Bitcoin Loans: How to borrow against your BTC

How Do Bitcoin Loans Work?

Unlike traditional loans, cryptocurrency loans don’t ask for extensive credit checks. Instead, you provide Bitcoin as collateral in exchange for a loan funded in USD (or another fiat currency), a stablecoin equivalent, or another cryptocurrency. In the event of default, the lender can use the digital assets you’ve deposited to satisfy the loan balance.

Because $BTC’s value can be volatile, lenders structure the loan to be overcollateralized, meaning the initial value of the collateral assets is higher than the loan amount (confused? check the example below). This structure allows some room for changes in the value of Bitcoin, reducing the risk of a margin call, which is a demand from the lender that you either pay down the loan or provide more collateral assets.

Bitcoin Backed Loan Example:

Let’s say you want to borrow $10,000. Depending on which lender you choose, you’ll need to deposit more than $10,000 in $BTC to fund the loan. One popular platform requires a $20,000 deposit to fund a loan of this amount or a 50% loan-to-value ratio. Others may let you borrow a higher percentage of your collateral.

Top CeFi Bitcoin-Backed Loan Platforms

• Nexo
• Ledn
• SALT
• Arch Lending
• APX Lending
• Figure Markets

Bitcoin borrowing options range from $50 to larger funding of $2 million or more. Interest rates range from 0% to more than 10%.

Platform	Crypto Accepted For Collateral	Origination Fees	Interest Rates	Minimum Provided Loans	Maximum Provided Loans	Standout Feature
Nexo	$BTC, $ETH, $XRP, $LTC & more	0%	2.9% – 18.9%	$50	$2 million	Bitcoin borrowing rates as low as 2.9% to 5.9% for Platinum and gold respectively
SALT	$BTC, $ETH, $LTC and more	5%	5%-15% APY	$5,000	$1 million	SALT is one of the quickest in the space, with clients receiving their funds in as little as 24-48 business hours after approval.
Ledn	$BTC, $ETH	2% admin fee	12.4%	$500	$1,000,000	Ledn offers proof-of-reserves, letting you verify your deposit at any time. You can repay the loan before the maturity date without any penalties.
Arch Lending	$BTC, $ETH & more + Equity shares from 1 of 33 approved private companies	Origination fee of 1.5%, Liquidation fee of 2.5%	14.5%	Depends on Location	None	Arch Lending puts security and trust first, storing your collateral with cold storage providers
APX Lending	$BTC, $ETH	0%	12.99%	$500	TBC	Terms from 3 months to 5 years, with options to extend or repay early with zero penalties, andLTV ratios from 20% to 60%,

DeFi Loans

Centralized finance (CeFi) platforms aren’t the only way to borrow against your Bitcoin. A growing number of decentralized finance (DeFi) protocols now offer ways to borrow against crypto assets.

You can think of DeFi protocols as programs that automate the lending process in a permissionless way using smart contracts.

Note: Because current DeFi protocols don’t run on Bitcoin’s blockchain, you’ll need to convert your Bitcoin to a tokenized version, such as $WBTC, which is a token on the Ethereum network designed to provide 1:1 value for $BTC.

Some common DeFi borrowing protocols include the following:

• Aave
• Compound

Top DeFi Bitcoin-Backed Loan Platforms

Platform	Crypto Accepted For Collateral	Origination Fees	Interest Rates	Minimum Provided Loans	Maximum Provided Loans	Standout Feature
Aave	$BTC, $ETH, $USDT, $USDC, $USDS, $AAVE, $AVAX & more	None	3%-10% APY (depends on the asset)	$100	None	With Aave, users can switch between stable and variable interest rates allowing for greater flexibility while borrowing.
Compound	$WBTC, $ETH, $USDT, $USDC, $COMP and more	None	3%-10% APY (depends on the asset)	$20	None	Compound’s standout feature is its changing interest rates. These rates go up or down based on how many people want to borrow or lend a particular cryptocurrency.

Tax Advantages of Bitcoin Loans

Bitcoin loans can be attractive for a number of reasons, but tax advantages remain one of the key reasons $BTC investors choose asset-backed loans.

