What went wrong at BlockFi?
BlockFi was founded in 2017 with a mission to "redefine banking." Just over five years later, the platform is now one of several cryptocurrency exchanges that have failed. BlockFi's big draw was its interest-earning accounts. It also offered a crypto credit card and allowed clients to buy and sell crypto. The company attracted a serious number of investors and customers flocked to its products.
However, in 2021, as crypto started to lose its shine, BlockFi found itself in hot water with regulators. Several states outlawed its interest-bearing accounts. The issue? If a crypto account pays interest, regulators argue it fits the definition of a security. Securities are tightly regulated by the SEC. Early in 2022, BlockFi reached a $100 million settlement over the sale of unregistered securities. That split into a $50 million penalty for the SEC and $50 million for various states.
Crypto prices dropped dramatically in 2022. Bitcoin (BTC), the leading cryptocurrency, which reached a high of almost $68,000 in November 2021, fell below $16,000 the following year. The prolonged drop in prices exposed several crypto platforms, some of which had been taking significant risks with client funds. After Three Arrows Capital failed, BlockFi got caught up in the contagion. It got bailed out by FTX, but when FTX collapsed, the firm was out of options.
In a court submission, the BlockFi Official Committee of Unsecured Creditors argue that the collapse of other platforms is only part of the story. It says BlockFI's management "ran their business in a way that caused foreseeable, catastrophic loss."
Is cryptocurrency a safe investment?
There are a number of risks involved in cryptocurrency investment. Key amongst them is that, unlike banks and brokerages, crypto accounts are not protected against failure by FDIC insurance or SIPC insurance. As is the case with BlockFi, if you have assets on a centralized platform that fails, your money could get tied up in bankruptcy proceedings. Plus, if you put your money into a crypto interest-bearing account, it isn't always clear what's going on behind the scenes to generate the interest.
In addition to the platform risk, cryptocurrency prices are extremely volatile. It's a relatively new and unregulated asset class. Cryptocurrency could transform the way we manage money and digital identities, but it could also collapse completely. There's a lot we don't know about how it will develop. It's almost certain that we'll see increased regulation, but there's less certainty about the exact shape of that regulation and the impact it will have on the cryptocurrency market.
Investing always carries risk, but other assets -- such as stocks, bonds, and real estate -- carry a lot less risk. This is why many financial experts advise that crypto should only represent a small proportion of your portfolio. If you want to build wealth, particularly for your retirement, the key is to make consistent contributions to a diverse portfolio. Maximize your tax-advantaged contributions to an IRA or 401(k) and, if you don't have one already, check out our list of top brokerage accounts.