BlockFi’s Flori Marquez: We’ll hit one million customers by the end of 2021

Co-founding BlockFi, the crypto lending unicorn, wasn’t the first niche opportunity in online lending to catch Flori Marquez’s eye — though the previous one wasn’t as glamorous.

Four years ago, Marquez was a portfolio manager at the online lending platform Bond Street when its team was aqui-hired by Goldman Sachs in October 2017.

But Marquez had already worked at a hedge fund called Oak Hill Advisors and says she knew life inside a big bank wouldn’t be for her. So, she took Bond Street’s investors up on an offer to effectively run off the company’s $125 million loan book, which she describes as an amazing opportunity. 

Speaking recently with Marquez via Zoom, I point out that the job sounds a bit procedural.

“Oh, 100% procedural, right? Who wants to wake up every day and service loans?” she says. 

But it was an opportunity that meant Marquez, at the age of twenty-five, got to split a servicing fee previously paid to Bond Street, the entity, between herself and just one other colleague.

One might imagine she would have traveled the world on such a budget. Instead, she decided to start her own business.

“I’m a little bit of a crazy person, and I thought, ‘I really want to know what it’s like to stretch my brain to its full capacity,’” she says. “What if I use this opportunity to lever myself up and start a different company during the day and work on Bond Street at night?”

Most of Marquez’s early colleagues at BlockFi were not aware that she had a night job, because she didn’t want them to think she was distracted.

In October 2017, she founded BlockFi alongside CEO Zac Prince, another crypto convert from the online lending sector. Prince spent two years as a vice president at online lending analytics firm Orchard. 

Three and a half years later, BlockFi has become a force to be reckoned with in the crypto sector. The company has raised over $500 million from investors and was recently valued at $3 billion. Its flagship product allows crypto holders to park funds on the platform and earn interest. BlockFi then lends those crypto deposits out to institutions — such as Fidelity, Susquehanna and Akuna Capital — which use it for arbitrage opportunities.

But a good portion of BlockFi’s success has mirrored the broader rise of the crypto market during the past year. Whether that success is sustainable may depend at least in part on whether Marquez and her team can continue to identify and seize on niche opportunities.

Mega metrics and closing windows

Equity investors certainly seem to like what they see from BlockFi.

In March, BlockFi closed a $350 million Series D led by new investors including Bain Capital Ventures, partners of DST Global, Pomp Investments and Tiger Global. It had secured $50 million in a Series C only six months earlier. 

Why, then, did it raise again so soon?

“Metrics. Pure and simple, we just hit the places that we were supposed to hit faster than anyone anticipated,” says Marquez. “And that continues to be true today.” 

By way of example, she explains that the company’s “reach goal” for 2021 was to grow its base of funded clients to 500,000. As of late March, it had more than 280,000.

“If you look at our current rate of growth, it looks like right now, if we keep it up, we’ll hit a million clients before the end of the year,” she says.

BlockFi has been growing so quickly, in fact, that Marquez felt comfortable briefly pausing user sign-ups while the startup’s engineers resolved a spam attack, which recently flooded its systems with hundreds of fake accounts. The spammer used vulgar language to fill in the first and last name fields on BlockFi’s account registration page.

“I made the call to say, let’s actually shut down sign-ups and give the engineers the time they need to really resolve this issue and make a couple of improvements so that it’s not able to happen to us again,” she says.  

Part of BlockFi’s success so far stems from seizing niche opportunities in a nascent and fast-evolving crypto lending market — very much Marquez’s style. There are signs, though, that some of those opportunities are fading.

Take the startup’s investment in Grayscale’s investment trusts, for instance. Grayscale’s flagship product, the Grayscale Bitcoin Trust (GBTC), for years traded at a significant premium relative to net asset value (NAV). This presented institutional investors with a simple trade: subscribe for shares at NAV via private placements using either cash or bitcoin, wait out the six-month lock-up period, sell the shares and pocket the difference. BlockFi, wielding its ever-increasing deposit base, is one of many investors (see also Three Arrows Capital) to have exploited the opportunity.

In February, however, the trust suddenly began trading at a discount for the first time in its more than eight-year history. Commentators have suggested that the approval of a growing number of exchange-traded products in Canada, Europe and beyond — though as yet, not in the United States – triggered the reversal. Perhaps pent-up demand for passive crypto investment products is finally being met.

“I would love for the premiums to come back and it’s a question of supply and demand, and I think it would make sense for them to come back over time,” says Marquez. “But as of right now it’s just about hedging any downside risk, which we’ve always done, and continuing to generate yield in the way that we’ve done traditionally — which is lending crypto out to institutional investors.”

But that too has become more challenging of late, prompting a recent rate cut at BlockFi — a reminder that, crypto or no crypto, lenders are beholden to market conditions.

Yield hunting

BlockFi offers different rates based on how the amount of crypto that customers hold with it. As of April 1, BlockFi changed both its tier caps and its rates. For “tier 2” bitcoin holdings, for example, BlockFi cut Annual Percentage Yields from 3% to 2%, while enlarging the tier to include anyone holding between 1 and 20 BTC with the platform.  

“I think of it very much like a marketplace. There are different drivers for the yield we can get on the institutional side,” says Marquez, adding that yields can also tick up in periods of high volatility — because of higher institutional borrowing demand.

“It just depends on what we see from the market. We recently announced a rate decrease because the yield that we were seeing was lower, but we do have a history of lowering the rates when the yield is lower and raising them again when the yield gets higher,” she adds.

But where does BlockFi see potential new sources of yield?

One option, of course, is to muscle in on the ETF rush. Marquez thinks any product that helps “normalize” crypto for investors is a net benefit for BlockFi and the wider crypto ecosystem. She would not say, though, whether BlockFi has anything planned on the ETF front.

BlockFi would also seem well-placed to drive forward conversations about the crypto market’s first securitizations, which would involve packaging up bundles of crypto-backed loans and selling them off to big investors in different tranches, with rates varying depending on investors’ risk appetite. But such a move is not in BlockFi’s “immediate roadmap,” according to Marquez.

“It would be interesting to give [investors] another traditional avenue which the Jefferies [the investment bank] and other investors of this world are used to accessing, but for the time being it’s working out pretty nicely for us to just finance the loans ourselves,” she adds.

Marquez understands what BlockFi is up against because she’s familiar with what happened to the first wave of online lenders. Those firms emerged in the wake of the Global Financial Crisis, a period in which big banks massively pulled back on lending to small businesses and consumers. But after a while those very same banks were back in the market, making life difficult for lending startups. 

Today, many online lenders have either toppled over, been sold, or become banks. Indeed, many of Marquez’s former colleagues at Bond Street now work for Marcus, Goldman Sachs’s online lender.

The biggest competitive challenge for online lenders, she says, is the “huge balance sheets” of big banks.

“You can give [customers] better tech and a better experience,” says Marquez. “But in the end, you don’t want to pay $1,000 more for your loan if a larger bank can give you something that’s better for your business.”

It seems inevitable that, before long, big banks and their balance sheets will also start trying to eat BlockFi’s lunch, particularly given that more and more Wall Street crypto desks have been coming online. 

That may explain the startup’s massive fundraising and ambitious goal to reach one million funded accounts by the end of the year. BlockFi is trying to get entrenched to the point that it cannot be dislodged.

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