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Coinbase users can now use their Bitcoin as collateral to obtain a $100,000 loan in the USDC stablecoin, following the launch of the new service on Thursday.
The loans will be available through the Coinbase app but will be serviced by DeFi platform Morpho, which sits on the Base blockchain developed by Coinbase.
Using Bitcoin as collateral offers the opportunity to raise funds without making taxable transactions in Bitcoin, but it also exposes it to risk.
Amid volatility in Bitcoin prices, Coinbase's services require additional capital or liquidation of Bitcoin holdings if the value of the loan exceeds 86% of the value of the Bitcoin held as collateral.
If you are Coinbase (coin) users, you may be able to use Bitcoin (Bitcoin USD) you own as collateral to obtain a loan.
The cryptocurrency exchange on Thursday announced a new service that allows users to raise funds in stablecoin USD Coin (USD Digital Currency Corporation) against their Bitcoin holdings.
"You can also convert USDC to USD 1:1 for free to cover major expenses like a car purchase or a mortgage down payment," Coinbase said.
While the service is integrated into the Coinbase app, loans will be serviced by a decentralized finance (DeFi) platform called Morpho, which is deployed on the Base blockchain created by Coinbase.
While using the service, Coinbase's U.S. customers (except those residing in New York state) can use the company's app to stake their Bitcoin and borrow up to $100,000 in USDC.
Unlike regular loans from financial services companies, in this case your ability to borrow depends on how much Bitcoin you have to put up as collateral, not your credit score or creditworthiness. Your interest rate will be based on current market rates and will be visible when you make your loan transaction. There is no stated maturity date or fixed monthly payments, and you may choose to repay the loan in full or in part.
When you decide to get a loan with Bitcoin, it is first converted into Coinbase Wrapped BTC (cbBTC) tokens, which are Bitcoin-backed tokens issued by Coinbase. This cbBTC will then be incorporated into the Morpho smart contract on the Base blockchain.
Lending and borrowing against Bitcoin holdings has been an important financial service in the crypto space for years, whether it is DeFi applications or centralized financial institutions. It has its benefits and risks.
If you need money and sell your Bitcoins for a profit to raise funds, you will need to pay tax on that sale. Loans backed by Bitcoin can help you raise money without selling the cryptocurrency, but its tax treatment remains unclear, as some are concerned that switching from Bitcoin to cbBTC could be considered a taxable event.
Additionally, a big risk is that if the price of Bitcoin faces wild swings, the value of your collateral may be affected, causing some of your Bitcoin holdings to be liquidated.
Liquidating Bitcoin Holdings: According to Coinbase, the health of a loan is determined by its loan-to-value (LTV) ratio. If you borrow $500 with $1,000 of collateral, your LTV will be 50% (500/1000). If you use Coinbase to lend against Bitcoin, your LTV needs to be below 86%. "If your loan accrues enough interest, or the value of your collateral declines such that your loan LTV reaches 86%, your collateral will be liquidated to repay the loan plus penalties," Coinbase said. Cryptocurrency An executive from the exchange told coin table The company will set up a "liquidation alert" to inform consumers.
Risk of losing Bitcoins: The risks associated with crypto lending came to light more generally in 2022 when several crypto loan servicing companies, including BlockFi and Genesis, went bankrupt or stopped withdrawals. That said, using a DeFi platform like Morpho should provide greater transparency and avoid at least some of these issues, although it will also introduce risks associated with using smart contracts, which have suffered countless bugs and hacks over the years.
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