A bitcoin-collateralized loan lets you borrow cash or stablecoins without selling your BTC. You pledge bitcoin as collateral, receive funds, and later repay the loan to get your BTC back. Most providers cap the initial loan-to-value (LTV) near 50%, borrow $50,000 against $100,000 of BTC because bitcoin is volatile and lenders want a safety buffer. If the price drops and your LTV rises toward preset thresholds, you must add collateral or repay; otherwise the lender may liquidate some BTC to cover the loan.
Why do people use it? Three big reasons: (1) keep long-term exposure instead of selling, (2) access cash quickly without traditional credit checks, and (3) in many jurisdictions (e.g., the U.S.) borrowing isn’t income, so simply taking a loan typically isn’t a taxable event though local rules vary and liquidation can be taxable.
How the mechanics actually work
Loan-to-value (LTV). If you borrow $50k against $100k of BTC, your starting LTV is 50%. If BTC falls 30%, collateral value becomes $70k and LTV jumps to ~71%. Many platforms send margin alerts around this zone and liquidate near ~80% LTV if you don’t act (exact levels vary by provider).
Volatility is the point of risk. Bitcoin has a history of sharp drawdowns double-digit drops are common, and cycle-level declines of 65–77% have occurred. That’s why buffers exist and why conservative starting LTVs matter.
Liquidation process. Unlike traditional collateral (cars/houses), crypto liquidations are typically automated: if price falls through a trigger and you don’t top up, the platform sells just enough BTC to repay the loan and fees. This speed reduces lender losses but it also means you must monitor LTV.
Market size and maturity. After the industry shake-outs of 2022, crypto lending rebounded but remains below prior peaks; research estimates $36.5B in total as of Q4 2024, down from a $64B high in 2021, reflecting a market that’s rebuilding with tighter risk controls.
Costs you should expect
Rates and fees vary with the provider, term, and funding conditions. As a reference point, one large bitcoin-native lender publicly lists up to 50% LTV and example APR around ~12% for standard loans (terms change; always check the current schedule). Expect origination fees and specific policies for margin alerts and liquidations.
Custody and counterparty risk: the part most people skip
Your collateral’s custody model determines a lot of your risk:
- Rehypothecation vs. no-rehypothecation. Some lenders re-lend client BTC; others promise not to. A number of bitcoin-native providers use collaborative multi-signature custody (e.g., 2-of-3 with independent neutral key holders) so no single party can move your coins and you can watch collateral on-chain. If a lender says “no rehypothecation,” look for how they technically enforce that claim.
- Transparency track records. Several firms now publish principles or stats tied to non-rehypothecation and multi-institution key distribution; use these as diligence inputs, not marketing gloss.
A worked example
- You post 2 BTC worth $100,000 and borrow $50,000 (50% LTV).
- BTC falls 20% → collateral $80,000 → LTV 62.5% (usually fine).
- BTC falls 30% → collateral $70,000 → LTV 71.4% (often near a margin-call zone).
- BTC falls 40% → collateral $60,000 → LTV 83.3% (near liquidation lines).
Your options if price drops: add BTC collateral, partially repay, or let the system liquidate some BTC. Because bitcoin has historically seen swift, deep pullbacks, many borrowers start at ≤40–45% LTV to create extra room.
A quick due-diligence checklist
- LTV policy: initial LTV, margin-call alerts, and liquidation LTV. Look for clear, written numbers and examples.
- Custody model: multi-sig? independent key agents? on-chain verifiability? rehypothecation policy?
- Rate sheet & fees: APR by term; origination; transfer/withdrawal rules; prepayment terms.
- Track record: audited processes, public principles, or multi-cycle performance.
BTC-backed lending is a tool, not a free lunch. Used well, it unlocks liquidity while you maintain long-term exposure. Used carelessly, it can separate you from your bitcoin in a bad week. Start with conservative LTVs, understand custody and rehypothecation, and insist on transparent margin and liquidation rules. The market has matured since 2022’s shake-outs, but diligence is what keeps your long-term plan intact.
This article is educational, not financial/tax advice. Always confirm local regulations and consult qualified professionals before borrowing.
