Coinbase offers loans against your Bitcoin. Should you get one?

If you are a Coinbase user (currency(User, you may be able to use Bitcoin)Bitcoin against the dollar) you own as collateral for a loan.

The cryptocurrency exchange announced a new service on Thursday that will allow its users to raise funds in the stablecoin USD Coin (US dollars) against their Bitcoin holdings.

“You can also convert USDC to USD 1:1 for free for major expenses like buying a car or making a down payment on your mortgage,” Coinbase said.

While the service is integrated into the Coinbase app, the loan will be serviced through a Decentralized Finance (DeFi) A platform known as Morpho, which is deployed on the underlying blockchain created by Coinbase.

How does borrowing for Bitcoin work on Coinbase?

While using this service, Coinbase customers in the US — excluding those who live in New York State — can pledge their Bitcoin to borrow up to $100,000 in USDC using the company’s app.

Unlike a regular loan from a financial services company, your ability to borrow in this case is related to the amount of Bitcoin you have to offer as collateral rather than your credit score or creditworthiness. Your interest rate will be based on the prevailing market rate, and will be visible to you when you make the loan transaction. There are no required due dates or fixed monthly payments, and you can choose to repay the loan in full or in part.

When you decide to take out a loan against your Bitcoin, it is first converted into Coinbase Wrapped BTC Token (cbBTC), which is a Bitcoin-backed token issued by Coinbase. cbBTC will then be integrated into the Morpho smart contract on the underlying blockchain.

Should you borrow against your Bitcoin?

It was borrowing against Bitcoin holdings A major financial service in the crypto space For a number of years in relation to both DeFi applications and centralized financial institutions. It has its benefits as well as risks.

If you need money and sell your Bitcoin for a profit to raise funds, you will be on the hook for doing so Pay taxes On that sale. A loan against your Bitcoin can help you raise funds without selling your cryptocurrencies, but its tax treatment is still unclear as some fear that transferring from Bitcoin to CBBTC may be considered a taxable event.

Another big risk is that if the price of Bitcoin experiences extreme fluctuations, the value of your collateral could be affected, resulting in some of your Bitcoin holdings being liquidated.

Pros of loans with Bitcoin as collateral

• Raise money without selling your Bitcoin: Unlike other assets used as collateral, this service allows you to obtain instant liquidity by pledging your Bitcoin without having to sell it.

Risks of loans with Bitcoin as collateral

• Liquidation of Bitcoin holdings: According to Coinbase, the authenticity of the loan is determined by it Loan-to-value (LTV) ratio.. If you borrow $500 against a collateral of $1,000, your LTV will be 50% (500/1000). If you have borrowed against your Bitcoin using Coinbase, you should have a LTV of less than 86%. “If your loan accrues enough interest or the value of your collateral declines, causing the LTV of your loan to reach 86%, your collateral will be liquidated to repay the loan plus penalty fees,” Coinbase said. An executive from the cryptocurrency exchange said CoinDesk The company will prepare “liquidation warnings” to inform consumers.
• Risk of losing Bitcoin: The risks associated with cryptocurrency lending became more public in 2022 when several cryptocurrency lending services emerged, including BlockFi and GenesisOr went bankrupt or stopped withdrawals. However, using a DeFi platform like Morpho should provide greater transparency and avoid at least some of these issues – while also introducing risks associated with using Smart contractswhich has undergone countless Bugs and hacks Over the years.