BlockFi faces heavy losses from its loan to Core Scientific

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Last week, the fledgling US-based miner Core Scientific, which has been selling most of its bitcoin throughout this year announced that it’s ready to go through bankruptcy proceedings with creditors as it halts all its debt payments.

Core Scientific has more than $1 billion in outstanding liabilities to various creditors, including an $80 million loan from BlockFi. Core currently holds only 24 bitcoin (worth just under $500,000) and around $26.6 million in cash. It’s also making a loss on its operations and estimates that the total cost of its property and equipment is around $99 million, meaning that the company is heavily short on its obligations to creditors.

Two years ago, BlockFi began an extensive campaign to finance bitcoin miners and even has a section on its website dedicated to the service. Under the guidance of capital markets veteran Joseph Chu, BlockFi has handed out various loans to miners, including $46.9 million to Alborz JV and $32 million to Bitfarms. As of last summer, bitcoin miners had up to $4 billion in debts and BlockFi was alleged to have been the second leading creditor to publicly-listed bitcoin miners.

According to its latest transparency report, BlockFi has exposure to $1.8 billion in loans to institutional and retail clients and up to $3.9 billion in clients’ assets which it can deploy.

BlockFi’s term sheets are not publicly available, but a reddit post alleged that BlockFi offers loans of larger than €10 million with a 10% bitcoin deposit along with collateral against equipment. In its SEC filing, Core Scientific said that it borrowed two loan tranches from BlockFi, to buy mining equipment, one of $60 million in December 2021, and another of $20 million with an interest of 13.1% and payable within 24 months.

Companies in the crypto-finance industry like BlockFi and Celsius based their business models on giving high-interest payments to clients from profits they would have made either trading crypto or from interest payments they would receive from loans to retail and institutional clients against their crypto collateral. BlockFi stresses that, unlike Celsius, it has always honored clients’ withdrawal requests.

However reckless trades, bad debts, and high leverage meant it never worked out this way. BlockFi itself had already been bailed out by Sam Bankman-Fried with $250 million after it lost more than $285 million in 2020 and 2021. This is according to alleged leaked income documents.

Notable companies which went bankrupt so far this year include Three Arrows Capital (3AC) and Celsius while BlockFi had to be bailed out. However, we’ve so far not seen a widescale deleveraging of bitcoin miners.

Miners are nevertheless undergoing severe stress with electricity prices yet to drop back to pre-2022 levels and bitcoin stuck in a bear market. The stock price of most publicly-listed miners has crashed while Riot Blockchain, one of the biggest in the US has taken losses of at least $330 million this year alone. A crypto miner crisis may once again put BlockFi into financial turmoil.

Following publication, BlockFi contacted Protos with a statement from the company’s chief risk officer, Yuri Mushkin:

“BlockFi runs a diversified lending business to the crypto ecosystem, of which mining-backed loans is a minority portion of our larger lending portfolio,” said Mishkin.

“These mining-backed loans are collateralized with mining equipment, and we follow the same prudent risk and underwriting practices that we implement across the rest of our institutional business. BlockFi holds risk capital reserves to protect against potential loan defaults, which includes the mining equipment finance business.

“Furthermore, our credit risk management team closely monitors the bitcoin mining sector and regularly speaks with the borrowers in the portfolio. The company has not underwritten a new loan in this sector since the spring of 2022 and is working to support the sector during this time. BlockFi clients funds are not impacted and remain safeguarded, and all Institutional, Private Client, and Retail products and services continue to operate normally.”

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Edit 18:55 UTC, Oct 31: Following the statement from BlockFi, the article has also been edited to point out that the $285 million figure mentioned in paragraph 7 was taken from leaked documents, and to reflect BlockFi’s stance on clients’ withdrawal requests.