Coinbase introduces USDC loans guaranteed by Bitcoin: possibility to access credit up to $100K

The cryptocurrency exchange Coinbase has just introduced a very interesting feature that allows users to obtain liquidity without having to sell their Bitcoin.

From now on, users residing in the United States can request loans up to 100,000 USDC by pledging their BTC as collateral through the Morpho Labs vault.

The stablecoin can then be easily converted into USD, so that you can cover expenses such as purchasing a car or the down payment on a mortgage.

The advantages of this practice are numerous, but be careful because there are also significant risks not to be underestimated, especially in the case of a volatile market.

Let’s see all the details below.

Coinbase launches USDC-collateralized loans through Morpho Labs

The well-known crypto exchange Coinbase has introduced a new financial service that allows users to access on-chain loans in stablecoin.

As with a banca tradizionale, now Coinbase customers can also borrow money and use it freely for real-world expenses.

This feature was launched in collaboration with Morpho Labs, a decentralized lending protocol built on the Base blockchain.

Loans are disbursed in USDC up to a maximum of 100,000 dollars, and are secured by deposits in Bitcoin, which serves as a collateral asset in case of non-repayment.

More specifically, the collateral used is Coinbase Wrapped Bitcoin (cbBTC), a wrapped version of BTC that is more easily usable in the DeFi ecosystem.

When a user deposits Bitcoin on Coinbase to borrow USDC, the assets are automatically converted into cbBTC and transferred to Morpho.

The USDC obtained as a loan can then be easily swapped into USD to facilitate the use of liquidity outside of the cryptographic circuits.

At any time, the debt can be paid directly on the platform, and the locked Bitcoins are automatically redeemed to your balance in the wallet.

This service offered by Coinbase is free from fees or credit checks and features competitive interest rates with traditional banks.

Furthermore the money is made available in real time, without long waiting times, and with flexible and indefinite repayment terms, to which no penalties apply.

In this initial phase, Coinbase has opened on-chain lending only for customers residing in the United States, excluding the state of New York, but plans to expand to other markets in the future.

The advantage of being able to access an on-chain loan on Coinbase

The on-chain lending service offered by Coinbase presents a wide range of advantages.

First of all, users can request money for their expenses without having to sell their crypto assets.

In this way, they can continue to benefit from the potential price increase in the bull market, while still having liquidity ready for use.

Imagine needing 100,000 dollars and having to withdraw them from your crypto account.
Rather than selling 1 BTC at a market price of $100K, you can deposit the assets as collateral and wait for the end of the bull market to repay the debt.
In the best case, if the price of BTC doubles, you manage to repay the entire debt by only having to sell 0.5 BTC (plus, of course, the loan interest rates).

Furthermore, by doing so, excellent tax advantages are obtained as the realization of a capital gain or a capital loss is delayed.

Taking an on-chain loan does not constitute a taxable financial operation, at least until the collateral is sold for FIAT.

Another advantage of this Coinbase service is the ability to “leverage” with your Bitcoin, using the USDC borrowed to purchase other cryptocurrencies.

Alternatively, USDC can be used in DeFi, where there are currently many opportunities for yields above 15%. In this way, a profit is obtained from the difference between the yield earned and the loan interest rate.

Finally, the last advantage of using this service is the possibility of accessing credit without having to undergo the long and tedious bureaucratic procedures of banks

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Attention to liquidation risks

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In addition to the advantages, the practice of on-chain lending also presents some risks.

Borrowing a crypto asset, on Coinbase or generally on any lending market, involves a great risk of liquidation.

If you are liquidated, meaning you entirely lose the collateral put up as security, if the value of the latter falls below the value of the loan.

If, for example, we deposit 1 BTC at a market price of $100K to borrow 80,000 USDC, and subsequently BTC falls below $80K, we are liquidated.

The risk of liquidation is greater in the case of a volatile market, especially if the directionality is bearish.

Furthermore, the same risk is amplified when using a high LTV (loan-to-value) with a low “collateral factor”, meaning a collateral is pledged with a value slightly above the value of the loan itself.

Generally, all lending markets, including this one from Coinbase, impose an LTV limit, which is the ratio between the amount of the financing and the value of the asset provided.

In our case on Coinbase the LTV is at 86%. This means that we can borrow up to 86% of the value of our collateral.

 To reduce the risk of being liquidated, it is important to use an LTV of at least below 50%. In this way, one can act in time in case of a bear market, and add more collateral or repay part of the debt.

In any case, it is not advisable to borrow crypto assets without having a good understanding of how these services work.

How to start and take a credit in USDC on Coinbase

Borrowing USDC on Coinbase is very easy and intuitive.

The first thing to do is go to the “Contanti” tab of your Coinbase account, and click on “Prendi in Prestito”, then enter the amount of USDC you wish to borrow against the Bitcoin collateral.

Depending on the quantity of BTC committed, it is possible to obtain a credit of up to 100,000 USDC, which can be repaid freely without deadlines.

Remember, however, that as time goes by, more interest accumulates to be repaid along with the debt itself.

Once the amount of USDC is confirmed, the BTC that will be used as collateral are converted into cbBTC and transferred on-chain to Morpho

In a matter of seconds, the USDC will be credited to the Coinbase account.

We remind you that interest rates are variable and are calculated by Morpho based on the changing market conditions. These could change significantly within a few days/weeks.

There is no fixed repayment plan: users are free to choose to what extent to pay the debt and with what timing.