateral loans at lower interest rates. With nobody willing to engage in that sort of lending now, borrowers are being forced to come up with collateral they wouldn't have need to before.

It's counterintuitive that the June shakeout would make things safer, and not riskier, so take advantage of the lenders who have been scared away by locking in high interest rates before people forget what happened, which they inevitably will.

An analysis of the June 2022 crash

Speaking of the June crash, let's spend a few paragraphs discussing how the lenders were affected and why or why not their experiences are applicable to the current situation.

Celsius failed because it was a fraud from the start. CEO Alex Mashinsky knew that the company had taken a huge loan from EquitiesFirst, attempted to pay it back, EquitiesFirst somehow "lost" the collateral, and Mashinsky came up with a weird scheme to allow EquitiesFirst to pay back $5m/month when he could have immediately sued them and demanded full repayment. The whole situation stinks of criminality - both in how EquitiesFirst can somehow lose half a billion dollars, and also why Celsius would not be outraged like any reasonable person would at not being repaid such an unbelievable amount of money. There will be a lot of jail time in the Celsius case, and EquitiesFirst is a key part of unraveling whatever happened at Celsius (if anyone ever actually looks into it, which for some reason none of the various committees in the case have.)

Voyager failed because the company had unbelievably irresponsible lending practices. They made an uncollateralized loan to a single company (3 Arrows), knowing a single default would cause insolvency. BlockFi specifically addressed the importance of ensuring that multiple uncollateralized loans must default simultaneously to result in insolvency - something that Voyager did not do.

Genesis required a bailout because of even worse lending practices. CEO Michael Moro allowed the company to lend several billion dollars to 3 Arrows with an undercollateralized loan where the collateral (Digital Currency Group's own underwater Greyscale funds) was poor to begin with. Genesis may have been at low risk of failure, because creditors in any insolvency might have been able to claim against Digital Currency Group and its other companies, but they lost the most money in the catastrophe and should have known that 3 Arrows was engaged in risky trading.

Ledn claimed to have not lost money to 3 Arrows in the collapse. While technically true, Ledn lent money to Genesis, and therefore their statements are somewhat misleading. The collapse of Genesis would have taken out the whole industry, including Ledn. To Mauricio's credit, he did not lend any money directly to 3 Arrows, however, despite a direct request.

BlockFi received a line of credit, but it sits at a zero balance. A recent exposé of BlockFi painted what the headline claims is a negative picture of them, but a closer reading of the text suggests that the company weathered the storm well. They lost $80m, which is less in both absolute terms and proportion of portfolio than Genesis and Voyager, and had the foresight to require full collateral for 3 Arrows. The impression I got was that BlockFi's main difficulty was liquidity caused by a bank run, rather than the risk of insolvency the others experienced.

An overview of BlockFi

Loans and rates

BlockFi has recovered its position of having the best risk-reward ratio for long-term loans. For fixed-term loans, Gemini, which lends to Genesis, is a superior option for some coins, despite Genesis itself offering abysmal open-term rates to direct customers.

The fixed-term loans that BlockFi is offering have more lenient terms than those of Genesis. BlockFi's contract allows for early termination. Although the high fees make early termination undesirable in anything but an emergency situation, Genesis does not provide for early termination in their contracts at all. One of the reasons I deposited some money at BlockFi in September was because, in the event that I am diagnosed with a terminal illness, I could withdrawal the money and spend it before I die.

BlockFi's fixed-term loan rates are likely influenced by the metrics being used to evaluate BlockFi's valuation. FTX, which has the option to purchase BlockFi on June 23, 2023, is required to pay more if BlockFi has a larger number of deposits on its loan book at that time. Because BlockFi's shareholders will directly earn more by closing year-long loans regardless of how much profit the loan actually makes, there is an incentive for BlockFi to close as many loans that extend past the valuation date as possible. Meanwhile, other companies like Genesis and Ledn actually have to continue to make (or lose less) money, so the yield curve isn't as steep at those companies.

