Bitcoin-Backed Loans, Explained: Cash Without Selling Your BTC
A bitcoin-backed loan lets holders borrow cash or stablecoins against their BTC instead of selling it. The catch: collateral rules and liquidations carry real risk.
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Key takeaways
- Bitcoin-backed loans let you borrow cash or stablecoins while keeping your BTC.
- Your bitcoin is locked up as collateral for the duration of the loan.
- Loan-to-value (LTV) measures how much you borrow relative to what your collateral is worth.
- If BTC drops far enough and your LTV climbs too high, your collateral can be liquidated.
You can borrow cash or stablecoins against your bitcoin and never sell a coin. That's the pitch behind bitcoin-backed loans, which Decrypt broke down in an explainer published today.
How it works
The setup is simple. You deposit BTC with a lender as collateral. You get cash or stablecoins back. Your bitcoin stays locked until you repay. Pay up, and the coins come home.
Long-term holders will see the appeal right away. Selling BTC can mean giving up future upside, and in many places it can trigger a tax bill. Borrowing sidesteps the sale.
LTV and liquidations
Two terms matter most. Loan-to-value (LTV) compares the size of your loan with the current value of your collateral. Borrow more against the same BTC and your LTV climbs.
Bitcoin is volatile. If its price falls, your collateral is worth less, and your LTV rises even though you haven't borrowed another dollar. Push past the lender's threshold and you face a liquidation. The lender sells some or all of your collateral to cover the debt.
That's the catch. You dodge selling on your terms. A sharp drop can force a sale on someone else's.
Why it matters
Borrowing against BTC can be a handy tool. It isn't free money. Leverage cuts both ways. Before you take a loan, check the lender's liquidation threshold and keep your LTV well below it. Decide in advance how you'd top up collateral or repay in a crash. And ask who holds your coins while they're locked. Counterparty risk is part of the deal.
Source: Decrypt
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Alex covers crypto markets and trading, testing every platform hands-on before writing about it.
