Overview
Coinbase has introduced a new feature that allows users to borrow up to $100,000 in the form of USDC (USD Coin), a stablecoin.
To get the loan, users will need to use their bitcoin (BTC) as collateral. This service launched on Thursday and is available through the Coinbase app. However, the actual loan is managed by a decentralized finance (DeFi) platform called Morpho, which operates on Base—a blockchain built by Coinbase.
This setup provides a way for users to access cash without having to sell their bitcoin. That means they can avoid turning their crypto into a taxable event. But there are also risks—mainly that if the value of bitcoin drops significantly, users could be required to add more funds or risk having some of their bitcoin liquidated.
How the Loan Works
If you’re a Coinbase user in the U.S. (excluding New York), you can use your bitcoin to get a loan of up to $100,000 in USDC directly from the Coinbase app. Unlike traditional loans, this process doesn’t look at your credit score or income. Instead, it relies solely on the amount of bitcoin you’re willing to use as collateral.
Your interest rate will vary based on current market conditions, and you’ll see the exact rate before you confirm the loan. There’s no fixed repayment schedule—you can repay the loan partially or in full whenever you like.
When you choose to borrow, your bitcoin is first converted into Coinbase Wrapped Bitcoin (cbBTC). This is a special token backed 1:1 by real bitcoin and issued by Coinbase. The cbBTC is then placed into a smart contract on Morpho, a DeFi lending protocol on the Base blockchain.
Should You Consider Borrowing Against Your Bitcoin?
Getting a loan against bitcoin isn’t a new idea—it’s been available through both centralized and decentralized platforms for years. However, this new offering by Coinbase is drawing attention because it combines the convenience of a major exchange with the transparency of DeFi.
One of the biggest advantages is that you can get liquidity without selling your bitcoin. Selling would likely result in capital gains taxes if your bitcoin has appreciated in value.
But using it as collateral means you can keep your bitcoin while still getting access to cash. Coinbase even points out that you can convert the USDC to USD on a 1:1 basis at no extra cost to fund things like buying a car or making a home downpayment.
However, there’s a potential issue with taxes. Some experts are warning that converting bitcoin into cbBTC—required to secure the loan—might itself be treated as a taxable transaction, though that’s still unclear and may depend on future IRS guidance.
Major Risks to Consider
- Liquidation Risk
Your loan is tied to the value of your bitcoin. Coinbase requires you to keep your loan-to-value (LTV) ratio below 86%. So, if you borrow $500 and your bitcoin collateral is worth $1,000, your LTV is 50%. But if the value of bitcoin drops or you rack up enough interest to push your LTV to 86%, Coinbase will automatically liquidate enough of your bitcoin to cover the loan and apply a penalty fee.
To help with this, Coinbase says it will offer liquidation warnings to alert users if their LTV is approaching the danger zone.
- Possibility of Losing Your Bitcoin
Crypto lending has faced major challenges in the past. In 2022, several crypto lending companies like BlockFi and Genesis went bankrupt or froze customer accounts, leaving users unable to withdraw their funds. While this Coinbase offering is different because it uses a DeFi protocol (Morpho), it’s still not completely risk-free.
DeFi platforms have their own vulnerabilities—mainly bugs in smart contracts or security loopholes. These risks have resulted in many high-profile hacks in the past. So, while Morpho offers better transparency than traditional lenders, it introduces new risks that users should carefully consider.
Pros of Borrowing Against Bitcoin
- Keep your bitcoin while accessing cash: This loan option lets you hold onto your bitcoin instead of selling it, which could trigger taxes or lose potential future gains.
- Flexible repayment terms: There are no set due dates or monthly payments. You repay when you want.
- Transparent and decentralized: Using Morpho on the Base blockchain allows for greater visibility and trust in how the loan is managed.
Cons of Borrowing Against Bitcoin
- Market volatility risk: If the price of bitcoin drops too much, you could be forced to repay the loan early or lose part of your bitcoin due to automatic liquidation.
- Smart contract risk: Because this system runs on DeFi, it’s vulnerable to technical bugs or hacks.
- Uncertain tax implications: The conversion from BTC to cbBTC might be seen as a taxable event, though this hasn’t been clearly defined by regulators yet.
Final Thoughts
If you’re thinking about using Coinbase’s new loan service, make sure you understand both the benefits and the risks.
This could be a useful way to get quick access to funds without losing your bitcoin investment, but only if you’re comfortable with the possibility of liquidation and smart contract issues. And since tax rules are still murky, it may be wise to speak with a tax professional before diving in.
In short, borrowing against your bitcoin can be a helpful tool—but it’s not for everyone. Be sure to weigh your personal financial situation, your need for cash, and your comfort with crypto-related risks before making a decision.
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