You can borrow against crypto by pledging Bitcoin, Ethereum, or certain other tokens as collateral to a lender that gives you cash or stablecoins in return, usually 25 to 80 percent of the collateral’s market value. Funding takes minutes on a decentralized protocol and one to three business days through a centralized platform that wires to your bank. The loan itself is straightforward. The hard parts are the loan-to-value math, the risk of forced liquidation if prices fall, the tax bill that liquidation creates, and the platform risks that sit behind the whole arrangement.
How the Loan Is Structured
The loan-to-value ratio is the single most important number. It divides what you borrow by the current market value of what you pledge. Deposit $100,000 in Bitcoin and borrow $50,000 and your LTV is 50 percent, a common starting point.
LTV drives both your interest rate and your distance from trouble. A lower LTV gives the lender a bigger cushion if the market drops, so your rate is lower. A higher LTV puts more cash in your pocket now but comes with steeper interest and a short walk to a margin call if prices fall.
Rates generally run from around 2 percent to more than 12 percent annually, depending on your LTV, the asset you pledge, and market conditions. They are typically quoted as an APR that includes origination and administrative costs.
Most lenders limit acceptable collateral to assets with high trading volume and deep liquidity, primarily Bitcoin and Ethereum. Some platforms accept additional tokens, but less-established assets qualify for lower LTVs because their prices swing harder.
Centralized Platform or Decentralized Protocol
Your first real choice is what kind of lender to use. The two options work in fundamentally different ways.
Centralized Platforms
Centralized platforms operate like traditional financial institutions. They take custody of your collateral, set your loan terms, and provide customer support. Because they act as financial intermediaries, they must comply with the Bank Secrecy Act and anti-money laundering rules.1Financial Crimes Enforcement Network. The Bank Secrecy Act Related obligations extend to banking organizations handling crypto-asset safekeeping.2Federal Deposit Insurance Corporation. Crypto-Asset Safekeeping by Banking Organizations
Expect a Know Your Customer process. You will need government-issued photo ID such as a driver’s license or passport, your Social Security number for tax reporting, proof of address like a utility bill or bank statement, and source-of-funds information covering your employment and the intended use of the loan. Platforms use this to run background checks and confirm you are not on any government restricted-party lists.
The trade-off is counterparty risk. You are trusting the company with custody of your assets, and that collateral is not covered by FDIC insurance.
Decentralized Protocols
Decentralized protocols use automated smart contracts to run the whole loan. No company holds your assets. Your collateral is locked in self-executing code that enforces the terms.
To use one, you need a self-custody wallet compatible with the protocol’s blockchain, the exact collateral already sitting in that wallet, and extra cryptocurrency for gas fees paid in the network’s native token, such as ETH on Ethereum. No identity check, no waiting for approval. In exchange, you take on smart contract vulnerabilities, oracle manipulation, and the absence of any support line if something breaks.
Applying and Getting Funded
On a centralized platform, you complete a digital application specifying the amount you want, whether you want fiat or stablecoins, and the loan term. You link a bank account if you want proceeds in dollars. After document review and identity verification, approval can take hours or a few business days. Once approved, you send your crypto to the platform’s deposit address, and the platform disburses the loan.
Stablecoins usually arrive in your wallet within minutes. Fiat sent by wire or ACH takes one to three business days. The platform provides a loan summary with the final terms, rate, and payment schedule.
On a decentralized protocol, you connect your wallet to the platform’s interface, pick the collateral, the amount to borrow, and the stablecoin you want in return. You then approve two blockchain transactions: one that authorizes the smart contract to access your collateral, and one that executes the deposit and the loan. Each transaction takes a gas fee. On Ethereum, gas for a smart contract interaction typically runs about $2 to $10, though it can spike during network congestion. Borrowed funds land in your wallet as soon as the blockchain confirms the transaction, usually within minutes.
Whichever route you use, save the transaction ID or hash for every transfer. That is your blockchain receipt and lets you independently verify that your collateral is where it should be.
Watching Your LTV and Handling Margin Calls
Funding is not the finish line. Crypto prices move constantly, and every move changes your LTV. A drop in your collateral’s price raises your LTV and walks you toward a margin call.
If your LTV crosses a warning threshold, the lender sends a margin call asking you to add collateral or repay part of the loan to bring the ratio down. Many platforms set the warning around 75 to 80 percent LTV, though the exact number varies. You often have only a few hours to respond. If you don’t act and prices keep falling, the platform liquidates enough of your collateral to bring the loan back in line, or all of it if the LTV is severely exceeded. Liquidation triggers commonly sit between 83 and 90 percent LTV.
