Crypto-backed loans at Coinbase collapse after massive liquidations

The sudden drop in bitcoin and Ethereum triggered a series of historic liquidations on Coinbase, exposing a major crypto credit vulnerability. In a few hours, millions of dollars of guaranteed loans were wiped out, revealing the limits of a system designed to withstand shocks. This new episode of tension, far from being anecdotal, calls into question the robustness of financing mechanisms backed by cryptos.

Record liquidations on Coinbase: a system under pressure

This February 6, Coinbase experienced a critical event on its crypto-backed loan product via Morpho Blue. As the market collapsed with notable losses on bitcoin, liquidations continued at an unprecedented pace. More than $170 million in guarantees sold in one week, including $90.7 million in just a few hours.

These loans, backed by bitcoin and Ethereum collateral, are automatically liquidated as soon as their coverage ratio falls below a predefined threshold. “Loans are automatically liquidated when they are no longer sufficiently guaranteed”, explain the Morpho team.

This loan structure, although built to be unauthorized and resilient, showed its limits in the face of a sudden drop in prices. Here are the technical elements to remember from this sequence:

• The Morpho Blue contract used by Coinbase alone accounted for around 90% of the liquidations observed on the protocol, according to on-chain data;

• The loans required a high overcollateralization rate, often above 130%, to protect against price fluctuations;

• The simultaneous decline of BTC (~‑10%) and ETH (~‑26%) was enough to trigger a series of forced sales, amplified by the automation of the system;

• The liquidations were not absorbed gradually, but occurred in bursts, accentuating the selling pressure on the market.

The mechanism, designed to secure creditors, acted as a catalyst for systemic stress. This phenomenon, although contained in contracts specific to Coinbase, could be reproduced identically on other similar protocols exposed to the volatility of cryptos.

Beyond Coinbase: a global market weakened by the domino effect

The series of liquidations observed on Coinbase is not an isolated case. Since the beginning of February, the entire crypto market has been facing increased volatility and high levels of stress in derivatives markets.

Bitcoin fell below $61,000, while Ethereum lost nearly 26% of its value over the same period. This widespread drop triggered hundreds of millions of dollars in additional liquidations on other platforms, demonstrating a domino effect. Such an episode takes place in a context of imbalance between the levels of leverage used by investors and the real liquidity of the market.

The very structure of certain derivative products, combined with borrowing models excessively correlated with the price of bitcoin, reinforces the vulnerability of the system. Observers also point to the rise of decentralized or semi-centralized credit products, whose guarantees are exposed to the same market dynamics. In other words, when the price falls, everything falls.