Coinbase customers are feeling pain in new ways as Bitcoin and Ethereum plummet, 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 in collateral due to liquidations on DeFi platform Morpho, according to a Dune dashboard. While Bitcoin and Ethereum recorded double-digit declines, some 2,000 users lost $90.7 million on Thursday alone.
When Coinbase began providing access to Bitcoin-backed lending last year, the company positioned the product as a way for people to grow their wealth. It later expanded to Ethereum-backed lending while increasing loan limits to $5 million per customer.
While Bitcoin and Ethereum have fallen 17% and 26% respectively in the past week, an increasing number of user loans have reached the point where they are considered unhealthy, allowing third parties to pay them back – and claim the collateral at a reduced rate.
As users’ loans near the point of liquidation, some have added more collateral or paid off debt in the form of Circle’s USDC stablecoin. Over the past week, approximately 3,300 users have sat idle while their Bitcoin and Ethereum were wiped out for good.
The losses may be a small amount amid the broader crypto crash, but the dynamics show how Coinbase’s efforts to incorporate DeFi into its business could have a direct impact on users as the company pursues its ambitions to become a “change everything.”
Since its debut last January, the product has originated $1.8 billion in loans.
If user collateral were to drop another 50% in value, Coinbase users could lose $600 million, but a Coinbase spokesperson told Declutter that the exchange regularly notifies users 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 possible 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 risks that users should understand.
The spokesperson said Coinbase does not earn any fees from user liquidations. But the company still makes money on the product as a technology provider by receiving a reduction in the performance fees earned by risk managers.
Coinbase once offered Bitcoin-backed lending in a centralized manner, but that is not the case it stopped they will be issued in May 2023 amid an increase in scrutiny of the sector. Through its new product, folks not necessary to provide personal information before making loans to Americans.
In October, when Bitcoin was near an all-time high of over $126,000, Max Branzburg, head of consumer products at Coinbase, said: Declutter that the exchange “enabled people to grow their wealth in ways they could not otherwise achieve.”
He said he had seen people use Coinbase’s product to take important steps without having to sell their Bitcoin, such as buying a car or renovating a house.