Coinbase has made it possible for users to put their crypto to work as collateral and borrow in US dollars. The new offering, which the company has rolled out as reported by MoneyZG, is an option for those who wish to meet financial obligations without having to part with their digital assets.
How Coinbase’s Crypto-Backed Loans Work
Among the supported holdings are such staples as Bitcoin and Ethereum. It is a way to tap into liquidity while remaining invested in the crypto market.
There are parameters to consider, however. The platform has set a 75% cap on the loan-to-value ratio; put another way, $10,000 in crypto would qualify for a loan of no more than $7,500. While this makes borrowing straightforward, the high LTV does carry risk should the value of the collateral take a nosedive. With liquidation becoming a concern at levels above 85%, the service may well change the way digital assets are handled.
Risks: Liquidation Threshold and Fees
With Coinbase’s crypto-backed loans, the 85% liquidation threshold is a matter of some importance. Should the collateral put up for a loan fall in value and push the loan past that mark, Coinbase is programmed to automatically offload some or all of the crypto on hand to settle the debt. The host at MoneyZG has pointed out how a sharp decline in the price of Bitcoin or Ethereum, for instance, can set this in motion and leave users without their assets.
Then there is the question of cost. The company applies a variable rate of interest that begins at 4.73% but is subject to the vagaries of the market. On top of that, one can expect a fee of as much as 2% per transaction. Since these are steeper than what you might find with conventional lending products, it is well worth considering the full expense before borrowing.
Managing Your Loan on Coinbase
With a user-friendly loan interface, Coinbase has made it straightforward for borrowers to handle their loans right on the platform. There is flexibility to keep one’s LTV in check and guard against liquidation by adding or withdrawing some of the crypto put up as collateral.
Those new to the world of crypto would do well to be clear on what is at stake when using digital assets as collateral. A crypto-backed loan is a means of putting cash in hand without having to part with an investment, but it comes with its own set of risks: market volatility and the possibility of steep costs. As was made clear in the MoneyZG episode, it is prudent for any borrower to review the terms in full and consider their risk tolerance before moving forward.
Source — MoneyZG: https://www.youtube.com/watch?v=caqtSIEKnFI