What is Loan-to-Value (LTV) in Crypto?

Key Takeaways

• Loan-to-value (LTV) is the ratio of how much your loan is compared to the value of the collateral you provided
• LTV= (Market Value of Loan) / (Market Value of Collateral)
• Market volatility can cause large swings in the value of your loan and collateral

Loan-To-Value (LTV) Definition & Example

Loan-to-value isn’t just a crypto borrowing term. You’ll find it in auto loans and home loans as well. LTV is just a simple way to compare the loan value to the value of the collateral (the thing you might give up if you don’t repay the loan).

An easy way to calculate the LTV is to divide the loan balance by the value of the crypto you post as collateral and then multiply by 100.

For example, if you put down $10,000 worth of Bitcoin as collateral and borrow $4,000 of USD, your LTV is 40%.

($4,000 / $10,000)*100 = 40 (40% LTV)

But the LTV on a crypto loan changes based on the market price of your collateral. To use the example above, maybe Bitcoin goes wild, and now your collateral is worth $20,000. Nifty. Now, your LTV is only 20%.

($4,000 / $20,000)*100 = 20 (20% LTV)

But the market giveth, and the market can also taketh away. If the price of Bitcoin takes a swan dive ending in a belly flop, your LTV increases. Ouch. What if your Bitcoin is only worth $5,000 instead of $10,000?

($4,000 / $5,000)*100 = 80 (80% LTV)

In this example, your crypto is probably a misty-eyed memory (but you get to keep the loan proceeds). Many crypto platforms will liquidate (sell) your crypto to cover the loan even before the LTV reaches 80%. Loans with higher LTVs are riskier to borrowers who value their crypto.

As you pay down the loan, LTV usually decreases. But if the value of the collateral also falls, the LTV might still go up. If your original $4,000 loan balance drops to $3,000, but your collateral value falls from $10,000 to $5,000, your LTV is now 60%. As you can see, LTV is always a moving target because the numbers in the formula change over time.

($3,000/$5,000)*100 = 60 (60% LTV)

A higher LTV at the time of the loan usually means you’ll pay a higher interest rate because there’s a bigger risk that the loan platform may have to liquidate your collateral. The flip side is that a lower LTV often means lower interest rates.

If you venture into DeFi-land for your crypto loan, you might also see the term collateral ratio–which is like LTV but in reverse. For example, a 200% collateral ratio is the same as a 50% LTV. The collateral is worth twice as much as the loan balance.

Want an example of how each loan type would play out? Check out our example below for the numbers.

An interest and principal loan is less expensive if the interest rate and loan length (term) are the same. An interest-only loan costs more over the full loan term but has lower monthly payments–until the final payment, which includes a lump sum payment.