From Decrypt · By Decrypt Agent
In brief
Bitcoin-backed loans let holders pledge BTC as collateral to borrow dollars or stablecoins, keeping exposure to Bitcoin's price and often avoiding a taxable sale.
Loan-to-value ratios typically run from about 30% to 70%, and borrowers face margin calls or liquidation if Bitcoin's price falls sharply.
The market has matured since the 2022 lender collapses, with an investment-grade securitization and big banks joining in, though published rates still run from about 5.8% to 14%.
Most long-term Bitcoin holders know this problem. You need cash for a house deposit, a business or a tax bill, but selling BTC means giving up exposure to its future price. In many countries it also means paying capital gains tax. A Bitcoin-backed loan is a way around that: you pledge your Bitcoin as collateral and borrow dollars or stablecoins against it.
The idea is as old as lending itself. People have long borrowed against homes, stock portfolios and gold. What's new is the collateral, an asset that trades around the clock and can swing in price by double digits in a week.
The market collapsed in 2022, when lenders including Celsius and BlockFi went bankrupt. It has since come back in a more cautious form, with centralized lending more than tripling from its late-2023 low, according to Galaxy Research.
This guide covers what Bitcoin-backed loans are, how they work, who offers them, and the risks borrowers should understand before taking one out.
What is a Bitcoin-backed loan?
A Bitcoin-backed loan is a secured loan with BTC as the collateral. You deposit Bitcoin with a lender, or lock it in a smart contract. In return you get a loan worth a fraction of that Bitcoin's value, paid in fiat currency such as U.S. dollars or in a stablecoin such as USDC.
While the loan is open, your Bitcoin stays locked. Once you repay the principal plus interest, you get it back.
Lenders lean on the collateral rather than your income history, so many of these loans need little or no traditional credit check. They come in two broad types:
Centralized (CeFi) loans, from companies such as Ledn, Strike, Unchained, Nexo and Coinbase. You go through identity checks, and the company or its custodian holds your BTC.
Decentralized (DeFi) loans, from protocols such as Aave and Morpho. A smart contract holds the collateral, and native BTC usually has to be "wrapped" into a token on another blockchain first.
Did you know?
Wrapped Bitcoin is a token on another blockchain, such as Ethereum, that is backed 1:1 by real BTC held in custody. It enables Bitcoin to be used in DeFi apps.
How does a Bitcoin-backed loan work?
The key number is the loan-to-value (LTV) ratio: how much you borrow compared with the value of your collateral. Industry LTVs typically range from about 30% to 70%, and many lenders start at 50%. At a 50% LTV, $100,000 of Bitcoin gets you a $50,000 loan.