Crypto Loans: How Borrowing Against Crypto Works
A crypto loan lets you borrow cash or stablecoins while keeping your coins. The catch is that the loan is tied to a price you do not control. This guide walks through the decisions that matter before you borrow, using one example from start to finish.
Latest in this topic
The short version
You lock crypto as collateral, receive a smaller amount of stablecoins or fiat, pay interest, and get the collateral back when you repay. If the collateral’s price falls far enough, the platform sells part or all of it to cover the debt. Almost everything else on this page is detail around that one mechanism.
Why people borrow instead of selling
- Keeping exposure. Someone who plans to hold bitcoin for years may prefer a loan to a sale they would later regret.
- Tax timing. In many countries selling crypto is a taxable event and borrowing against it is not. Rules differ, and some tax authorities treat certain DeFi transactions as disposals, so check local rules or ask a tax adviser before relying on this.
- Speed. A DeFi loan settles in minutes with no credit check. A bank loan does not.
- Leverage. Some borrowers use the loan to buy more crypto. This multiplies gains and losses alike and is the most common route to liquidation.
One loan, followed from start to finish
The numbers below are illustrative, not a quote from any platform.
Maria deposits 1 ETH worth $3,000 and borrows $1,500 in USDC. Her loan-to-value (LTV) is 1,500 ÷ 3,000 = 50%. The platform’s liquidation threshold for ETH is 80%.
| ETH price | LTV | What it means for Maria |
|---|---|---|
| $3,000 | 50% | Loan opened |
| $2,500 | 60% | Nothing happens yet, but this is the moment to start watching |
| $2,000 | 75% | Close to the threshold: add collateral or repay part of the loan |
| $1,875 | 80% | Liquidation can start |
Interest is left out for clarity. In reality it adds to the debt and pushes the LTV up a little every day. ETH only has to fall 37.5% from the opening price for Maria to reach the threshold. Crypto has fallen that far within weeks many times, which is why experienced borrowers open loans well below the maximum LTV a platform allows.
What liquidation actually costs
Liquidation is not a polite reminder. On most DeFi protocols an outside bot repays part of your debt and receives your collateral at a discount, usually called a liquidation bonus or penalty. You keep the money you borrowed, but you lose more collateral than the debt it covered. Some protocols liquidate a position in steps, others can close the whole loan at once. Centralized lenders set their own rules, which may include margin calls by e-mail before anything is sold. Read the liquidation section of the terms before you borrow, not after.
Interest: fixed, variable or “zero”
DeFi money markets such as Aave and Compound mostly charge variable rates that move with how much of a pool is already borrowed. When demand for a stablecoin spikes, its borrow rate can jump within hours. Some centralized lenders offer fixed rates for a set term. A few products advertise zero interest and charge elsewhere, for example through an origination fee or a lower maximum LTV. Compare the total cost over the time you expect to keep the loan, not the headline rate.
Where to borrow: two very different models
With a centralized lender a company holds your collateral and you depend on its solvency. With a DeFi protocol a smart contract holds it and you depend on the code and on price oracles. Both models have failed borrowers, in different ways. We compare them in CeFi vs DeFi crypto loans.
What about loans without collateral?
Crypto loans for individuals are almost always overcollateralized. Undercollateralized lending exists mainly for companies and trading firms that pass a credit assessment. If you want to know how that works, read about uncollateralized crypto loans and our private credit section.
Before you borrow: a checklist
- Decide the LTV you will open at and the LTV at which you will act. Write both down.
- Find the liquidation threshold and penalty for your exact collateral asset.
- Check whether the rate is fixed or variable and how it has moved recently.
- Know who holds your collateral and what happens to it if that company or protocol fails.
- Keep spare funds in stablecoins or fiat so you can add collateral during a fall.
- Set price alerts. Most liquidations happen to people who were not watching.
- Borrow in a stablecoin you understand, since that is what you will have to buy back.
Questions borrowers ask
On most crypto loans, no. The loan is backed by your collateral, and liquidation stops at the collateral you posted while you keep the borrowed funds. Some centralized products and leveraged trading positions work differently, so read the terms.
There is no universally safe number. The lower your LTV, the bigger the price drop you can survive. Use the worked example above with your own figures to see how far the price can fall before liquidation.
Not for DeFi protocols, which rely only on collateral. Centralized lenders usually require identity verification and may run additional checks.
You return the borrowed amount plus interest and fees, and the collateral is unlocked. On DeFi protocols you can usually repay at any time; some fixed-term centralized loans charge for early repayment.