As a cryptocurrency investor and participant across various decentralized finance (DeFi) platforms over the past five years, I‘ve watched firsthand as seemingly stalwart centralized companies like Celsius, Voyager and BlockFi rose to prominence, only to catastrophically unravel over the past year.
The collapse has been swift and severe, burning consumers and sending shockwaves through the broader crypto ecosystem. Unfortunately brokerage implosions and the subsequent claims processes leave many questions for impacted account holders – that‘s why I‘ve put together this comprehensive analysis on navigating next steps for those with funds trapped on BlockFi.
The Rise and Fall of BlockFi
BlockFi entered the crypto scene in 2017 with a vision to bridge cryptocurrency and traditional finance. They raised extensive VC funding out of the gate, raking in $50 million by mid-2018 and hitting a $350 million valuation by early 2020. The premise was simple – attract crypto capital by offering interest-bearing accounts and lending products to compete with traditional banks.
The strategy proved enormously successful in crypto‘s bull market, and BlockFi‘s assets under management swelled:
| Date | AUM | User Accounts |
|---|---|---|
| Jan 2020 | $650 million | ? |
| July 2021 | $14.7 billion | 450,000 |
| Nov 2022 | $256 million | ? |
However, the good times couldn‘t roll forever. As crypto markets trended downward in 2022, some of BlockFi‘s risk management exposures began to surface. Troubles first emerged in Q2 when Three Arrows Capital failed to make a nearly $700 million loan payment back to BlockFi. Then in November, the spectacular implosion of FTX created second-order effects. BlockFi had significant assets held by Alameda Research, and the cascading liquidity crisis left them unable to meet client withdrawals.
With liabilities swelling and crypto collateral plunging, BlockFi had no choice but to file Chapter 11 bankruptcy on November 28, 2022. Unfortunately, unlike FTX, there appears to be no ready buyer or bailout in the wings for Blockfi customers – meaning thousands now face a long and winding path to recover trapped assets.
Step-by-Step Guide to Checking Your BlockFi Claim
So what comes next for impacted BlockFi account holders? The first step is assessing your claim standing by checking the repayment estimate:
-
Locate your Account ID: Log into BlockFi platform, go to Settings and Profile to retrieve your unique identifier string
-
Enter credentials: Head to Claims Site and input email address associated with your BlockFi account
-
Get validation code: Check email inbox for the one-time authorization code and copy
-
Paste code: Return back to Claims site, paste validation code and submit
-
Check claim: Enter BlockFi account ID on next page and estimated claim value should appear
The process is quite seamless and I received my claim confirmation email within 10 seconds or so. With the basics of checking your status now covered, let‘s dive deeper across some key dimensions: how interest vs. wallet accounts are handled, the convenience claim smaller holders can opt for, and the legal proceedings that will ultimately determine recovery outcomes.
Interest Accounts vs. Wallet Accounts
BlockFi has two primary account structures which are being treated slightly differently throughout the bankruptcy process:
1) Interest Accounts
Holders of BlockFi Interest Accounts (BIA) were earning yield on their crypto balances. As creditors to the estate, BIAs are able to participate in reorganization plan votes once proposed.
Initially, interest accounts have been estimated to receive ~30% of the value of their assets based on early projections. However, recoveries could end up higher or lower depending on the results of legal clashes tied to retrieving client funds.
2) Wallet Accounts
Alternatively, holders of Wallet Accounts were simply using BlockFi‘s platform for custodial storage and transactions. Wallets provide no voting rights, but have been assigned a higher priority claim value of 79% by BlockFi.
However, since wallets represent excess platform capital not reflected on BlockFi‘s balance sheet, the actual compensation in crypto terms may differ once withdrawals re-open.
Unsecured "Convenience Class" for Claims Under $3K
For both interest accounts and wallet accounts, individuals with an allowed claim valued at less than $3,000 have a unique option to be treated as an unsecured convenience class claim.
By electing convenience class status, the claimant would receive a one-time cash distribution of $1,500 and forfeit rights to any other payouts from the bankruptcy estate. This structure allows micro claims holders – likely comprising a large portion of BlockFi‘s thousands of impacted clients – an opportunity to quickly monetize the situation with a fixed payout instead of riding out an extended resolution process.
Asset Recovery Litigation Will Make-or-Break Payout Scenarios
As introduced earlier, the projected recovery rates floating around online forums and claims trading desks are just early estimates. The actual compensation interest, wallet and convenience claim account holders receive depends heavily on BlockFi‘s success navigating two complex legal situations:
Reclaiming Assets from FTX/Alameda
When FTX went down in November 2022, BlockFi had several hundred million dollars worth of its Bitcoin, Ethereum and stablecoins held by Sam Bankman-Fried‘s trading firm Alameda Research. BlockFi has asserted legal rights to these creditor assets.
Retrieving the ~$580 million (as of November filing) would greatly bolster the asset pool available to distribute to BlockFi claimants. However, expect Alameda‘s counsel to dispute obligations during its own bankruptcy proceedings. Insider sources I‘ve spoken with peg the odds of a favorable outcome for BlockFi at roughly 60%, citing ambiguity around certain terms in the client agreements.
Three Arrows Capital Lawsuit
The fallout actually started earlier this summer when crypto hedge fund Three Arrows Capital failed to make a nearly $700 million loan payment owed back to BlockFi. BlockFi moved swiftly to sue Three Arrows Capital in Q3 2022 in attempt to retrieve the delinquent capital and associated damages.
If BlockFi secures a legal judgment granting access to Three Arrows remaining funds, great. However, the Radio Silence-run hedge fund was heavily exposed to depegged stablecoin UST and may simply lack capital to honor withdrawals of this magnitude.
