> Is Coinbase "loaning" out the Bitcoin users have deposited in it?
I don't understand how they would loan it out. What denomination/form will the loan be transferred in? Bitcoin? If so, how are they creating the Bitcoin to loan out?
They can't take it out of their depositors' wallets because by design that would result in a lower balance for the wallet on the blockchain.
They can't make a copy because Bitcoin prevents double transactions. Likewise, Bitcoin can't be "created" like banks create fiat currency on their balance sheets.
If they are loaning out fiat cash fractionally backed by depositors' Bitcoin, who are they borrowing that cash from, and how can they guarantee to their creditors that the Bitcoin backing the loan are available as collateral?
Would they take their users' wallets' private keys to pay in the event of a default?
Their depositors wallets aren't "on the blockchain" -- if they were, they'd be in the the depositors custody not coinbase's.
Their users balances are just entries in a database at coinbase. Users expect that coinbase holds coins to back up those balances, but there is no proof of it.
Last I checked coinbase doesn't participate in any proof of solvency protocols so there is no way to know if customer balances exceed their holdings.
> Their depositors wallets aren't "on the blockchain" -- if they were, they'd be in the the depositors custody not coinbase's.
If the users' wallet values are really just database entries referring to some miniscule portion of the mega-wallet whose private keys are actually owned by an exchange, then what's the point of using the blockchain at all?
What is the value provided by exchanges other than an asset database that (hopefully) has bank-level security?
Just a way for regular folks to speculate on cryptocurrency?
Couldn't that function be equally served by some kind of high-risk brokerage account that has a crypto investment option?
The exchange is just that.. an exchange, people use it as gateway to the world of dollars. When they're done trading users can (and ought to!) withdraw their funds to their own wallets. Like anything else that requires an extra step, many do not (or delay a long time before doing so).
> Couldn't that function be equally served by some kind of high-risk brokerage account that has a crypto investment option?
Absolutely. What coinbase does could be done by traditional brokerage accounts. This is one of the reasons that people have been critical of coinbase as a business.
The regulatory uncertainty around Bitcoin has so far mostly kept more traditional brokerages out of the space. Though, FWIW, Interactive Brokers has a partnership with PAXOS to support bitcoin on their platform, the integration is not amazing however.
It's also the case that cryptocurrency exchanges make a considerable amount of income from promoting varrious extremely sketchy alternative cryptocurrency and accepting massive bribes for their listings and other activities that traditional brokerages wouldn't likely be interested in engaging in because they're already illegal for the other assets they handle.
I don't understand how they would loan it out. What denomination/form will the loan be transferred in? Bitcoin? If so, how are they creating the Bitcoin to loan out?
They can't take it out of their depositors' wallets because by design that would result in a lower balance for the wallet on the blockchain.
They can't make a copy because Bitcoin prevents double transactions. Likewise, Bitcoin can't be "created" like banks create fiat currency on their balance sheets.
If they are loaning out fiat cash fractionally backed by depositors' Bitcoin, who are they borrowing that cash from, and how can they guarantee to their creditors that the Bitcoin backing the loan are available as collateral?
Would they take their users' wallets' private keys to pay in the event of a default?