Coinbase Offers Loans against Your Bitcoin. What Should you do?

The Key Takeaways

• A new service launched on Thursday allows Coinbase customers to use their bitcoin as collateral when taking out a USDC-stablecoin loan of $100,000.
• This loan can be obtained via Coinbase, however it will be processed by the DeFi platform Morpho which runs on Coinbase’s base blockchain.
• You can raise funds without having to pay taxes on your bitcoin, but you also put it at risk.
• Coinbase will require additional capital in the event of bitcoin volatility or to liquidate bitcoin holdings, if they value the loan at more than 86% the value.

You may be eligible to borrow money if you are a user of Coinbase (COIN).

A new service was announced by the cryptocurrency exchange on Thursday, allowing its users to convert their bitcoins into stablecoin USD Coin.

"You can also convert USDC to USD 1:1 for free to cover major expenses like buying a car or making a downpayment on your mortgage," Coinbase said.

While the service is integrated into the Coinbase app, the loan will be serviced by a decentralized finance (DeFi) platform known as Morpho, which is deployed on the Coinbase-created Base blockchain.

How does borrowing against Bitcoin work on Coinbase?

While using this service, Coinbase's U.S. clients—except those who live in New York state—can pledge their bitcoin to borrow up to $100,000 in USDC using the company's app.

In this instance, unlike a traditional loan with a financial institution, the ability to borrow is based on how much Bitcoin you can offer as collateral and not your credit rating or creditworthiness. Your interest rate will depend on the going market rate, and will be visible to you when you're making the loan transaction. The loan can be repaid in whole or in part.

Coinbase’s Wrapped BTC Token (cbBTC), a token backed with bitcoin, is converted first when you choose to take out a loan. The cbBTC token will be used to create a Morpho contract using the Base blockchain.

What Should you do with your Bitcoins?

For many years now, both DeFi and centralized institutions have offered a financial service that allows users to borrow against their bitcoin holdings. There are both benefits and risks.

If you need money and sell your bitcoin for a profit to raise funds, you’d be on the hook to pay taxes on that sale. You can raise funds by taking out a loan on your bitcoin, without having to sell it. However, the tax treatment of this is unclear. Some people worry that converting bitcoin into cbBTC could be viewed as taxable.

One big risk, if bitcoin’s price is volatile, could be that the collateral value will drop, resulting in the liquidation of some bitcoins.

The Benefits of Bitcoin Loans

• Earn money from your BitcoinThis service, like other collateral assets that are used to secure loans and mortgages, allows you to obtain immediate liquidity without selling your bitcoin.

The Risks Of Loans With Bitcoin As Collateral

• Liquidation bitcoinsAccording to Coinbase’s definition, the loan-to value (LTV), ratio determines a loan’s health. Your LTV is 50% (500/1000) if you lend $500 on a $1,000 security. When you borrow against bitcoin with Coinbase, your LTV must be less than 86%. “If your loan accrues enough interest or the value of your collateral drops, and that causes the LTV of your loan to reach 86%, then your collateral will be liquidated to repay the loan plus the penalty fee,” Coinbase said. Coindesk has reported that a senior executive at the crypto exchange said the company would set up shop. “liquidation warnings” Informing consumers is important.
• Loss of bitcoinIn 2022, the risks of crypto-lending became apparent when BlockFi, Genesis and other crypto-lending services went out of business or stopped withdrawals. That said, the use of a DeFi platform such as Morpho should offer greater transparency and avoid at least some of those issues—albeit while also introducing risks associated with the use of smart contracts, which have been subject to countless bugs and hacks over the years.

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