BlockFi's open term loans and "interest account" deposits are a fair offer, but are not spectacular like the fixed-term loans are, and those rates are only available to Private Clients. The real money is made by forming an LLC and gathering together money from friends. BlockFi will deal with LLCs that are willing to deposit $250,000, which is considerably less than the $2,000,000 that Genesis requires. $250,000 is within reach of a middle-class group of ten friends. If you can form an LLC like this, do so and negotiate a 12-month loan with BlockFi for rates at or above 6.5%.

Note that BlockFi advertises its loan rates as APR, while Genesis advertises its loan rates as APY. That's another example of BlockFi's marketing struggles, and is another reason why BlockFi's loans are so attractive. For example, a 3% APR BlockFi loan pays 0.04% more than an equivalent Genesis-advertised APY loan.

Transparency

BlockFi has the best public transparency of all of the lending firms at the moment, and they will share internal documents after the signing of a non-disclosure agreement. As I wrote above, these documents should be made public rather than kept hidden. It's weird to me that on reddit, Brandon and the company's risk manager continually repeat "the company is solvent," which is true, but don't go any further when they could share a lot of positive information. For that reason, I wrote above that BlockFi is extremely poor at public relations, because they allow rumors to circulate that give the impression that BlockFi is hanging on by a thread, while providing trite responses.

One can compute from BlockFi's "transparency report" that, as of June, BlockFi's loan book was about 61% collateralized. Unfortunately, the quality of that collateral has not been published; some sources have claimed that BlockFi's books may be inflated by poor-quality miner loans, a characterization that Zac Prince disputed. However, I was impressed that BlockFi (and Genesis) treat Tether differently from USDC and GUSD, and correctly don't consider Tether as high-quality collateral compared to the other audited stablecoins.

Just from public information, one can conclude that BlockFi's financial situation is strong because the company received a takeover bid from Ledn. While Mauricio at Ledn has criticized what he saw as irresponsibility at other lenders and has stopped lending to Genesis, Ledn obviously saw something in BlockFi that gave them confidence.

DeFi

BlockFi admitted in public statements that it has exposure to DeFi contracts when Brandon stated in a reddit thread that the company does not have "a lot" of money locked up in staked derivatives. I don't believe that DeFi, by itself, has enormous risks compared to lending directly to an institution, as long as too much money isn't deposited into any single contract. Celsius failed because it was never solvent in the first place, not because it staked too much ether; too much staking could have been solved by just delaying withdrawals.

There are ways to make more money in DeFi than by lending money to BlockFi. One method, for example, is to buy Lido stETH tokens to earn staking interest, and then to lend those tokens to DeFi contracts or through other means to get even more interest. Why, then, would it be better to allow BlockFi to pass through money to DeFi?

First, it takes a lot of time, research, and effort to assess which contracts are safe. I wouldn't want to send money to a contract unless I had reviewed all of its code to check for things that might suggest a lack of attention to detail, like a lack of comments or spaghetti code. A lot of time is also required to actually interact with the contracts, because there aren't always easy tools to do so. Plus, mistakes can be made, and BlockFi with its large funds would need to make multiple mistakes with DeFi to become insolvent, while I would only need to make one. Thus, BlockFi serves as a sort of "insurance fund" against a limited number of smart contract failures.

Second, and more importantly, DeFi usually uses tokens, and often "wrapped" tokens for coins from other chains, in its operations. Converting coins to these tokens might be a taxable event. The reason I don't sell at the top of cycles is because it is very difficult to time the tops to regain the 23% I would lose to taxes. I haven't sold any personal bitcoins since 2013 and have no plans to do so, because my goal is to earn as much interest as possible and every coin I do sell results in less interest I can earn ten years from now. Eventually, all of the coins I don't need can be gifted untaxed to charity when I die, rather than only 77% of it. BlockFi's dealing with DeFi for me protects me from taxes.

In a way, I see BlockFi's DeFi use as a sort of fee for me to use DeFi without having to pay taxes. Even if they're taking 3% in interest I could otherwise earn from DeFi, that's still a lot less than 23% from taxes. But there are risks associated with DeFi that are different than those involved with direct lending to other people, and depositors to BlockFi should be aware of that.