Lenders typically charge a liquidation penalty of about 2 to 5 percent of the liquidated amount, taken from whatever collateral remains. You can shrink the risk by starting with a lower LTV so you have a wider buffer, setting price alerts in your platform or a tracking app, keeping extra crypto ready to top up your position, and choosing lenders that send multiple warnings before hitting the liquidation threshold.
Tax Treatment
The IRS treats digital assets as property, not currency, and that classification shapes every tax question here.3Internal Revenue Service. Digital Assets
Taking out a loan secured by crypto is generally not a taxable event. You have pledged your assets, not sold them, so no gain or loss is triggered. When you repay and the collateral comes back, that return is likewise not treated as a taxable disposition. You still have to report your digital asset activity on your federal return.4Internal Revenue Service. Taxpayers Need to Report Crypto, Other Digital Asset Transactions on Their Tax Return Keep records for every step: the collateral deposit, top-ups, interest payments, and the final release.
Forced liquidation is different. A liquidation counts as a sale or disposition of property, which triggers recognition of gain or loss under federal tax law.5Office of the Law Revision Counsel. 26 U.S. Code 1001 – Determination of Amount of and Recognition of Gain or Loss You owe capital gains tax on any appreciation between your cost basis and the liquidation price, reported on Form 8949 and Schedule D.3Internal Revenue Service. Digital Assets If your collateral is liquidated below cost during a crash, you may be able to claim a capital loss, but the transaction still has to be reported. Losing collateral and then owing tax on it is why avoiding a margin call matters as much as the loan terms themselves.
Platform Insolvency and Rehypothecation
On a centralized platform, you are trusting a company to hold your collateral and return it. The collapses of Celsius and BlockFi showed how thin that trust can wear.
Many centralized platforms include terms of service granting them the right to re-use your collateral by lending it out, pledging it for their own borrowing, or investing it for yield. This practice, called rehypothecation, means the specific coins you deposited may not be sitting anywhere waiting for you. If the platform becomes insolvent while your collateral is tied up elsewhere, getting it back can be extremely difficult.
In the Celsius bankruptcy, the court found that the platform’s terms of service “clearly and unambiguously” gave Celsius ownership of deposited digital assets. Depositors who assumed their crypto was still theirs were classified as general unsecured creditors, last in line in the bankruptcy.
Unlike money in a bank account, crypto collateral on a lending platform is not covered by FDIC insurance. The FDIC has stated that it “does not insure assets issued by non-bank entities, such as crypto companies” and that its insurance “does not protect against the default, insolvency, or bankruptcy of any non-bank entity, including crypto custodians, exchanges, brokers, wallet providers.”6Federal Deposit Insurance Corporation. What the Public Needs to Know About FDIC Deposit Insurance and Crypto Companies Nothing eliminates counterparty risk, but look for platforms that publish proof-of-reserves audits, segregate customer collateral from operating funds, and are licensed in jurisdictions with real consumer protection laws.
Smart Contract Risk on Decentralized Protocols
A decentralized protocol can’t go bankrupt with your collateral, but it can be exploited, and there is no support line to reverse the damage.
A smart contract is only as safe as its code. Attackers routinely probe DeFi protocols for weaknesses, and a single successful exploit can drain a treasury in one transaction. The U.S. Treasury has found that cyber criminals increasingly exploit vulnerabilities in DeFi smart contracts to steal virtual assets, and that publicly available open-source code, while transparent, also gives attackers a map to potential flaws.7U.S. Department of the Treasury. Illicit Finance Risk Assessment of Decentralized Finance
Many DeFi lending protocols rely on oracles, external data feeds that tell the smart contract what an asset is worth. If someone manipulates the feed, they can trick the protocol into overvaluing collateral and borrowing far more than it is really worth. Treasury documented a scheme where oracle manipulation was used to unlawfully obtain over $110 million by artificially inflating the price of a token used as collateral.7U.S. Department of the Treasury. Illicit Finance Risk Assessment of Decentralized Finance
Before depositing collateral in any decentralized protocol, check whether the smart contracts have been professionally audited by a reputable security firm. Prefer protocols that draw from multiple independent oracle sources and can pause operations if an exploit is detected.
Repaying and Closing the Loan
Most platforms bill interest monthly or accrue it continuously against your balance. You can usually pay in the same cryptocurrency you pledged, in stablecoins, or, on centralized platforms, in fiat. Missing payments can trigger late fees or accelerate the loan, making the full balance immediately due.
To close the loan, repay the principal plus any remaining interest. Once the platform verifies payment, it releases your collateral back to your wallet. Centralized platforms typically return collateral within minutes to 24 hours. On decentralized protocols, the collateral unlocks as soon as the repayment transaction is confirmed on the blockchain, usually within minutes.
The return itself is generally not a taxable event, but keep the records.3Internal Revenue Service. Digital Assets The blockchain produces a permanent record of the release, which is your proof that the loan is settled and no further claim exists against your assets.