Coinbase Unveils Bitcoin-Backed Loans: Borrow Up to $100,000 in USDC

Coinbase, the leading cryptocurrency exchange, has launched a new service allowing users to borrow up to $100,000 in USDC stablecoins using their Bitcoin (BTC) as collateral. This innovative offering, announced on January 16, 2025, is powered by the decentralized finance (DeFi) platform Morpho, which operates on Coinbase's Ethereum layer-2 network, Base.

How Bitcoin-Backed Loans Work on Coinbase

Coinbase's U.S. clients, excluding those in New York state, can now pledge their Bitcoin to borrow up to $100,000 in USDC using the company's app. Unlike traditional loans, the ability to borrow is linked to the amount of Bitcoin offered as collateral rather than the borrower's credit score or creditworthiness. Interest rates are determined by market conditions and visible during the loan transaction. There are no required due dates or fixed monthly payments, allowing borrowers to repay the loan entirely or partially at their own pace.

When a user decides to get a loan against their Bitcoin, the Bitcoin is first converted to Coinbase Wrapped BTC (cbBTC), a Bitcoin-backed token issued by Coinbase. This cbBTC is then incorporated into a Morpho smart contract on the Base blockchain.

Should You Be Borrowing Against Your Bitcoin?

Borrowing against Bitcoin holdings has been a popular financial service in the crypto world for several years, offering both benefits and risks. If you need money and sell your Bitcoin for a profit, you may face tax implications. However, borrowing against your Bitcoin could help you raise money without selling your crypto, potentially avoiding these tax implications. It's essential to consult with a tax professional or financial advisor to understand the specific tax implications in your jurisdiction.

One significant risk is the potential for Bitcoin price volatility, which could affect the value of your collateral and lead to liquidation of some of your Bitcoin holdings. Coinbase's service requires a minimum collateral ratio of 133%, with borrowers able to adjust their loan-to-value (LTV) ratio above this threshold. If the loan balance reaches 86% of the collateral's market value, the collateral will be liquidated to repay the loan plus a penalty fee, with any remaining Bitcoin returned to the borrower.

Pros and Risks of Loans With Bitcoin as Collateral

Pros of loans with Bitcoin as collateral include raising money without selling your Bitcoin, providing immediate liquidity, and potentially avoiding taxable transactions. However, there are also risks, such as the possibility of liquidation of Bitcoin holdings if the loan balance exceeds 86% of the collateral's market value. Additionally, the use of DeFi platforms like Morpho introduces risks associated with smart contracts, which have been subject to countless bugs and hacks over the years.

Coinbase's new Bitcoin-backed loan service offers an exciting opportunity for users to access liquidity without selling their Bitcoin. However, it's crucial to carefully consider the potential risks and benefits before using such services. By staying informed and making well-researched decisions, you can make the most of this innovative offering from Coinbase.