Coinbase Is Offering Loans Against Your Bitcoin. Should You Get One? | Global News Avenue

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 (U.S. Department of Agriculture) 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 Decentralized Finance (DeFi) The platform, called Morpho, is deployed on the Base blockchain created by Coinbase.

How to borrow money in Bitcoin on 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 in 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.

Should you borrow money in Bitcoin?

Lending against your Bitcoin holdings Key Financial Services in Crypto It has been going on for many years in terms of DeFi applications and centralized financial institutions. It has its benefits and risks.

If you need money and sell your Bitcoins for a profit to raise funds, you’re in trouble pay taxes during 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.

Advantages of using Bitcoin as collateral for loans

• Raise money without selling Bitcoin: Unlike other assets used as collateral, this service allows you to gain immediate liquidity by staking your Bitcoin without selling it.

Bitcoin-backed loan risks

• Liquidating Bitcoin Holdings: According to Coinbase, the health of a loan depends on 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 borrow against Bitcoin, your LTV needs to be below 86%. “If your loan accrues enough interest, or the value of your collateral decreases such that your loan’s LTV reaches 86%, then your collateral will be liquidated to repay the loan plus penalties,” Coinbase said. An executive at a cryptocurrency exchange told coin table The company will set up a “liquidation alert” to inform consumers.
• Risk of losing Bitcoins: Risks associated with cryptocurrency lending came to light more generally in 2022, when several cryptocurrency lending services, including Brockfield and Genesisbankruptcy or suspension of 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 DeFi. smart contracthave received countless Bugs and Hacks over the years.