Coinbase's Crypto-Backed Loans Notch Record Liquidations Amid Bitcoin, Ethereum Plunge

In brief

• Thousands of Coinbase users lost money this week as crypto-backed loans soured.
• The exchange’s users have faced $170 million in liquidations over the past week.
• The losses represent the most in the product’s one-year history.

Coinbase customers are experiencing pain in new ways as Bitcoin and Ethereum tumble, with losses piling up for thousands of users through the exchange’s crypto-backed lending product. Over the past week, Coinbase users have lost $170 million worth of collateral through liquidations on DeFi platform Morpho, according to a Dune dashboard. As Bitcoin and Ethereum notched double-digit declines, some 2,000 users lost $90.7 million on Thursday alone. When Coinbase began providing access to Bitcoin-backed loans last year, the company positioned the product as a way for people to grow their wealth. It later expanded to Ethereum-backed loans, while raising loan limits to $5 million per customer. 

As Bitcoin and Ethereum have respectively dropped 17% and 26% over the past week, an increasing number of users’ loans have reached the point where they are considered unhealthy, allowing third-parties to repay them—and scoop up the collateral at a discounted rate. As users’ loans have approached the point of liquidation, some have added more collateral or paid down debts in the form of Circle’s USDC stablecoin. Over the past week, around 3,300 users have sat idle as their Bitcoin and Ethereum was whisked away for good. The losses may be a small sum amid the broader crypto crash, but the dynamic shows how Coinbase’s efforts to fold DeFi into its business can directly impact users as the company pursues its ambitions of becoming an “everything exchange.”  Since its debut last January, the product has originated $1.8 billion in loans.

If users’ collateral were to fall another 50% in value, Coinbase users could lose $600 million, but a Coinbase spokesperson told Decrypt that the exchange notifies users frequently when their loans are at risk of liquidation, “up to every 30 minutes.” Compared to traditional loans, the spokesperson described crypto-backed loans as faster, cheaper, and more efficient. They noted that crypto-backed loans can also offer better rates. As a risk management tool, all loans on Morpho are over-collateralized by default. At the same time, the exchange’s app “enforces an additional buffer when users take out a loan to reduce liquidation risk,” while notifying them of that potential outcome, the spokesperson said. The exchange is exploring additional ways for users to protect their loans, they added, acknowledging that crypto-backed loans come with their own set of risks that users should understand. The spokesperson said that Coinbase doesn’t earn any fees from users’ liquidations. But the company still makes money on the product as a technology provider by receiving a cut of performance fees that are earned by risk managers. Coinbase once offered Bitcoin-backed loans in a centralized manner, but it stopped issuing them in May 2023 amid an uptick in regulatory scrutiny toward the industry. Through its new product, people don’t need to provide personal information before lending to Americans. In October, when Bitcoin traded near an all-time high above $126,000, Max Branzburg, head of consumer products at Coinbase, told Decrypt that the exchange was “empowering people to help grow their wealth in ways that they couldn’t otherwise.” He said he had observed people tapping Coinbase’s product to make important moves without needing to sell their Bitcoin, like purchasing a car or renovating a home.