I was just reading a blog post about BlockFi (https://zanepocock.com/blockfi-and-the-mystery-of-finance-e8a3a8ae90ee ) and am a bit confused. Here’s a concatenated quote:
“In its defence, BlockFi claims it over-collateralizes its loans (in this case with fiat) and requires short termination windows for its lending contracts to other institutions.....Yet even given these precautions by BlockFi, there remains the possibility that bitcoin prices soar unexpectedly and institutions aren’t able to pay back the bitcoin. Their models would then, in theory, terminate the loan contract and market-buy bitcoin with the fiat collateral to cover the gap. “
I thought the loans were collateralized with BTC (in exchange for fiat) and were over-collateralized via a 20-50% LTV. What is this fiat over-collateralization? Is BlockFi setting aside its own reserves for losses on the loans to pay back the interest accounts in the event of default?
Also, i don’t understand the point about institutions not being able to payback the btc because of soaring prices. Aren’t the loans in USD and therefore payable in USD? Wouldn’t a soaring BTC be good because the collateral was gaining in value? Thanks!
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