How to borrow against crypto: simple guide to crypto-backed loans

Borrowing against crypto refers to using digital assets, such as Bitcoin or Ethereum, as collateral to obtain a loan in stablecoins or another supported currency. The collateral is typically locked by the provider until the debt is repaid.

Such loans are offered by various exchanges and specialized services, each with its own terms: interests, fees, minimum collateral, and supported currencies.

This overview is for informational purposes only. The relevance of crypto lending depends on individual circumstances, and platform terms should always be understood before interacting with such services!

Crypto lending terms explained

When taking out a crypto loan, you will encounter the following concepts:

• Collateral – digital assets locked by a platform as security for a loan.
• LTV (Loan-to-Value ratio) – a metric that shows the relation between the loan amount and the current value of the collateral.
• Liquidation Threshold – a predefined LTV level at which the system may sell collateral to cover the loan.
• Fixed-Rate Model – loan conditions where repayment terms remain constant according to predefined rules.
• Flexible-Rate Model – a loan format where repayment terms may vary depending on platform mechanics.
• Centralized Lending Platforms (CeFi) – services where lending operations and liquidation logic are handled by the platform’s internal systems.
• Decentralized Lending Platforms (DeFi) – smart contract-based systems operating on blockchain, where loan mechanics and liquidation are executed automatically according to on-chain logic.

Why people use crypto-backed loans

Some people consider crypto-backed loans as one of several ways to access liquidity. This approach allows them to obtain funds without selling their digital assets. It also opens up additional possibilities. For instance, holders may keep exposure to potential price movements of the cryptocurrency used as collateral. However, this also means that the usual risks remain: cryptocurrency is highly volatile, which can lead both to gains and to losses depending on market conditions.

LTV and liquidation threshold in crypto lending

Lending platforms typically use the Loan-to-Value ratio (LTV) to determine the maximum amount that can be issued against the deposited collateral.

As LTV increases due to a decline in the collateral’s price, a borrower’s position may approach the liquidation threshold. Most platforms that offer crypto-backed loans set upper LTV limits. When the ratio reaches this predefined level, the platform may liquidate the collateral to avoid losses.

Before a liquidation threshold is reached, many platforms issue notifications indicating that the collateral value has decreased significantly and that the position may require adjustment or partial repayment. These mechanisms are intended to reduce the likelihood of enforced collateral liquidation.

Different platforms use different LTV limits. This information is usually available in the loan terms during the borrowing process.

How platforms track LTV and manage loans

Crypto lending platforms report loan status to users in different ways. Some services provide real-time LTV tracking, while others may issue periodic status reports or send notifications when certain thresholds are reached (for example, when collateral value drops significantly).

Platforms that offer crypto-backed lending are commonly divided into centralized and decentralized. In centralized services, most processes, including liquidation, are managed through internal automated systems, while decentralized platforms rely on smart contracts where liquidation is carried out according to predefined on-chain logic.

The overall mechanics of how a loan is managed can vary across platforms depending on their technical architecture and defined terms.

Crypto loan lifecycle: how the process works

On most crypto lending platforms, the loan process follows a similar pattern. Interfaces may vary, but the general logic remains the same.

Phase 1 – Platform interaction

The process usually begins with selecting a platform that aligns with the lending terms a borrower finds suitable. The choice often depends on a wide range of personal preferences: some people prioritize the speed of loan issuance, others focus on reliability, while for some the flexibility in supported assets plays a more significant role.

Phase 2 – Collateral providing

To initiate a loan, platforms typically require users to give a supported cryptocurrency as collateral. Once the assets are deposited, they remain inaccessible for transfers until the loan is fully repaid under platform terms.

Phase 3 – Loan parameters and LTV calculation

The platform determines the available loan amount based on the collateral and its current market value using the LTV (Loan-to-Value) ratio. The borrower reviews the terms, selects between a fixed-rate or flexible-rate model and considers the associated risks.

Phase 4 – Loan confirmation and receipt of funds

The borrower confirms the loan, and the assets are credited to their balance on the platform. Loans are typically issued in stablecoins such as USDT or USDC, although other currencies may be available depending on the service. The received funds can be used within the platform or transferred elsewhere using a compatible crypto wallet address.

Phase 5 – Monitoring and automated risk actions

Throughout the loan period, the LTV ratio may rise or fall due to market changes. Each platform defines its own threshold levels at which certain automated actions, such as collateral liquidation, may be triggered. Some services also notify users when those thresholds are reached.

Phase 6 – Repayment logic

After the loan is repaid according to the selected terms (whether it follows a fixed or flexible rate model), the platform unlocks the collateral and the assets become available on the borrower’s account again.

Crypto lending in digital asset ecosystems

Crypto-backed lending represents one of several mechanisms used in digital asset ecosystems to access liquidity without selling collateral. Its relevance and outcomes depend on market conditions, platform architecture and individual use cases.

The mechanics described above illustrate how such systems function from a technical perspective. Platforms continue to develop monitoring interfaces, automated collateral management and notification tools, which shape how users interact with lending products in practice.

 

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any finance decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.