Coinbase's Crypto-Backed Loans Notch Record Liquidations Amid Bitcoin, Ethereum Plunge

Coinbase users are experiencing significant losses through the platform’s crypto-backed loan program. Over the past week, $170 million worth of collateral has been liquidated on the DeFi platform Morpho. The decline in Bitcoin and Ethereum prices has triggered a spike in liquidations as users’ collateral values fall below thresholds according to reports.

The price of Bitcoin has dropped 17% and Ethereum has fallen 26% in the last week. These declines have caused many users’ loans to become ‘unhealthy.’ When this happens, third-party actors can repay the loans and take possession of the collateral at a discounted rate. On Thursday alone, 2,000 users lost $90.7 million.

Some users have attempted to mitigate their losses by adding more collateral or repaying debts using USDC. However, around 3,300 users were unable to act in time and lost their assets. These liquidations underscore the risks associated with crypto-backed lending during periods of volatility as data shows.

Why Did This Happen?

The crypto-backed loan product, launched by Coinbase in January 2025, allows users to borrow funds using their crypto holdings as collateral. The program has originated $1.8 billion in loans since its launch. As crypto prices have fallen, the value of the collateral has dropped, increasing the likelihood of liquidation events.

All loans on Morpho are over-collateralized by default. Coinbase has added an additional buffer in its app to reduce liquidation risk. Users are also notified frequently—up to every 30 minutes— when their loans are at risk.

What Are Analysts Watching Next?

If crypto prices were to drop an additional 50%, Coinbase users could lose up to $600 million in collateral. The recent trend of outflows from the Base Layer 2 solution also reflects a broader shift in investor sentiment. Base has seen a net outflow of $4.3 billion in 2026, compared to a net inflow of $3.8 billion in 2025.

Ethereum, by contrast, has seen a net inflow of $8.5 billion, indicating a reversal in investor sentiment. The outflows from Base are attributed to Binance withdrawing capital to Layer 1, which has affected overall ether deposits on the platform according to reports.

How Are Markets Reacting to the Liquidation Surge?

The broader crypto market has seen mixed reactions. Bitcoin and Ethereum have shown signs of recovery, but the overall volatility remains high. On February 6, Bitcoin edged above $65,000 while Ethereum hovered just above $1,900. However, both assets remain under pressure from macroeconomic concerns as market data shows.

Derivatives markets also show signs of stress. Bitcoin futures open interest has dropped to $47 billion, a sign that traders are closing positions. Long positions have been hit harder than short positions, with $2.13 billion in losses.

Ethereum spot ETFs have seen outflows as well, with institutional investors withdrawing nearly $81 million in a single day. This marks the second consecutive day of outflows and suggests caution among institutional participants according to reports.

What Are the Broader Implications for Coinbase and the Industry?

Coinbase’s foray into DeFi-backed lending is part of its strategy to become an “everything exchange.” The company has positioned the product as a way to help users grow their wealth without selling their crypto holdings. However, the current environment highlights the risks involved as analysis indicates.

The company has stated that it does not profit from liquidations directly. Instead, it earns a cut of performance fees paid to risk managers who manage the loans. Coinbase also offers users the ability to protect their positions through additional collateral or repayment according to reports.

What If the Downturn Continues?

Should the crypto downturn continue, the number of liquidations could rise significantly. If users’ collateral were to fall another 50%, losses could reach $600 million. This would be a substantial blow for many users and could further erode confidence in crypto-backed loans as market data shows.

The broader market has already seen a $2.6 billion liquidation event in recent days, indicating the high volatility still present in the market. Analysts are watching for signs that the market might stabilize or if further declines are on the horizon according to reports.

In the long term, the regulatory environment will also play a key role. U.S. Treasury Secretary Scott Bessent has urged the passage of the Digital Asset Market Clarity Act, which would provide a regulatory framework for the crypto industry. However, the bill remains stalled in the Senate according to reports.

Summary of Key Points

• Coinbase’s crypto-backed loan program has resulted in $170 million in losses through liquidations.
• Bitcoin and Ethereum prices have declined significantly, triggering liquidations.
• Coinbase has implemented risk management tools and frequent notifications to help users manage their positions.
• The broader market remains volatile, with mixed signals from derivatives and ETF data.
• If the downturn continues, losses could rise to $600 million.
• Regulatory clarity remains a key factor for the future of crypto-backed loans and the broader market.

The current environment underscores the importance of risk management in crypto lending. Users must remain vigilant as market conditions continue to shift rapidly.