Now what would happen if Coinbase went down at a time when Bitcoin was going through a short period of decreasing value?
If there's a run on the bank, the little people are gonna get screwed, no doubt about it, no matter what store of value we're talking about (seashells, gold, paper currency, cryptocurrency, gold-pressed latinum, etc).
Fractional reserve banking is a prisoner's dilemma, we all marginally benefit from the status quo of credit/debit/interest, but in a crisis, the first people to pull out win, and everyone else loses.
It stores your shares for you, but it’s not loaning them out. The only way you get money out of Coinbase is if someone buys your shares.
1 BTC at Coinbase is only worth whatever Fiat currency Coinbase is willing to buy it from you for. If that's $1 for all your Bitcoins, tough luck.
They're under no obligation to guarantee a sale price for BTC.
Then how do they pay you when you come to withdraw your cash?
Bank runs are how fraudulent exchanges are caught: Bitcoin is self-auditing, and either you have it or you don't, there aren't IOUs or paper receipts.
Fractional reserve banking is a prisoner's dilemma, we all marginally benefit from the status quo of credit/debit/interest, but in a crisis, the first people to pull out win, and everyone else loses.