Management

On Friday, September 23, 2022, I sent simultaneous messages to Genesis and BlockFi, telling both that we had decided to keep all of our money with Genesis, because we weren't confident in the terms of the FTX deal. Genesis sent me a contract for the full amount. One minute before I was about to sign the contract, Erin at BlockFi sent me a message saying that Zac Prince wanted to schedule a meeting. Prince is a great salesman, and to the disappointment of Griffin at Genesis, his quick thinking sealed a multi-million dollar deal.

Prince, of course, talked about how great BlockFi was, as one would expect the CEO of any company to do. But his presentation sold us for two specific reasons. The first was that Prince seemed like he was a competent manager. He was enthusiastic about his company, and the fact that he would take the initiative to schedule a meeting with us (remember, we didn't ask) showed that he takes an interest in the day-to-day business of the company rather than being a silent partner. I asked Prince hard questions, like why BlockFi had twice as many employees while having a loan book half the size of Genesis, and that we were concerned he hadn't issued enough layoffs. I asked whether he had a lot of loans collateralized with ASIC miners on the books, and whether he owed FTX money from their line of credit. He answered all of these questions without flinching. I wish I had asked Prince why the company had bet so much on GBTC early in 2021; for what it's worth, the company no longer has any positions in GBTC.

But more impressive was how Prince shared disappointing information that I would have expected him to paper over. The information presented at https://blockworks.co/how-blockfi-went-from-tech-unicorn-to-crypto-burnout/ should not shock anyone. Everyone knows that companies are losing money during the downturn - PROHASHING loses $16,000 per month, but built a $1.1m reserve when dogecoin prices were high. For us, we lose a little money for 3.5 years out of 4 and make huge profits during the 3 months before the litecoin halving and break even during the 3 months after the top of the bitcoin cycle. The goal is to position yourself to be ready for those few months when millions are made. I wouldn't expect BlockFi to have discovered a magical solution to the cyclical nature of the industry, and it was great to hear Prince acknowledge it. Hearing Prince talk about how BlockFi operates made me consider potential issues with other lenders I had not investigated before.

On the other hand, I was disappointed at how Prince said, in a recent podcast, that he knew of problems at Celsius but failed to disclose them because BlockFi's marketing strategy was to focus on its positives, not to discuss other companies' negatives. If he had spoke about what he knew, he would have $250,000 more in deposits right now - money that was lost as a direct result of his actions. If BlockFi wants to pride itself on transparency, it needs to share all of what it knows, not just selected information about its own workings, and this is another example of BlockFi's poor marketing.

Safety

The impression I've gathered from all of this research is that BlockFi was the furthest from collapse during the June catastrophe. This assessment should not be taken to mean that BlockFi didn't come under severe stress. I came to this conclusion because I trusted BlockFi's risk management more than Genesis's, and because Zac Prince appears to be more competent than Genesis CEO Michael Moro. As to Ledn, Mauricio tweeted public statements that Ledn suffered no losses from 3 Arrows - but that was only true because Ledn had lent to Genesis, and he was fortunate that Genesis survived despite its catastrophic loss to 3 Arrows.

On the other hand, BlockFi's loan book had 39% uncollateralized loans as of June 2022, and the company has not published the quality of the collateral for its collateralized loans. Therefore, if you believe that there is still a risk of a final shakeout that somehow is more severe than the June crash before the cycle reverses, you might want to approach BlockFi's loan book with caution. Should there be some sort of unprecedented event before the cycle reverses, my impression is that Genesis would be slightly more likely to survive because it is further along than BlockFi at the process both started to improve their loan quality after the June 2022 crash.

