Crypto-Backed Loans Explained: How to Borrow Against Your Holdings
You hold Bitcoin. You need dollars. Selling feels wrong because you believe in the long-term price. A crypto-backed loan solves that problem.
A crypto backed loan lets you deposit Bitcoin or other crypto as collateral and borrow cash or stablecoins against it. Your crypto stays locked in a vault. You get liquidity. When you repay the loan, you get your crypto back.
The concept is straightforward. The details, however, vary enormously depending on where you go.
How a Crypto-Backed Loan Works
The basic process has four steps.
First, you choose a platform and deposit your collateral. Typically Bitcoin, Ethereum, or a handful of other large-cap assets. The platform locks this in a custody arrangement or smart contract.
Second, the platform calculates your maximum loan based on a loan-to-value (LTV) ratio. If the LTV is 50% and you deposit $20,000 of Bitcoin, you can borrow up to $10,000.
Third, you receive the loan. This might be USDC, USDT, a bank transfer in fiat, or a protocol-native stablecoin depending on the platform.
Fourth, you repay the loan plus interest. Your collateral is released. If the price of your collateral drops too far before repayment, the platform liquidates your position to cover the debt.
That is a crypto backed loan in plain terms.
Loan-to-Value (LTV) Explained
LTV is the ratio of what you borrow to what you deposit as collateral.
A 50% LTV means you can borrow half the value of your collateral. If Bitcoin is worth $100,000 and you deposit 1 BTC, you can borrow $50,000.
Lower LTV means less risk of liquidation, because Bitcoin's price would need to fall further before your collateral is insufficient. Higher LTV gives you more liquidity but puts you closer to the liquidation threshold.
Most platforms set maximum LTV between 50% and 75% for Bitcoin. Conservative borrowers typically aim for 30-40% LTV to give themselves a comfortable buffer.
Liquidation: What Happens When Price Drops
Liquidation is the biggest risk in a crypto backed loan.
If Bitcoin's price falls and your collateral value drops below the platform's minimum threshold, the platform sells enough of your collateral to cover the loan. You keep the borrowed amount. You lose the collateral that was sold.
Some platforms liquidate all at once. Others do partial liquidations. Some give you time to add more collateral (a "margin call"). Check this before you borrow.
Example: you deposit 1 BTC at $100,000 and borrow $50,000 (50% LTV). Your liquidation threshold is 75% LTV. If Bitcoin drops to $66,667, your LTV hits 75% and liquidation begins. At a 30% LTV, you would not be liquidated until Bitcoin fell to $166,667 worth relative to your loan, far safer.
The fix is simple: borrow conservatively and monitor your position.
CeFi vs DeFi: Key Differences
Centralised (CeFi) platforms hold your crypto and handle everything through a company. Decentralised (DeFi) protocols use smart contracts instead of companies.
| Platform | Type | Custody | KYC Required | Collateral |
|---|---|---|---|---|
| Ledn | CeFi | Custodial | Yes | BTC, ETH |
| Nexo | CeFi | Custodial | Yes | 40+ assets |
| Coinbase | CeFi | Custodial | Yes | BTC, ETH |
| Aave | DeFi | Smart contract | No | ETH, WBTC, others |
| Ducat | DeFi | Non-custodial vault | No | BTC (L1) |
CeFi is simpler to use and can offer fiat disbursements. The tradeoff is that the company holds your Bitcoin. Celsius was a CeFi platform. When it failed, customers lost access to their funds.
DeFi gives you code instead of a company. The rules are enforced by the protocol, not a team of humans. The tradeoff is more complexity and a different risk profile (smart contract bugs rather than company failure).
Interest Rates Compared (2026)
Rates vary significantly. These are approximate annual rates for Bitcoin-collateralised borrowing as of early 2026:
| Platform | Borrowing Rate | Loan Currency | Notes |
|---|---|---|---|
| Ledn | 10-14% | USDC, USD | Fixed or variable |
| Nexo | 6-14% | USDC, fiat | Lower with NEXO token stake |
| Coinbase | Variable | USD | Via Coinbase Borrow (limited availability) |
| Aave | 3-8% | USDC, DAI, others | Variable, market-driven |
| Ducat | Protocol rate | UNIT | Bitcoin L1, no bridge exposure |
DeFi rates are generally lower and market-driven. They can spike during periods of high demand. CeFi rates are often more predictable but include the platform's margin.
Read more from the Bitcoin Loans guide for a full breakdown of current options.
Tax Implications
This is not tax advice, and your situation will depend on your jurisdiction. That said, these are the general principles worth understanding.
Taking a crypto-backed loan is generally not a taxable event. You are not selling your Bitcoin; you are borrowing against it. The loan proceeds are not income.
Repaying the loan is also generally not taxable.
However, if the platform liquidates your position, that liquidation is typically treated as a disposal of the collateral. You may owe capital gains tax on any appreciation.
In the UK, HMRC treats crypto liquidations as taxable disposals. In the US, the IRS treats them similarly. Consult a tax professional before taking a large loan. The HMRC cryptoassets guidance and IRS Notice 2014-21 are worth reading.
The main tax advantage of borrowing: you access liquidity without triggering a disposal. If you have held Bitcoin for years with large gains, borrowing instead of selling defers that tax event.
The Bitcoin L1 Advantage
Most crypto backed lending platforms that claim to support Bitcoin are doing one of two things. They are either holding your Bitcoin in company custody (CeFi), or they are requiring you to bridge it to Ethereum as wrapped Bitcoin (WBTC) before lending (DeFi).
Both approaches introduce risks beyond Bitcoin itself. CeFi adds company failure risk. Bridges and wrapped tokens add smart contract risk on a second chain and custodian risk on the underlying asset.
Lending directly on Bitcoin L1 means your collateral stays on the most battle-tested blockchain in existence, secured by proof-of-work consensus. No bridge to hack. No custodian holding the underlying asset. No dependency on a second chain's security model.
Ducat is built this way. You deposit actual Bitcoin into a non-custodial vault. You borrow UNIT, a dollar-pegged stablecoin issued natively on Bitcoin L1. Every piece of the loan stays on Bitcoin. There is no trust assumption outside the protocol code itself.
If that appeals, read how borrowing against Bitcoin without bridges works in practice, or the guide to non-custodial crypto loans for a deeper comparison of the custody models.
Choosing the Right Platform
The right crypto backed loan depends on what you value most.
If you want simplicity and fiat disbursement, CeFi platforms like Ledn are easier to use. Just understand you are trusting that company with your Bitcoin.
If you want code over companies, DeFi is the answer. Aave is the most established. Ducat is the option if you want to stay on Bitcoin L1 with no wrapping or bridging.
Start conservative on LTV. Monitor your position. Understand the liquidation terms before you borrow a single dollar.
The loan does not sell your Bitcoin. Make sure the liquidation does not either.
