To borrow against Bitcoin, you pledge your coins to a lender as collateral and receive a cash or stablecoin loan worth a portion of their market value. Most platforms lend at a loan-to-value (LTV) ratio between 50% and 80%, with interest rates starting around 5% annually on major platforms.1Coinbase. Crypto-Backed Loans You keep the upside if Bitcoin rises, you avoid a taxable sale, and you get liquidity in a few hours. The trade-off is that if Bitcoin’s price falls far enough, the platform sells your collateral automatically, and that forced sale can leave you with a capital gains bill on top of the loss.
Choosing a Platform
Two very different kinds of lenders offer Bitcoin-backed loans, and the choice shapes everything else about the transaction.
Centralized platforms such as Coinbase, Nexo, or Ledn hold your Bitcoin themselves and run the loan through their internal systems. Because they are subject to federal anti-money-laundering rules, you open an account by uploading a government photo ID and a proof of residence dated within the last 90 days. The platform verifies you before it will accept collateral or release funds.
Decentralized (DeFi) protocols like Aave replace the company with a smart contract on a blockchain. You connect a software or hardware wallet directly to the protocol, and the contract locks your collateral and releases the loan without any identity check. That removes the paperwork, but it also removes the counterparty you would otherwise have recourse against. The U.S. Treasury has documented that DeFi services are vulnerable to code exploits in which attackers drain locked funds through smart-contract vulnerabilities.2U.S. Department of the Treasury. Illicit Finance Risk Assessment of Decentralized Finance
The Numbers That Set Up the Loan
Loan-to-Value Ratio
LTV is the single most important number in the deal. It’s your loan amount expressed as a percentage of your collateral’s market value: put up $100,000 in Bitcoin, borrow $50,000, and your LTV is 50%. A lower starting LTV gives you a bigger cushion, because the price has to fall much further before the platform gets nervous. A higher starting LTV maximizes the cash in hand but puts you close to the liquidation threshold from day one. Most platforms let you choose an initial LTV somewhere between 50% and 80%.
Interest Rate and Duration
Rates depend on the platform, your chosen LTV, and how long you want to borrow. Some platforms advertise rates starting as low as 5% annually.1Coinbase. Crypto-Backed Loans Higher LTVs and longer terms usually cost more. Many crypto-backed loans run 12 months or less, though some are open-ended: you pay interest on an ongoing basis and repay principal whenever you decide.
How You Receive the Money
You can take the loan in U.S. dollars sent to a linked bank account, or in stablecoins like USDC or USDT sent to a digital wallet. Stablecoin disbursements typically arrive faster because they settle on-chain; bank transfers take one to three business days.
Funding the Loan
Once your terms are set, the platform generates a deposit address, either a custodial wallet address on a centralized platform or a smart-contract address in DeFi. You send the exact amount of Bitcoin specified from your personal wallet to that address. Blockchain transactions are irreversible, so a mistyped address means the funds are gone.
The platform then waits for the network to confirm the deposit, usually 30 to 60 minutes depending on congestion. When your account status flips to funded, the loan proceeds become available to withdraw to your bank account or wallet.
Managing the Loan After Funding
From funding day forward, your main job is watching the LTV ratio. Bitcoin’s price moves constantly; the loan balance does not. If the price drops, your LTV rises, because the same debt is now backed by less valuable collateral. If the price rises, your LTV improves.
The platform dashboard shows the ratio in real time, and most platforms send automated alerts when LTV crosses warning levels, often around 70% to 75%. Treat those alerts as the call to act. If your LTV keeps climbing, you have two ways to bring it back down:
- Send more Bitcoin to the deposit address. Once the new deposit confirms, your LTV recalculates.
- Pay down part of the loan. A smaller loan balance means a lower ratio against the same collateral.
What Happens If You Get Liquidated
Every platform has a liquidation threshold. On Coinbase, it’s 86% LTV.1Coinbase. Crypto-Backed Loans If your ratio hits that line and you have not added collateral or repaid, the platform’s automated systems sell enough of your Bitcoin to cover the outstanding balance. No human reviews it. It can happen in minutes.