The uncollateralized loans are a risk, but I'd suggest another identical crash is insufficient to bankrupt BlockFi because they would have failed the first time if all that happens is the same thing again. Something unprecedented would have to occur, such as the collapse of Tether. That's why my questions to Prince were mainly about business execution, which I see as a still small, but somewhat larger risk to BlockFi. BlockFi could, as it has before, send money to the wrong address, fail to issue more layoffs if conditions worsen, or suffer non-monetary issues like E-Mail hacks that cause customers to leave due to bad publicity. More of these errors have happened at BlockFi than have at its competitors.

Overall, however, BlockFi's interest rates for fixed-term loans are so high that they clearly outweigh the risk of failure, making BlockFi a recommended company. There is also a chance, given that we don't know as much about Genesis, and given that Genesis lost so much money, that BlockFi is not just the highest risk/reward, but outright in the strongest position of all lenders. We have acted accordingly with a show of faith, and are currently responsible for 0.3% of BlockFi Lending LLC's deposits.

An overview of Genesis

While reading this section, note that Gemini solely lends to Genesis. People who want to lend to Genesis can either open an account directly with them, if they have enough money, or open an account with Gemini's "Earn" program, which aggregates funds and deals with Genesis indirectly.

Loans and rates

Disappointingly, Genesis requires a non-disclosure agreement over the rates it pays its direct customers. However, they did say that it's permitted to say things like "around 3%" when the rates are 3.5, or something similar.

One way to determine the rates Genesis is offering to some customers using only public information is to look at what Gemini's Earn program is paying out. In September 2022, Earn was paying Earn customers 3.04% for ETH deposits, while charging 0.27% in fees. Therefore, Genesis had offered Gemini an open term loan at 3.31%. This rate is more competitive than the 2% BlockFi was paying that month, and given that Genesis has a strong loan book, was a better deal.

Genesis and BlockFi are the two US-based lenders that are left standing in the ashes of the June 2022 panic. Whether Genesis or BlockFi is more competitive on open-term deposits depends on the month, but Genesis has been trending towards very poor open-term rates. Genesis tends to provide worse rates to direct customers and superior rates to Gemini, so it can often be better, if you want an open term loan, to create an account at Gemini. That leads to the small additional risk of Gemini's failure dragging you down with them, but the contract for the Earn program is structured in such a way that Gemini seems to want to wash its hands of all responsibility for Genesis's actions, in the unlikely event that Genesis ever goes under. That same contract works the other way too, protecting lenders against Gemini's failure. At the very least, Genesis, and not Gemini, would have title to the money in a bankruptcy case. Remember, though, that there is additional risk when the money is present at Gemini, like of Gemini's making a mistake in sending money to Genesis or while withdrawing it.

Another issue to consider with Gemini is that when a withdrawal request is placed, Gemini has 7 days to return the money to you. The seven-day clause is in Genesis's terms, but Genesis rarely enforces it with direct clients. During those seven days, Gemini will not pay interest. This policy cost me hundreds of dollars when I tried to make a large withdrawal from their Earn program. Consider that the actual rate you earn will be lower than the advertised rate, because there may be delays in withdrawals during which you are not paid.

Altcoins

Genesis is the only trustworthy borrower that deals in altcoins. While their rates for some altcoins are poor, others, like Ethereum Classic, offer extremely high interest rates that are not attainable from anyone else. BlockFi and Ledn limit their dealings to the coins with the highest market capitalization, so Genesis is the place to go for altcoin lending.

Transparency

I'd prefer that Genesis be more transparent with their financials. Their customer service is helpful and their employees on-point, and they will share information with non-disclosure agreements, but what they share publicly doesn't provide true insight into the company. Like BlockFi, that's perplexing to me - it doesn't make sense why a company that is in good shape would want to hide its financials.

Genesis has an internal memo that lists anonymized counterparties, collateral ratios, and type of collateral. That memo provides more information even than what BlockFi reveals to its private clients. Unfortunately, not only am I prohibited from releasing the data, but Genesis also doesn't provide this data on its "Prime" portal to its customers. Again, this is a lost opportunity to prove to clients that the company's loan book is strong.

I have absolutely no evidence that Genesis is hiding anything, and everything I've seen has been positive. However, the culture of opaqueness at Genesis is disappointing to me.