Some of the benefits include:

• Avoiding Capital Gains Taxes: If you sell your Bitcoin to access capital in the US, you’ll create a tax liability for either short-term or long-term capital gains, depending on how long you’ve held your Bitcoin. For those with sizable gains, the tax costs can be significant. Using a loan to access capital avoids the need to sell and create a taxable event.
• Deductible Interest: In some cases, particularly for loans used to fund real estate or business-related purchases, the interest for your loan may be tax-deductible. Discuss your specific situation with a qualified tax advisor.

While there are tax advantages, you have to consider the risks involved as well:

• Tax Risks (liquidation): While taking a Bitcoin loan isn’t a taxable event, a forced liquidation can create a taxable event for capital gains, assuming your cost basis is below the liquidation value.

What Do I Need To Get A Bitcoin Loan?

Unlike a traditional loan, for which you’ll typically need to provide income documentation and likely a bevy of other paperwork, to get a Bitcoin loan you just need enough Bitcoin as collateral. The amount of Bitcoin you can provide as collateral determines the amount you can borrow.

Expect an easy process with minimally intrusive forms. Some platforms may ask how you’ll use the funds. To complete the loan, however, you’ll need access to the private keys to place your collateral in a custodial wallet with the lender.

Ultimately, one of the most important assets you’ll need in the transaction is knowledge. It’s important to understand key terms, such as loan-to-value (LTV) ratio and margin calls, and how they can affect your loan.

Crypto Loans Without Collateral

There are multiple ways to get Bitcoin loans without depositing any collateral but keep in mind that these are extremely high risk strategies and we don’t recommend this.

The most “crypto-native” way to get a Bitcoin loan without collateral is called a “Flash loan“. These uncollateralized loans must be borrowed and repaid within a single transaction. They are often used to take advantage of quick arbitrage opportunites, hence the name “flash”.

If you’re looking for more long-term crypto loans with collateral, here are a few options:

• Peer-to-Peer Lending: Some platforms facilitate peer-to-peer (P2P) lending where individuals can borrow Bitcoin without deposits.
• Unsecured Loans: Some platforms offer unsecured loans based on your creditworthiness rather than collateral. This is similar to traditional loans, but they may require a good credit score and thorough background check.
• Higher Interest Rates: Because these collateral-free loans are riskier for lenders, they often come with higher interest rates compared to secured loans.

The options for crypto loans without collateral are more limited compared to TradFi, and they may not be available in all regions.

Interest-Only Vs. Interest & Principal Vs. Credit Lines

You’ll find three distinct types of loans offered by Bitcoin lenders.

• Interest-Only Loans: With an interest-only loan, you don’t pay down the principal each month. Instead, you’ll pay interest only, with a lump sum due at the end of the loan term. You may be able to roll the balance over into a new loan.
• Interest And Principal: An interest and principal loan is similar to an auto or home equity loan (mortgage), wherein your monthly payments cover interest but also pay down the loan balance. With fixed monthly payments, you can plan your pay back schedule more effectively.
• Credit Lines: Similar to a line of credit you might have based on your home equity, a Bitcoin-backed line of credit lets you access cash based on the amount of $BTC you deposit. With a line of credit, you only pay interest on the amount you draw from the credit line, and there is no fixed term.

A given loan type may not be the best fit for the way you want to deploy capital. Some lenders may offer more than one type of loan. With several well-established lenders to choose from, you have options.

$BTC Loan Comparison

Several lenders offer a calculator that helps you understand the total costs for the loan as well as monthly payments. Before choosing, compare loan costs and loan types available from the providers you’re considering.

Different types of loans have differing interest costs as well. For example, here we compare an interest-only loan compared to a loan that requires interest and principal payments.

	Interest-Only	Interest And Principal
Borrowed Sum	$50,000	$50,000
Interest Rate	9%	9%
Term Of Loan	12 months	12 months
Loan to Value Ratio	50%	50%
Monthly Repayment	$375 for 11 months with a final payment of $50,375 on month 12	$4,373 monthly (12 payments)
Total Owed	$54,500	$52,471
Total Interest Charged	$4,500	$2,471

Margin Calls

A margin call refers to a notice from the lender informing you that you’ll need to add more collateral (or pay down the balance) to maintain an acceptable loan to value ratio for the loan. Some lenders use the term collateral call.