Most platforms also charge a liquidation penalty. Coinbase’s is 4.38%.1Coinbase. Crypto-Backed Loans DeFi protocols often impose penalties around 10%, shared between the party that triggers the liquidation and the protocol. Any Bitcoin left after the loan and penalties are settled is returned to you; the platform only sells what it needs.
The uncomfortable second bill is the tax one. The IRS treats cryptocurrency as property, so a liquidation is a disposition, and if the sale price is above what you originally paid for the Bitcoin, you owe capital gains tax on the difference even though you did not choose to sell.3Internal Revenue Service. Notice 2014-21
Paying the Loan Off
To close the loan, you repay the full principal plus accrued interest through the platform’s interface, usually in the same currency you borrowed. Many platforms accept partial repayments as well, which reduces the balance and lowers your LTV if you want to free up some collateral without closing out.
Once the platform confirms full repayment, it releases the hold on your Bitcoin. You give it a destination wallet address, and the collateral moves back to you, typically settling within a few hours. At that point you have your Bitcoin back in your own control and the loan is closed.
Tax Rules to Know Before You Borrow
The IRS classifies digital assets as property, not currency, and that classification drives two rules you need to hold in mind.4Internal Revenue Service. Digital Assets
First, taking out the loan is not a taxable event. You are taking on a debt, not selling anything, so the proceeds are not income. This is the same principle behind a home mortgage or a securities-backed line of credit: loan proceeds come with an obligation to repay, and that obligation offsets the cash.5Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined
Second, a sale of the collateral is a taxable event, whether it’s a forced liquidation or a voluntary sale to repay. You owe tax on the difference between your original cost basis and the sale price.3Internal Revenue Service. Notice 2014-21
- If you held the Bitcoin for one year or less, the gain is short-term and taxed at ordinary income rates of 10% to 37%.
- If you held it for more than a year, the gain is long-term and taxed at 0%, 15%, or 20%.
The result can feel backward. Say you bought Bitcoin at $10,000, watched it climb to $80,000, borrowed against it, and were liquidated at $50,000 during a crash. You lost a fortune on paper against the peak, but for tax purposes you realized a $40,000 gain from your $10,000 basis. Starting in 2026, crypto brokers must report cost-basis information to the IRS on certain transactions, so your own records need to be accurate.4Internal Revenue Service. Digital Assets
Risks You Cannot Insure Away
Bitcoin held as collateral on a lending platform is not covered by FDIC insurance. FDIC insurance applies only to deposits at member banks and does not extend to crypto assets, custodians, or exchanges.6Federal Deposit Insurance Corporation. What the Public Needs to Know About FDIC Deposit Insurance and Crypto Companies SIPC coverage, which protects brokerage customers, also does not apply. If a centralized lender becomes insolvent while holding your Bitcoin, your collateral may end up as part of the company’s bankruptcy estate rather than being returned to you.
The risk profile differs by platform type. With a centralized lender, you’re exposed to the company itself: mismanagement, hacks, bankruptcy. With a DeFi protocol, you’re exposed to the code: a smart-contract bug that lets an attacker drain funds. In neither case is there a government backstop to make you whole.
State rules also vary. Some states require crypto lending platforms to hold money transmitter licenses, others have built specialized licensing frameworks, and some have exempted crypto businesses from money transmission laws entirely. That matters for what recourse you have if something goes wrong.
How the Law Treats Your Collateral
When a lender takes Bitcoin as collateral, the arrangement creates a security interest in personal property, governed by Article 9 of the Uniform Commercial Code.7Cornell Law School. UCC Article 9 – Secured Transactions Under Article 9, the lender can file a UCC-1 financing statement, a public notice that puts other creditors on notice of the claim. Filing fees generally run $15 to $50 depending on the state.
A newer piece of the framework is UCC Article 12, which specifically addresses “controllable electronic records” and covers cryptocurrencies directly. As of early 2025, more than 24 states and the District of Columbia had enacted Article 12. It clarifies who holds enforceable rights in a digital asset when it is transferred or pledged, which reduces some of the legal uncertainty that existed when crypto sat only under Article 9’s general personal-property rules. If you’re borrowing a large amount, checking whether your state has adopted Article 12 is worth the few minutes.