In the world of cryptocurrency, rules, regulations, and opportunities come and go as fast as the weather changes. Buying crypto on margin or receiving a loan using Bitcoin as collateral are just two examples of recent changes and new opportunities.
In this article, we will provide a full Coinbase margin review. How do you actually get started with Coinbase? What are the requirements for a loan? We will answer those questions and more below.
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Coinbase announced on November 24, 2020 that it would no longer offer margin trading to investors. This came as a result due to a change in regulation from the Commodity Futures Trading Commission.
They stated the following:
We believe clear, common sense regulations for margin lending products are needed to protect and provide peace of mind to U.S customers. We look forward to working closely with regulators to achieve this goal.
As a result, investors cannot purchase any cryptocurrency using margin with Coinbase. However, members can still use their Bitcoin as collateral in order to receive a loan, which we will cover shortly.
Margin trading is a type of loan from a broker to an individual investor. It is a way for investors to purchase assets using funds from a broker.
Each brokerage will have varying rules regarding margin trading such as the initial margin requirement. Suppose for example that a brokerage offers margin trading with a 70% requirement. This means that the investor would have to pay 70% of the desired purchase while the broker would supply the other 30%. (If the investor wanted to purchase $10,000 of a certain asset using margin, they would need to pay $7,000, and the broker would provide $3,000.)
While investors can no longer trade on margin with Coinbase, they can still leverage their Bitcoin to receive a loan in USD.
This is appealing for a number of reasons. Typically, if an individual with Bitcoin needed cash for something such as a car repair, they would have to sell off their Bitcoin and use the funds to cover their needs. Selling the Bitcoin would be subject to Coinbase transaction fees as well as tax implications. Rather than selling your Bitcoin, Coinbase offers members the ability to receive a loan using the Bitcoin in the account as collateral.
Before receiving a loan from Coinbase, there are a few things to be aware of:
When you receive a loan from Coinbase, the required Bitcoin collateral is moved from your BTC wallet to a collateral wallet. The amount of Bitcoin used as collateral cannot be removed from the collateral wallet until the loan is paid in full.
You can opt to receive the funds from the loan in a linked bank account. You can expect the funds to appear in your account within 1-3 business days. Funds up to $10,000 can also be received in a PayPal account, which would be made available immediately.
Interest accrues daily and will be posted to the account on the 1st of each month. Coinbase recommends paying the balance due between the 1st and the 10th of each month. If payment is not received by the 15th, Coinbase will sell a portion of your Bitcoin collateral to cover the payment and a 2% transaction fee.
If a payment is made before the 1st of the month, it will be used towards the principal of the loan. There is no penalty for early payment.
Payments can be made within the app or on the desktop version using a linked bank account or cash held in the platform.
If the value of your loan exceeds 30% of the collateral, Coinbase may sell a portion of the Bitcoin to bring the loan back to healthy levels. Coinbase uses the term "Loan Health."
Coinbase states the following regarding acceptable Loan Health values:
Loan Health is simply 100% minus the loan to value ratio. For example, if you have a loan of $3,000 with $10,000 of Bitcoin as collateral, you have a loan to value ratio of 30% ($3,000/$10,000). The loan health would be 70% (100% minus the LTV of 30%). If the loan health falls to 40% or below, Coinbase will send an email to the individual informing them of action needed.
Let's look at an example.
Suppose you receive a loan for $3,000. This means that $10,000 worth of Bitcoin will be moved into a collateral wallet. If the value of Bitcoin were to fall and your loan health were to fall to 40% or lower, you would need to add more Bitcoin into your collateral wallet within 72 hours to avoid Coinbase selling off a portion of your BTC to bring loan health back to 50%.
Adding more BTC to your collateral wallet can be done through visiting the Borrow Homepage and selecting "Add Collateral."
Coinbase is a platform designed for investors looking to buy, sell, and store cryptocurrency. In addition to trading an impressive number of cryptocurrencies, members can also use their Bitcoin as leverage to obtain a loan.
Receiving a loan using your Bitcoin as collateral may be a desirable option for you. When receiving a loan, you can avoid tax implications of liquidating a Bitcoin position as well as transaction fees. Getting started with a Coinbase loan is simple and requires no credit check.