What is cbBTC? (Beginner’s Guide)

What is cbBTC?

cbBTC, or Coinbase Wrapped Bitcoin, is a new token created by Coinbase to represent Bitcoin on Ethereum and other blockchains. 

cbBTC is designed to mimic the value of BTC 1:1. Each cbBTC is backed by BTC held in Coinbase’s reserves. 

cbBTC is a great option for Bitcoin holders who wish to interact with applications on chains like Ethereum and Solana. 

Here’s what you need to know about cbBTC: 

• Launch Date: Coinbase officially launched cbBTC in September 2024. 
• Networks Supported: cbBTC is currently available on Ethereum, Base, Solana, and Arbitrum. 
• Availability: Currently available to Coinbase users in select regions such as the U.S. (excluding New York State), UK, EEA countries (excluding Germany), Australia, and Brazil.
• Secure: Coinbase has a reputation as a highly secure exchange — which means that all BTC reserves are held safely in custody. 

Is cbBTC the same as BTC?

It’s important to note that cbBTC and BTC are not the same asset. cbBTC is backed by BTC 1:1 and mimics its price, but exists on separate blockchains. 

Remember, BTC is built on the Bitcoin blockchain, which is incompatible with Solana and Ethereum. That means assets cannot easily be bridged from one network to the other. 

Assets like cbBTC help solve this problem by acting as a representation of BTC on Ethereum and other blockchains. 

Why should I use cbBTC instead of BTC? 

Compatibility: You should use cbBTC if you want to use it to interact with DeFi platforms and dApps on blockchains like Ethereum and Solana. 

Support: Several DeFi services on Ethereum — such as exchanges like Aerodrome and Curve, and lending protocols like Aave, Sky Protocol, and Compound — support cbBTC. 

Easier Access: If you're familiar with Ethereum-based wallets like MetaMask, cbBTC may be more accessible. Unlike BTC, cbBTC can be stored on Ethereum wallets! 

How is cbBTC different from wBTC? 

For years, wrapped Bitcoin (wBTC) was the most popular representation of Bitcoin on the Ethereum blockchain. 

Many investors turned away from wBTC after its parent company, BitGo, partnered with the Tron network and its founder, Justin Sun. Sun is considered a highly controversial figure in the cryptocurrency community and has previously been accused of fraud and market manipulation. 

Coinbase delisted wBTC due to the cryptocurrency’s association with Sun. 

How does cbBTC work? 

Coinbase makes the process of converting BTC to cbBTC and vice versa easy. 

When you send your BTC on the Coinbase exchange to an address on Ethereum, Base, or Solana, it will automatically convert 1:1 cbBTC. 

Meanwhile, if you send cbBTC to your Coinbase account, it will automatically convert to BTC. 

How does cbBTC compare to other Wrapped Bitcoin alternatives?

cbBTC is considered a great choice for investors looking for a representation of BTC on other blockchains. While other wrapped Bitcoin products exist, cbBTC is popular due to Coinbase’s fantastic reputation in the crypto community. 

If you value decentralization, you may want to consider a decentralized wrapped Bitcoin alternative — such as renBTC and tBTC. While the minting process for these cryptocurrencies is more difficult, they can be a great option for investors who want to move away from centralized entities like Coinbase. 

Is cbBTC safe?

cbBTC is considered safe and trustworthy. 

Coinbase employs industry-leading security practices to ensure that the BTC backing cbBTC is safely stored. 

Just like with any other cryptocurrency, it’s important to follow best practices when it comes to securing your cbBTC. 

How is cbBTC taxed?

Let’s walk through some of the tax implications of cbBTC. 

Minting cbBTC: At this time, the IRS hasn’t provided guidance on how ‘wrapping’ tokens like cbBTC are taxed. You may choose a conservative or aggressive approach depending on your risk tolerance. 

• Conservative approach: The conservative approach is to treat exchanging BTC for cbBTC and vice versa as a crypto-to-crypto swap subject to capital gains tax. 
• Aggressive approach: The aggressive approach is to treat exchanging BTC for cbBTC and vice versa as equivalent to holding the same cryptocurrency. In this case, there is no taxable event. 

Speak to your tax professional to see what approach is best for you. 

Selling/trading away cbBTC: Selling or trading away cbBTC is considered a taxable disposal subject to capital gains tax. You’ll incur a capital gain or loss depending on how the price of cbBTC has changed since you originally received it. 

Spending cbBTC: Spending cbBTC is considered a disposal of your cryptocurrency. You’ll incur a capital gain or loss depending on how its price has changed since you originally received it.

Looking for an easy way to track your gains and losses from cbBTC and other cryptocurrencies? Try CoinLedger — the crypto tax software trusted by more than 700,000 investors across the globe. CoinLedger integrates with Coinbase and hundreds of other wallets and exchanges to make tax reporting easier than ever. 

In conclusion

If you’re interested in getting started with blockchains like Ethereum and Solana, cbBTC can help. Before you get started, be sure to understand potential tax implications.