Crypto Loans: How Borrowing Against Crypto Works
A crypto loan lets you borrow cash or stablecoins without selling your crypto. You lock coins such as bitcoin or ether as collateral, receive a loan worth less than that collateral, and get the coins back when you repay. This page explains how crypto loans work, what drives their cost and risk, and how to compare lenders.
How a crypto-backed loan works
- You deposit collateral, usually BTC, ETH or another liquid asset.
- The lender sets a loan-to-value (LTV) limit. If the limit is 50% and you deposit $10,000 of BTC, you can borrow up to $5,000.
- You receive the loan in stablecoins, crypto or, with some centralized lenders, fiat currency.
- Interest accrues until you repay. Some loans have a fixed term, others stay open as long as the collateral covers the debt.
- You repay and unlock the collateral. If the collateral value falls too far before then, part or all of it can be liquidated.
Loan-to-value and liquidation
LTV is the loan amount divided by the current value of the collateral. It changes every time the price of your collateral moves. Each lender sets a maximum LTV for opening a loan and a higher liquidation threshold. When your LTV reaches that threshold, the lender sells collateral to cover the debt, usually with a penalty.
Example: you borrow $5,000 against $10,000 of BTC, an LTV of 50%. If BTC falls 30%, the collateral is worth $7,000 and your LTV rises to about 71%. If the liquidation threshold is 70%, part of your BTC is sold. Borrowing at a lower LTV gives more room for price swings.
Types of crypto lenders
DeFi lending protocols
Smart contracts hold the collateral and liquidate automatically. You keep control of your wallet, there is usually no credit check, and rates float with supply and demand in each market. The main risks are smart contract bugs, oracle failures and fast liquidations during volatile markets.
Centralized (CeFi) lenders
A company holds your collateral and often lends in fiat. They may offer fixed rates and customer support, but you take on counterparty risk: if the lender fails, your collateral can be frozen. Several large centralized lenders froze withdrawals during the 2022 downturn.
Institutional and undercollateralized credit
Some protocols lend to vetted businesses with little or no collateral, relying on credit assessment and legal agreements instead. This is a different market from retail crypto loans. Our on-chain credit section covers it in detail.
What a crypto loan costs
- Interest rate: variable in most DeFi markets, often fixed or tiered with centralized lenders.
- Origination or withdrawal fees: some lenders charge to open the loan or to withdraw collateral.
- Network fees: every on-chain transaction costs gas.
- Liquidation penalty: the hidden cost if the market moves against you.
Checklist before you borrow
- What is the maximum LTV and at what LTV does liquidation start?
- Is the rate fixed or variable, and how often has it changed?
- Who holds the collateral, and is it rehypothecated (lent out again)?
- Has the protocol been audited, and how long has it run without incidents?
- Can you add collateral or repay early at any time?
- How would the loan be treated for tax purposes where you live?
Risks
The biggest risk is liquidation during a sharp price drop. Others include lender insolvency (CeFi), smart contract exploits (DeFi), stablecoin depegs and regulatory changes. Never borrow an amount you could not repay if your collateral fell sharply in value.
Common reasons people take crypto loans
- Liquidity without selling: covering an expense while keeping a long-term position.
- Avoiding a taxable sale: in many countries borrowing is not treated as a sale, although rules differ.
- Bridging finance: short-term cash needs, for example before a payment arrives.
- Leverage: borrowing stablecoins to buy more crypto. This multiplies both gains and losses and is the most common route to liquidation.
How to choose a crypto lender
| Criterion | What to look for |
|---|---|
| Collateral handling | Who holds it, whether it is rehypothecated, and how it is protected if the lender fails |
| Loan terms | Maximum LTV, liquidation threshold, margin call process, minimum and maximum loan size |
| Cost | Interest rate type, origination and withdrawal fees, liquidation penalty |
| Flexibility | Early repayment, adding collateral, choice of loan currency |
| Track record | Years in operation, audits, how the lender behaved during past market crashes |
| Regulation | Licences in your country and the legal entity you contract with |
A simple borrowing plan
- Decide how much you need and for how long.
- Pick a target LTV well below the liquidation threshold and calculate your liquidation price.
- Keep a reserve of stablecoins or extra collateral you can add quickly.
- Set price alerts and review the loan whenever the market moves sharply.
- Repay early if the reason for the loan no longer exists.
Frequently asked questions
Most crypto-backed loans do not, because the collateral secures the loan. Undercollateralized and institutional credit products do assess the borrower.
Yes. That is the main reason people use crypto loans: they get liquidity while keeping exposure to the asset.
The lender sells your collateral to cover the outstanding debt and fees.
In many countries taking out a loan is not a taxable event, but liquidation of collateral may be treated as a sale. Rules differ by country, so check with a tax advisor.
This page is for educational purposes only and is not financial, investment or tax advice. Crypto assets are volatile; you can lose all of your money.