Bitcoin Loans: How to borrow against your BTC

What is a Bitcoin-Backed Loan?

A Bitcoin-backed loan allows you to borrow money (USD, stablecoins, or other cryptocurrencies) by using your Bitcoin holdings as collateral. Your Bitcoin is the asset that secures the loan with the lender and ensures that you’ll pay back your loan. You benefit by getting access to cash without needing to sell your bitcoin. The lender benefits by charging you interest on the loan.

This is similar to how a HELOC (Home Equity Line of Credit) works in traditional finance where you can get a loan against the equity of your house. Only with a HELOC, you’re using your home as the asset to secure the loan instead of your Bitcoin.

Now, we’ll cover key terms like LTV and margin calls to help you fully understand Bitcoin-backed loans. If you’re already familiar with the basics, feel free to skip ahead to our roundup of the best CeFi and DeFi platforms for Bitcoin loans.

Why Consider a Bitcoin Loan?

You may be wondering “why not sell my Bitcoin and use the cash I get from the sale?”

Here are a few of the benefits of using a bitcoin-backed loan instead of selling your bitcoin to get cash:

• Avoiding taxes: Assuming your Bitcoin is worth more now than when you purchased it, selling some (or all of it) will most likely trigger a taxable event and you’d need to pay short-term or long-term capital gains taxes. With a loan, however, you’re not selling any Bitcoin, so you don’t have to pay taxes on the cash you get from the loan.
  
• You get to maintain your Bitcoin exposure: If you think Bitcoin is going to be worth more in the future than it is now, you don’t want to have to sell your Bitcoin and lose out on those gains.
  
• Quick liquidity: You can get cash from a Bitcoin loan in about the same amount of time it would take to sell those Bitcoins. Using DeFi platforms (that we’ll cover here in a minute) will allow you to take a Bitcoin loan out in a matter of minutes, 24/7, 365 days a year. Centralized platforms will take longer to approve your loan (a few hours to a few days).
  
• Deductible Interest: In some cases, particularly for commercial 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.

How Do Bitcoin Loans Work?

Let’s say you need to borrow $10,000 to cover a major expense. You can’t give the lender $10,000 worth of Bitcoin and expect $10,000 of cash or stablecoins in return. You need to give them more collateral than the amount you want to borrow.

This is called an over-collateralized loan. How much the loan needs to be over-collateralized varies depending on the lender but typically falls in the range of a maximum of 50% to 70% loan-to-value ratio.

If the lender you choose has a maximum of 50% LTV, in order to borrow $10,000 you would need to deposit at least $20,000 worth of Bitcoin.

If the lender you choose has a maximum of 70% LTV, in order to borrow $10,000 you’d need to deposit at least $14,285 worth of Bitcoin.

So A Higher LTV is Better Right? Not so fast…

One of the risks of taking out a Bitcoin loan is that the price of Bitcoin can be volatile. The value of your collateral will change significantly in a short period of time.

That means if the price of Bitcoin drops, the value of your collateral drops. And as the value of your collateral goes down, your LTV ratio goes up.

If your LTV gets too high, typically in the 75%-90% LTV range, the lender will sell your collateral to repay the loan.

To add insult to injury, if your loan is liquidated, that would trigger a taxable event. Taking a Bitcoin loan isn’t a taxable event, however, a forced liquidation can create a taxable event for capital gains, assuming your cost basis is below the liquidation value.

If you’re using a centralized platform, the lender may give you a margin call before liquidating your loan, which is a demand from the lender that you either pay back some of the loan or tell you how much more bitcoin you need to provide as collateral.

But if you’re using a decentralized protocol you’ll need to closely monitor your LTV because the smart contracts will automatically liquidate your loan if the LTV gets too high.

Let’s cover margin calls in more depth…

Margin Calls: What They Are & How to Avoid Them

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”.

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.

Are There Other 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: When borrowing on centralized platforms, you’ll need to deposit Bitcoin directly to the platform. In case the platform gets hacked or goes bankrupt, you are at risk of losing all your funds. Always use a reputable and responsible platform for your loans.
  
• 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. Consider this risk carefully and research the lender before committing your coins.
  
• Smart Contract Risks: On DeFi lending platforms, your loan is managed by smart contracts.If there are flaws or errors in the code, that can create a vulnerability for hackers to steal your collateral.

How To Choose a CeFi or DeFi Loan Platform

Now that you know the benefits and the risks of taking out a Bitcoin loan, let’s dive into where you can get a BTC-backed loan. You can choose between using a Centralized Finance (CeFi) platform or a Decentralized Finance (DeFi) protocol.

Here are some pros and cons to help you choose what’s best for your situation:

Feature	CeFi Platforms	DeFi Platforms
User Experience	✅ Beginner-friendly, customer support, smoother onboarding	❌ Requires wallet setup, network fees, and more technical knowledge
Loan Approval	❌ Depends on your location; Will likely ask for ID for KYC	✅ No geographical restrictions, open to everyone.
Collateral	✅ Native BTC accepted	❌ Must convert to wrapped BTC (wBTC) or Coinbase wrapped BTC (cbBTC) to use on Ethereum or other chains
Control & Transparency	❌ Platform controls funds and rules	✅ Open-source, transparent smart contracts
Custody	❌ You deposit BTC to their platform; they hold it	❌ Platform controls your collateral ($BTC) until you repay the loan
Security Risks	❌ Exchange custody risk, platform hacks, insolvency	❌ Smart contract bugs, oracle manipulation, user error
Fees	🟡 May include origination, withdrawal, and liquidation fees	🟡 Network gas fees, variable interest based on supply/demand
Interest rates	🟡 Fixed or tier-based (e.g. Loyalty programs)	🟡 Floating rates based on market dynamics
Examples	🟡 Nexo, Ledn, SALT	🟡 Aave, Compound

Top CeFi Bitcoin-Backed Loan Platforms

If you’re new to crypto, want to have customer support available if you need help, or just prefer the look and feel of more traditional banking, then a centralized finance (CeFi) platform is the way to go.

Our go-to picks are:

• Nexo
• Ledn
• SALT

They all offer Bitcoin-backed loans, but they vary in their interest rates, origination fees, their minimum and maximum loan values, loan terms, liquidation thresholds, and not all features may be available in your jurisdiction.

Top DeFi Platforms for Bitcoin-Backed Loans

If you’re more crypto savvy, comfortable using a browser wallet or hardware wallet, want the best rates, and don’t mind a lack of customer service, then a DeFi loan might be best for you.

Here are three popular DeFi borrowing protocols:

• Rocko
• Aave
• Compound

Bitcoin Loan Payment Options

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.

Loan Payment 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

Fees for Borrowing Against Your $BTC

Fees for Bitcoin loans are straightforward in most cases.

• Origination Fee (sometimes called an 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.

Crypto Loans Without Collateral

There are ways to get a Bitcoin loan 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 opportunities, hence the name “flash”.

If you’re looking for more long-term crypto loans without 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.

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 advantage to borrowing against your Bitcoin rather than selling, there are still risks involved. Keep an eye on borrowing costs and watch your LTV ratios carefully.

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

Frequently Asked Questions