Coinbase Offers Bitcoin-Backed Loans: How Does It Work & Should You Use It?

Coinbase users can now borrow USDC loans by pledging bitcoin as collateral. Learn how it works, the pros, and the risks before considering this option.

Jan 17, 2025 - 02:46
Jan 17, 2025 - 02:47
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Coinbase Offers Bitcoin-Backed Loans: How Does It Work & Should You Use It?
Coinbase Offers Bitcoin-Backed Loans: How Does It Work & Should You Use It?

Coinbase has introduced a new feature that allows its users to borrow funds using their bitcoin holdings as collateral. With this service, users can pledge their bitcoin to get loans in USDC, a stablecoin tied to the U.S. dollar, up to $100,000. This feature was launched on Thursday, and it operates through the Coinbase app, though the loans will be managed by the DeFi platform Morpho, which runs on the Coinbase-developed Base blockchain.

How Does Coinbase's Bitcoin-Backed Loan Work?

Coinbase users, excluding those in New York, can now use their bitcoin to borrow USDC loans. Unlike traditional loans that rely on credit scores, this service allows you to borrow based on the amount of bitcoin you have as collateral. The loan terms are flexible, with no fixed repayment schedule, and users can repay the loan partially or in full at any time.

Once you borrow against your bitcoin, Coinbase will convert it into a token called Coinbase Wrapped BTC (cbBTC), which represents your bitcoin holdings. This cbBTC will be stored in a smart contract on the Morpho platform, securing the loan. The loan's interest rate is determined by market conditions and will be visible at the time of the transaction.

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Why Borrow Against Bitcoin?

Borrowing against bitcoin offers a unique opportunity to access funds without having to sell your crypto, which could trigger a taxable event. While you might avoid paying taxes on capital gains by taking out a loan, it’s important to note that converting bitcoin into cbBTC may still be viewed as a taxable event, and the exact tax treatment is still uncertain.

However, the biggest risk comes from the volatility of bitcoin. If the price of bitcoin drops, the value of your collateral could fall, leading to the liquidation of some or all of your bitcoin to repay the loan.

Benefits of Borrowing Against Bitcoin

  • Access liquidity without selling: You can unlock funds without selling your bitcoin, avoiding taxable events.

  • Flexible repayment: There are no fixed due dates, and you can repay at your convenience.

Risks of Borrowing Against Bitcoin

  • Risk of liquidation: If the value of your bitcoin falls or if interest builds up, your collateral may be liquidated to cover the loan and penalties.

  • Potential loss of bitcoin: If the crypto market becomes volatile, there’s a risk of losing some or all of your bitcoin holdings.

Is This a Good Option for You?

This service is an attractive way to get quick access to cash without parting with your bitcoin, but it comes with considerable risks. If bitcoin’s price drops sharply, your collateral could be at risk of liquidation. It’s important to fully understand the potential tax implications and consider the risks of crypto market fluctuations before using this option.

Also Read: Dogecoin Could Hit All-Time High After Trump Inauguration, Influencer Predicts

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