Captain’s note
- Coinbase says that if a loan’s LTV reaches 86%, the collateral is liquidated to repay the loan, with an additional penalty of 4.38%.
- Coinbase’s lending disclosures say liquidation failures can occur due to sudden price drops or insufficient onchain liquidity.
- Fixed-rate loans on Coinbase can be liquidated if not repaid by maturity, even when the loan’s LTV is otherwise healthy.
Liquidation is what turns a loan against bitcoin into a sale of bitcoin you never meant to make. It is the lender’s protection and the borrower’s main risk, and on onchain loans it happens without a phone call. This guide explains the sequence, using Coinbase’s published terms as the worked example, so you can recognize how close a loan is to the edge.
The trigger
Every collateralized crypto loan has a liquidation threshold expressed as a loan-to-value (LTV) ratio: what you owe, including accrued interest, divided by what your collateral is worth. On Coinbase, which routes its loans through the Morpho protocol, the threshold for bitcoin is 86%. Coinbase’s wording is direct: if your loan accrues enough interest or the value of your collateral drops, and that causes the LTV to reach 86%, your collateral will be liquidated to repay the loan plus the penalty fee.
Three things can carry a loan there: a falling bitcoin price, interest building up on an open balance, and borrowing more. The first is the dangerous one, because it can happen in hours. The formula and worked examples are in Loan-to-Value and Margin Calls: The Ratio That Decides Your Loan.
What actually happens
- The smart contract sells enough collateral to repay the outstanding loan and accrued interest.
- An additional penalty is included; Coinbase gives it as 4.38%.
- Coinbase says the remaining collateral is withdrawn from Morpho and deposited back into your Coinbase account.
- You keep the USDC you borrowed, but you no longer have the bitcoin that was sold, and you have a sale to report for taxes.
Coinbase says plainly that it cannot prevent your collateral from being liquidated on Morpho. There is no appeal and no grace period once the threshold is reached.
Why it can go worse than the formula
Speed
Crypto prices can move a long way quickly; the FTC notes that values can change by the hour and that the change can be significant. A loan that looked safe at breakfast can be in the Danger band by lunch.
Liquidations that fail
Automatic liquidation depends on there being buyers for the collateral at the moment it is sold. Coinbase’s disclosures for its USDC lending product, the other side of the same Morpho markets, warn that liquidation failures can occur due to sudden price drops or insufficient onchain liquidity, and that lenders then share the losses. For a borrower the lesson is that a crash plus thin trading is the worst case for everyone involved.
Many loans at once
When prices fall across the market, many loans approach their thresholds together. Coinbase says that in such drops its loan protection feature prioritizes the loans closest to liquidation, which means loans further back in the queue may wait.
The warning you get
| Loan health on Coinbase | LTV range at an 86% threshold | What happens |
|---|---|---|
| Good | below 51.6% | Nothing; monitor |
| Fair | 51.6% to 77.4% | Nothing; monitor |
| Danger | 77.4% to 86% | Coinbase sends an email; add collateral or repay |
| Liquidated | above 86% | Collateral sold, penalty included |
An email at 77.4% leaves a gap of under nine percentage points of LTV. Depending on how much you borrowed, that can correspond to a modest move in bitcoin’s price.
Loan protection is not insurance
Coinbase offers an optional setting that adds a chosen amount of collateral when the loan reaches a trigger LTV. It needs the collateral asset already in your balance, applies once, must be re-enabled, and expires after one year. Coinbase’s own warning is that it is not a guarantee: market volatility and technical issues may prevent it from executing and can result in liquidation.
Fixed-rate loans have a second trigger
On Coinbase, a fixed-rate loan that is not repaid in full by its maturity date can be liquidated even if its LTV is healthy. Coinbase says the liquidation penalty then increases the longer the loan stays unpaid after maturity, up to a maximum, over approximately 15 minutes. You can still repay a matured loan as long as it has not yet been liquidated, but the window is short.
Tip: Set your own alert well before the lender’s. If you would add collateral at 70% LTV, have the collateral ready in the same account before you need it.
Keeping a loan far from the line
- Borrow a small share of your collateral’s value; a loan that starts at 20% LTV survives a far larger drop than one that starts at 70%.
- Pay interest as it accrues on a variable-rate loan.
- Know the bitcoin price that would liquidate your loan, and recheck it after every price swing.
- Save the backup link Coinbase provides for adding collateral when its main site is unavailable.
- Only borrow against bitcoin you could afford to lose, because liquidation means you may.
A liquidation is also a taxable sale; see Taxes on Crypto-Backed Loans: What the IRS Rules Say and Don’t Say.