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BlockFi and Crypto Maturity

by Alan Daniel
cryptocurrency

Cryptocurrency: A History

Cryptocurrency is something that has crept up over the past couple of years. It came about in 2009 but only gained notoriety among the masses in 2017. 2017 was when everything changed for the cryptocurrency sector from a massive adoption standpoint. Bitcoin saw a significant rise, and everyone and their grandmothers were asking around about this bitcoin phenomenon. 

Bitcoin flew like Icarus. It shot up from $1,000 at the start of the year to around $20,000 give or take a thousand depending on where you were and what exchange you were using.

It was exciting times.

But then something happened. 

A crash.

The great cryptocurrency crash was one the likes of which the general world never saw before. Crypto insiders saw significant increases and drawdowns, so it wasn’t as surprising to them. But for the broad new audience. That was crazy. 

The narrative went from bitcoin is a next-level paradigm to something that would become drastically different. It would leave many with a deflated asset over 2018 as it bottomed out around $3,000. Many people left the space. It wasn’t just those who conducted initial coin offerings, but those who invested in bitcoin and the various alternative coins that rose as well.

It was bad times, and some would say that it was the worst of times.

2018 was a rough year. The dog days were in for the cryptocurrency markets. But all was not lost. Core projects still stuck around and made a difference. Corporations such as Square Galaxy Digital invested in bitcoin projects and others. Fidelity, E-toro, and Robinhood, among many others, rolled out crypto trading offerings.

It was an excellent time for builders.

The cryptocurrency market recovered over 2019. Bitcoin went to around $14,000 before dipping back to $8,000 or so where it would trade for a while. 

Cut to 2020.

Bitcoin stayed steady, well, stable for bitcoin within a specific range. 

But here we are in March, where we see a sharp correction. Bitcoin traded down to $6,000.

This is worrisome for those that hold bitcoin with BlockFi, Celsius, and other crypto lending firms. These firms take in crypto-assets and then lend out fiat money like dollars against the crypto collateral. BlockFi released a statement that shows maturity within the cryptocurrency sector, and I believe that it is crucial to point out. Especially in times of distress like the one we are in right now where assets all around are in a downward spiral.

What Did BlockFi Say?

The team over at BlockFi had a measured response to the sharp decline in bitcoin.

Here’s an excerpt:

“Given the current dynamic market and public health considerations, I wanted to share a note about how we are managing the current environment at BlockFi. Our business is very strong and continues to grow. Earlier this week we successfully launched the ability to directly transfer cash to BlockFi. We remain focused on delivering the best experience possible for our clients and team members.”

The first few sentences are important. There’s been a slew of exit scams in the sector where people raise capital and then leave abruptly in some form or fashion. Investors have minimal recourse and lose capital. Releasing a statement like this one shows that there’s no need for concern and that the business is interested in sticking around for the long term.

The letter continues:

“In extremely volatile markets, we generally see heightened activity across our product suite (trading, USD loans, crypto lending, and interest accounts). Directionally speaking, upwards crypto price volatility drives more USD borrowing, while downwards volatility, drives more crypto borrowing. Volatility in any direction drives trading activity. This week and, specifically today, is no different and we continue to provide liquidity to the market – but in larger volumes.All of our products and systems continue to operate as normal. We have experienced no downtime throughout this period and all transactions are being processed normally. “

While the downwards volatility statement provides a bit of insight into how the business progresses, the most important line is that of transactions processing normally. You don’t want significant issues in a space that many people doubt and so would suffer from potential liquidity issues. That’s where you want a proper risk management system to where a bitcoin price decrease doesn’t affect the general health of the business, causing substantial impairment.

The note continues:

“With downward price movement, portions of our USD loan book experience margin calls (and liquidations, in some cases). We are proud of our world-class risk management system that protects BlockFi’s position and optimizes for client experience. Issuing a margin call or selling a client’s assets is never something that we want to do and our system is designed with both our clients’ interests and BlockFi’s risk management top of mind. “

This is the most important aspect, I wonder how they operate their risk management system to account for sharp losses like the one we experienced today. What does that entail? I aim to find out soon. Stay tuned.

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