How to Use Bitcoin (BTC) as Collateral to Get a Loan on Coinbase

Coinbase (COIN) users can now use their bitcoin (BTCUSD) holdings as collateral to get a loan, a service that has been available for a limited time.

The cryptocurrency exchange announced Thursday that its users will be able to raise funds in stablecoin USD Coin (USDC) against their bitcoin holdings.

"You can also convert USDC to USD 1:1 for free to cover major expenses like buying a car or making a downpayment on your mortgage," Coinbase said.

The loan will be serviced by a decentralized finance (DeFi) platform called Morpho, which is deployed on the Base blockchain, created by Coinbase.

How to borrow against bitcoin on Coinbase

U.S. Coinbase customers — except for those residing in New York — can now pledge their bitcoin to borrow up to $100,000 in USDC through the company's app.

The amount you can borrow is linked to how much bitcoin you have to offer as collateral rather than your credit score or creditworthiness, unlike a traditional loan from a financial services company. The interest rate, which will be determined by the prevailing market rate, will be displayed to you when you make the loan transaction. There are no set due dates or fixed monthly payments; you can choose to repay the loan in full or in part.

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

Should you be borrowing against your bitcoin?

Borrowing against bitcoin holdings has been a key financial service in crypto for several years, offered by both DeFi protocols and centralized financial institutions. It comes with both benefits and risks.

If you need money and sell your bitcoin at a profit to raise funds, you will be liable to pay taxes on that sale. A loan against your bitcoin could help you raise money without selling your crypto, but the tax treatment of such transactions is still unclear, with some suggesting that the conversion from bitcoin to cbBTC may be considered a taxable event.

Additionally, a major risk is that if the price of bitcoin experiences extreme volatility, the value of your collateral could be affected, potentially leading to the liquidation of a portion of your bitcoin holdings.

Pros of loans with bitcoin as collateral

Risks of loans with bitcoin as collateral