Automation

One major difference between BlockFi and Genesis is in automation. BlockFi clearly has automated most of its processes, while Genesis has a human do critical tasks, like sending massive amounts of money. I half-joked with Genesis employee Dan about how stressful his job, which includes conducting security verification calls before sending millions of dollars, must be. Despite the high stakes, Genesis has never made a mistake in sending money, at least that I know of. The same cannot be said of BlockFi, which has lost hundreds of bitcoins due to poor automation and employee mistakes - at least one employee was fired over that incident.

On the other hand, Genesis did make some mistakes in accounting; they undercredited us by about $4,000 in June 2022 when we renewed our loans with them, which they likely overlooked because of the chaos around that time. They fixed the error when it was pointed out, and that type of error was certainly better than the ones that BlockFi has made.

Management

Genesis has a strong loan book, and I had always thought that Genesis was the most solid company in the industry. However, my faith in Genesis was shaken by the poor performance of CEO Michael Moro and the company's decision to lend an undercollateralized loan to 3 Arrows. BlockFi required 100% collateralization on that loan, while Moro admitted in twitter posts that the Genesis loan was 80% collateralized, and the 80% was generous given what the collateral actually was. In the end, BlockFi lost $80m in liquidating the collateral, while Genesis claims a $1.2b loss. The amount that Genesis actually lost is probably far less, because in a legal case you cannot recover more than you ask for. PROHASHING claimed two million dollars in losses from Celsius, because of multiple accounts against all eight entities involved in that bankruptcy because we don't know which one will issue the payouts, not because that much was actually lost. That said, given the leaked email suggesting that 3 Arrows owed Genesis $1.6b, its losses were a minimum of 20% of that, or $325m, but likely far more due to slippage and the poor quality of the collateral (underwater Grayscale funds that are worth less than 70% of the backing assets.)

Moro was fired over that, as he should have been. Genesis makes loans that ensure that major exchanges have enough coins on hand to conduct trading and to service withdrawals. Had Genesis failed, the entire industry could have collapsed, taking down Gemini, Coinbase, Circle, and many other big names. Despite Moro's termination, however, I don't feel as if enough accountability has taken place for how close Genesis came to nearly ending the entire industry. The close call is indicated by the careful wording by Moro, who stated that parent Digital Currency Group "assumed the company's liabilites." The CEO, while directly responsible for what happened, however, is only part of the company's culture. I would have liked to see a cleaning of house, where there were personal consequences to anyone in positions who knew that such reckless lending was happening. It is sometimes necessary to fire people simply to teach others that they will be next unless they blow the whistle on this sort of stuff.

Genesis also hasn't made a public statement about what they are doing differently now. For example, what happened in regards to that ridiculous statement earlier in 2022 where Genesis decided to accept NFTs as collateral? Were those written off and is Genesis still accepting NFTs? The company's July report discusses the turmoil in the markets, but makes little mention of what happened at the company in June.

Genesis survived in part simply because they had so much money. Indeed, having a huge amount of money to correct mistakes might be reason enough by itself to have confidence in making a deposit.

Safety

Despite the mistakes that Genesis has made, the company has a strong loan book with many collateralized loans. The company should release what percentage of their loans are collateralized, as it will reflect positively upon them.

The extremely poor rates that Genesis is offering to open-term customers are probably aimed at strengthening their position further by ensuring that a bank run can't happen. The fixed-term focus of loans is a major difference between BlockFi and Genesis. BlockFi, with its direct retail investors all having open-term loans, is likely more vulnerable than Genesis is to its indirect customers at Gemini starting a bank run. While I can't say it for sure, it seems logical to assume that the rates Genesis is offering on open-term loans are so poor that they are clearing the books of short-term loans and either losing those customers or getting them to renew for the long haul.

