Coinbase Is Offering Loans Against Your Bitcoin. Should You Get One?

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Key Takeaways

• Coinbase users can now pledge their bitcoin as collateral to take out a loan significance $100,000 in USDC stablecoins after a new service was launched Thursday.
• These loans can be made via the Coinbase app but will be repaired by DeFi platform Morpho, which is found on the Coinbase-developed Base blockchain.
• Using bitcoin as collateral offers a wager to raise money without a taxable transaction for your bitcoin but also puts it at risk.
• In case of bitcoin amount volatility, Coinbase’s service requires additional capital or liquidation of bitcoin holdings if the value of the loan exceeds 86% of the value of the bitcoin controlled as collateral.

If you’re a Coinbase (COIN) user, you may be able to use the bitcoin (BTCUSD) you own as collateral to get a loan.

The cryptocurrency exchange announced a new use Thursday that will allow its users to raise funds in stablecoin USD Coin (USDC) against their bitcoin holdings.

“You can also remake USDC to USD 1:1 for free to cover major expenses like buying a car or making a downpayment on your mortgage,” Coinbase conveyed.

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

How Does Borrowing Against Bitcoin Work on Coinbase?

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

Unlike a regular loan from a financial services company, your faculty to borrow in this case is linked to how much bitcoin you have to offer as collateral instead of your credit millions or creditworthiness. Your interest rate will depend on the going market rate, and will be visible to you when you’re fixing the loan transaction. There are no required due dates or fixed monthly payments, and you can choose to repay the loan entirely or to a limited.

When you decide to get a loan against your bitcoin, it first gets converted to Coinbase Wrapped BTC (cbBTC) souvenir, which is a bitcoin-backed token issued by Coinbase. This cbBTC will then be incorporated into a Morpho knowledgeable contract on the Base blockchain.

Should You Be Borrowing Against Your Bitcoin?

Borrowing against bitcoin holdings has been a key economic service in crypto for a number of years in terms of both DeFi apps and centralized financial institutions. It has its benefits as fairly as 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 sales marathon. A loan against your bitcoin could help you raise money without selling your crypto, but its tax treatment stay behinds unclear as some worry that conversion from bitcoin to cbBTC may be considered a taxable event.

Also, one big hazard is that if the price of bitcoin faces wild swings, the value of your collateral could get affected, leading to a liquidation of some of your bitcoin holdings.

Pros of Allowances With Bitcoin as Collateral

• Raise money without selling your bitcoin: Not unlike other assets second-hand as collateral, this service allows you to get immediate liquidity by pledging your bitcoin without having to sell it.

Hazards of Loans With Bitcoin as Collateral

• Liquidation of bitcoin holdings: According to Coinbase, a loan’s health is determined by its loan-to-value (LTV) relationship. If you borrow $500 against a $1,000 collateral, your LTV would be 50% (500/1000). If you’ve borrowed against your bitcoin using Coinbase, you desperate straits to have an LTV of less than 86%. “If your loan accrues enough interest or the value of your collateral doffs, and that causes the LTV of your loan to reach 86%, then your collateral will be liquidated to repay the accommodation plus the penalty fee,” Coinbase said. An executive from the crypto exchange told Coindesk that the company determination set up “liquidation warnings” to inform consumers.
• Risk of losing bitcoin: The risks associated with crypto lending various generally came to light in 2022 when several crypto lending services, including BlockFi and Genesis, went bankrupt or halted withdrawals. That utter, the use of a DeFi platform such as Morpho should offer greater transparency and avoid at least some of those issuances—albeit while also introducing risks associated with the use of smart contracts, which have been referred to to countless bugs and hacks over the years.