Simply put
- This week, numerous Coinbase users faced significant losses due to issues with crypto-backed loans.
- The exchange saw $170 million in liquidations this past week alone.
- These are the largest losses recorded since the product’s launch a year ago.
As Bitcoin and Ethereum prices decline, Coinbase customers are feeling the impact, with many experiencing hefty losses from the exchange’s lending products.
Coinbase users reportedly lost $170 million in collateral through liquidations on the DeFi platform Morpho, as detailed by Dune. Around 2,000 users alone saw $90.7 million wiped out on Thursday when Bitcoin and Ethereum plummeted significantly.
When Coinbase initially began offering Bitcoin-backed loans last year, they touted it as a path to wealth accumulation. They later expanded this to include loans backed by Ethereum and increased the limit to $5 million per user.
With Bitcoin and Ethereum’s values dropping by 17% and 26% respectively over the past week, more loans became unstable, allowing third parties to step in and seize collateral at lower interest rates.
As loans near their liquidation thresholds, some users opt to add collateral or settle debts with Circle’s USDC stablecoin. Throughout the week, roughly 3,300 users have permanently lost their Bitcoin and Ethereum holdings, remaining inactive since.
Though these losses might appear minor amid a general cryptocurrency downturn, they indicate that the company is undergoing significant shifts.
Since its launch last January, the lending product has generated $1.8 billion in loans.
A Coinbase representative mentioned that users could face up to $600 million in losses if their collateral’s value decreases another 50%. The exchange plans to notify users of liquidation risks every 30 minutes.
The official added that compared to traditional loans, crypto-backed loans are typically faster, cheaper, and more efficient. They also tend to offer favorable interest rates.
All Morpho loans are inherently overcollateralized as a safety measure. Additionally, the exchange’s app incorporates an extra buffer when loans are issued to mitigate the risk of liquidation and alerts users of potential risks.
Coinbase acknowledges that crypto-backed loans carry specific risks and is looking into more ways users can protect their assets.
The spokesperson clarified that Coinbase does not charge fees on liquidated loans but noted the company continues to benefit financially. As a technology provider, Coinbase receives part of the success fee paid to risk managers.
Previously, Coinbase had been a primary provider of Bitcoin-backed loans. However, that product was reportedly halted in May 2023 amid growing regulatory scrutiny. The new offering does not require personal information from U.S. borrowers.
In October, when Bitcoin was trading near record highs exceeding $126,000, Max Brunzberg, Coinbase’s consumer products head, mentioned that the platform allows users to grow their wealth in ways that wouldn’t be feasible otherwise.
He observed that individuals were utilizing Coinbase’s offerings to make significant purchases, like cars or home renovations, without needing to liquidate their Bitcoin assets.