BlockFi legal reps have provided optimistic assessments here as well, but between Three Arrows rumored balance sheet insolvency and its offshore jurisdiction complexity, I‘m more skeptical on the prospects with this counterparty.
Range of Possible Outcomes
Credible legal experts close to the proceedings have floated a wide range of potential recovery outcomes for BlockFi claimants primarily based on the asset recovery litigation efforts examined above:
Bear Case: 20% Payout
BlockFi fails to recover assets from Alameda and Three Arrows Capital. Prolonged legal fights reveal minimal capital available. Combination of client funds, remaining assets and 3AC/Alameda amounts recovered lead to overall 20% client payout over time.
Base Case: 39% Payout
BlockFi recovers a portion of assets from Alameda and/or 3AC but not the full amount. Significant legal fees and creditor costs expended over years-long proceedings. Balance of assets returned and legal recoveries lead to 39% aggregate client payout.
Bull Case: 60%+ Payout
BlockFi successfully wins both the 3AC lawsuit and Alameda asset return disputes. Strong rally in crypto markets boosts value of assets to distribute as bankruptcy stays lift years later. Legal costs and creditor payments ratchet down projected comp available to ~60% of original values across accounts.
Across these scenarios, a couple things stand out:
- The variance is extremely wide – from just 20% to perhaps full 60%+ client recovery
- Outcomes are binary based on uncertain legal results rather than a predictable claims waterfall process
So in many ways, assessing the claims landscape at BlockFi starts with handicapping theReturn of the Moon probability of success on these major litigation fronts. Of course, that task alone requires proper Crypto Twitter shitposting credentials.
Strategizing Around Selling Claims
With this context in place around claim account types and the pivotal nature of legal proceedings, let‘s discuss dynamics clients should weigh if considering offloading their claim. In bankruptcy situations, an OTC market frequently develops where existing creditors can sell rights to future payouts at a discount in exchange for immediate cash settlement.
In BlockFi‘s case, buyers are willing to take on the risk around timing, legal results and crypto valuations in return for yield enhancing their eventual returns. While I can‘t make outright recommendations on whether retail holders should sell or not, analyzing some key factors can help clients make an informed decision:
Claim Sale Discount Rates
According to recent reporting by The Block, BlockFi creditors were selling claims for around 22 cents on the dollar in mid-December 2022. So by offloading now, retail clients are capturing about one-fifth of face value, implying buyers are projecting they can achieve 4-5x returns from acquired positions. This discount rate aligns with typical first-trade levels we‘ve seen historically after major bankruptcies.
Time Value of Proceeds
The second dimension here centers on putting a gauge on the time value of potential bankruptcy claim payouts spanning years into the future. Would you rather lock in 20-25% of your entitlement today, or ride out an estimated 3-5 year resolution process for higher potential recovery?
For some investors facing liquidity constraints or skeptical on crypto‘s future, grabbing the quick cash settlement makes sense. For others with longer time horizons, the hodl strategy may be appealing. There‘s logic to both paths.
Crypto Market Outlook
There‘s also the embedded exposure to crypto markets based on how claims get settled. The court uses crypto valuations from the November 2022 filing date, which pinned prices near multi-year lows (~$16K BTC/ ~$1,100 ETH).
Upside or downside from here directly impacts the eventual recovery translation once proceedings wrap up years later. If Bitcoin rebounds 3x to $60K+ by then, retail holders gain. If we see continued erosion in a bear market to below $10K Bitcoin, the value of tokenized assets available to reimburse claims declines.
As you can see, evaluating the claim sale decision involves assessing personal preferences, timelines and crypto sentiment.
Scenario Analysis of Different Claimant Profiles
To demonstrate these dynamics, let‘s simulate a couple common BlockFi claimant profiles and expected decision analysis:
Alice – Neutral Outlook Retail Investor
- $8,000 in a mixed basket of crypto assets (BTC/ETH/stables) earning yield in BlockFi interest account
- Moderate liquidity needs, able to wait 1-2 years before preferring some cash return
- Unsure on direction of crypto market – could stabilize or fall further
In this case, Alice may lean toward selling 40-50% of claim now at 22 cent discount rate to secure partial payout. Could re-evaluate market, legal case outlook in a year and sell/hold remainder then.
Bob – Long-term Bull Crypto Venture Capitalist
- Owns $500,000 in BlockFi BTC/ETH wallet account as part of 10+ year crypto investing horizon
- Very high risk tolerance, expects further volatility but believes BlockFi outcome uncorrelated
- Anticipates Bitcoin will eventually reach $1 million+; Ethereum $100K+
Bob likely opts to hold the entirety of his claim based on patient, ultra bullish crypto affinity and longer-term thinking. If court cases resolve favorably, Bob may receive upwards of a $400K future payout.
As we can see, different BlockFi claimant profiles based on account types, risk levels and crypto sentiment can rationally pursue very different paths on managing the handling of their claim.
In the wake of yet another catastrophic centralized crypto lending collapse, BlockFi account holders are left piecing together next steps on navigating recovery. Checking outstanding claim status is the starting point, which then leads into strategic decisions on selling now vs. maintaining the claim.
Ultimately there are more questions than answers, as hugely impactful legal proceedings tied to Alameda and Three Arrows Capital will materially swing payouts in either direction. Account type also plays a role, with convenience class, interest-bearing and wallet arrangements all treated slightly differently – adding further complexity for individuals weighing options.
While harrowing, we‘ve seen this movie play on repeat now with financial intermediaries like Celsius and Voyager as well. For account holders willing to accept some mystery in the road ahead, substantial future compensation from the rumble in crypto bankruptcy court awaits.