Either outcome results in a stronger book that will not be hit with huge numbers of withdrawals all at once, which BlockFi could theoretically be vulnerable to (although BlockFi claims to have 50% of loans callable within 7 days.) In my case, I ended up moving most of PROHASHING's money from Genesis to BlockFi while keeping our personal savings at Genesis, because Genesis's open term loan rates are so poor they aren't worth the risk for the open-term loans PROHASHING needs to hold.

If the loan book is looked at in isolation, from the publicly available data, their book appears strong. The risk with Genesis doesn't come from their loan book; it's from whether the company is making better decisions about who to lend to. It seems like that is the case, and therefore we signed loans with them for about 55% of our portfolio.

Conclusions

In conclusion, the June 2022 panic has improved the stability of the cryptocurrency lending industry. Now is the safest time there has ever been to lend, and rates are higher than they have ever been. The opportunity to make big money - from 5% to 7% in year-long loans - won't last long, as rates will likely decline quickly once lender demand returns and as short positions fall as the market climbs. If you are worried about lending because of this circumstance that happened in the past, you probably should not be. The real risk is of what you don't know you don't know, not history repeating itself.

In regards to which lenders you should use, BlockFi and Genesis are both good choices. BlockFi currently has the best risk-reward ratio due to its much higher rates, but Genesis has more collateralized loans on its book if your intention is to have the absolute lowest chance of losing money regardless of interest rate. However, it cannot be ruled out that BlockFi is outright in the industry's strongest position in addition to providing the best rates, because we know that FTX is in good shape but Genesis has not discussed the full 3 Arrows impact to Digital Currency Group's financials.

The most important piece of advice is to do whatever you can to form an LLC to grant you bargaining power and give you access to the highest rates, as the current lending market does not favor individuals. Here's a summary:

Less than $250,000 and no ability to form an LLC to aggregate $250,000

Deposit your money at Gemini, which will aggregate it and lend it to Genesis. Somehow, Gemini has negotiated a higher rate with Genesis than is available to most Genesis clients. As a result, Gemini's rates are currently higher than BlockFi's, Gemini allows US customers to deposit, and Genesis may have a slightly lower risk of failure than BlockFi.
If you are not a US customer, then BlockFi is also a solid choice. Go with whichever of the two companies pays more.
There is never a situation where lending money at 1% or less interest has a positive risk-reward ratio. Keep that money in a cold wallet.

From $250,000 to $2m, individually or as a multi-depositor LLC

Do whatever you can to get into this category, as the rates are triple the rates offered to the general public..
Lend to BlockFi Private Client with year-long fixed-term loans, which are being offered at high rates because BlockFi's valuation is determined in part by how much money is deposited there when FTX takes over on June 23, 2023.
For open-term loans, both BlockFi and Gemini are good choices; for Genesis, the LLC should open an account with Gemini and lend through them. Consider splitting the funds between both companies to mitigate losses should the unthinkable happen.
Negotiate higher rates and don't accept the first offer.
Genesis will not deal directly for fixed-term loans with LLCs of this size.

Greater than $2m, individually or as a multi-depositor LLC

Negotiate with Genesis for year-long loans, if you meet their minimum deposit sizes. These loans are exceptional deals, given their low risk and high returns.
Genesis is not competitive for open and short-term loans anymore. Negotiate open-term loans with BlockFi's Private Client program, or pass through amounts less than $5m to Genesis with Gemini's "Earn" program.
BlockFi offers incredible deals on long-term loans. To account for the additional risk of BlockFi's uncollateralized lending, we personally require a 1.5% higher return than Genesis. That threshold has been met for us with this latest round of refinancing.

Finally, my reviews of all three companies would be more positive if they allowed me to publicly disclose their financials, or if they did so themselves. The current review is based upon what a person researching publicly available information only would determine, but I will change them if contacted with permission to disclose the private information. Treat being a depositor as if you were a "shark," and look for the answers to difficult questions. The game has changed, and these companies need to understand that transparency is the #1 factor holding them back - particularly BlockFi, which has no competition remaining and stands to grow larger than Genesis should they receive SEC approval.

Depositing at cryptocurrency companies is safer than it has ever been, and we are currently experiencing a golden age for depositors.