With crypto loans, LTV and margin are linked. The “margin” is your collateral for the loan, and if the value of your collateral falls below a certain threshold, the lender’s risk increases. A fall in collateral value increases the loan’s LTV ratio.

A change in the value of Bitcoin can send you scrambling to pay down the loan, add more collateral, or even cause a liquidation if you can’t meet a margin call.

For example, if you provide $20,000 worth of Bitcoin as collateral on a $10,000 loan, the initial LTV is 50%. But if the value of the Bitcoin falls to $15,000 without any change in the loan balance, the LTV rises to 66-67%. With many lenders, you can expect a margin call if the LTV rises that high. If the value of the collateral falls much further, the lender may liquidate the collateral to settle the loan balance.

Here are the LTV guidelines from one well-known lender:

• Target LTV (50%): In this case, the target LTV is the ratio at which the loan started and the level at or below which the lender wants the ratio to remain.
• Margin Call LTV (70%): Expect a margin call notice from the lender when the LTV reaches 65 to 70%, assuming a 50% target LTV. This level varies depending on the initial LTV and sometimes by collateral type.
• Liquidation LTV (80%): If the value of the collateral continues to fall and you haven’t added collateral (or paid down the loan), the lender can liquidate your collateral to pay the loan balance.

Fees for Borrowing Against Your $BTC

Fees for Bitcoin loans are straightforward in most cases.

• Origination Fee (Administration Fee): Some loans require a one-time fee for admin expenses. Some lenders call it an administration fee. Although it’s a one-time fee, $BTC loans are typically short-term loans, so a one-time fee can have a big impact on borrowing costs.
• Withdrawal Fee: With some lenders, you may have to pay to withdraw your Bitcoin from the platform.
• Liquidation Fee: Check the fine print for details on fees for liquidations. On some platforms, you could pay up to 7% of the collateral value.

You’ll also want to consider conversion fees and costs associated with moving capital where it needs to be.

For example, a loan may fund in USDC, but maybe you need USD – and you need it in the bank. Moving the money will add to the loan cost. As another example, if you’re using a DeFi platform, there may be costs to moving your assets to and from the platform.

Are There Any Risks When Borrowing Against Bitcoin?

Bitcoin loans can bring distinct risks, some of which are unique to collateralized lending and specifically crypto loans.

• Custodial Risks: To fund a Bitcoin loan, you’ll need to deposit to a custodial wallet, which can bring its own risks. Much like an exchange, the platform can become a target for hackers. Research storage and security measures before depositing your Bitcoin.
• Rehypothecation: When you pledge your Bitcoin as collateral, that act is called hypothecation. If the lender then pledges the asset again for its own purposes, it’s called rehypothecation, and some lenders use this mechanism to gain access to lending funds. Consider this risk carefully and research the lender before committing your coins.
• Asset Exposure Risks: Early 2022 saw some lenders pushed to the brink of bankruptcy – and beyond, due in part to exposure to riskier assets. Some borrowers may prefer a Bitcoin-only lender.
• Margin Call: As discussed earlier, a margin call is a requirement for additional collateral or to pay the loan down so that the LTV is within the target range. A margin call can cause you to sell other assets or add more collateral at an inopportune time. Choosing a low LTV ratio can provide a larger buffer.
• Forced Liquidation: If you’re unable to meet the margin requirements, the lender can liquidate your Bitcoin to satisfy the loan balance. Loans with lower LTV ratios can help reduce the risk of liquidation.

In Conclusion

Bitcoin loans come in all shapes and sizes, offering a solution to many borrowing needs and allowing you to keep the asset as it grows in value.

While there are often tax advantages to borrowing against your Bitcoin rather than selling, the practice also brings risks of liquidations or surprise tax bills. Keep an eye on borrowing costs, as well, and consider LTV ratios carefully.

A well-chosen and well-managed Bitcoin loan can be a powerful part of your financial strategy.

Frequently Asked Questions