Coinbase Liquidations: $170M Crypto Loan Fallout After Bitcoin & Ethereum Crash

Coinbase customers are experiencing pain in new ways as Bitcoin and Ethereum plummet, with losses piling up for thousands of users across the exchange’s cryptocurrency-backed lending product.

Over the past week, Coinbase users have lost $170 million in collateral through liquidations on the DeFi platform Morpho, according to a Dune dashboard. While Bitcoin and Ethereum recorded double-digit drops, 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, increasing loan limits to $5 million per customer.

While Bitcoin and Ethereum have fallen respectively 17% and 26% over the past week, a growing number of user loans have reached the point where they are considered unhealthy, allowing third parties to repay them and take the collateral at a discounted rate.

As users’ loans have approached the point of liquidation, some have added more collateral or paid down debt in the form of Circle’s USDC stablecoin. Over the last week, around 3,300 users have been left inactive while their Bitcoin and Ethereum disappeared forever.

The losses may be a small sum amid the broader crypto meltdown, but the dynamics show how Coinbase’s efforts to integrate DeFi into its business can directly impact users as the company pursues its ambitions to become an “everything exchange.”

Since its debut last January, the product has originated $1.8 billion in loans.

If user collateral fell 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 cryptocurrency-backed loans as faster, cheaper and more efficient. They noted that cryptocurrency-backed loans may also offer better rates.

As a risk management tool, all loans at Morpho are overcollateralized by default. At the same time, the exchange’s app “imposes an additional buffer when users apply for 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, recognizing that cryptocurrency-backed loans come with their own set of risks that users should understand.

The spokesperson said Coinbase does not earn any fees from user settlements. But the company still makes money on the product as a technology provider by receiving a percentage of the performance fees that are earned by risk managers.

Coinbase once offered Bitcoin-backed loans centrally, but stopped issuing them in May 2023 amid increased regulatory scrutiny towards the industry. Through its new product, people do not need to provide personal information before lending to Americans.

In October, when Bitcoin was trading 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 them grow their wealth in ways they otherwise couldn’t.”

He said he had observed people using Coinbase’s product to make big moves without needing to sell their Bitcoin, such as buying a car or renovating a house.