To use crypto as collateral for a loan, you deposit Bitcoin, Ethereum, or another accepted token with a lender or into a smart contract and receive cash or stablecoins worth a fraction of what you pledged. Most platforms lend between 40% and 70% of your collateral’s market value, with interest from regulated lenders currently running roughly 8% to 12% APR. You can borrow through a centralized platform that verifies your identity or through a decentralized protocol where your crypto wallet is the only credential required.
The Numbers That Decide What You Can Borrow
A handful of figures will determine how much you get, what it costs, and when you could lose your deposit. Learn them before you apply.
Loan-to-value, or LTV, is the single most important one. It is your loan amount divided by the current market value of your collateral. Pledge $20,000 of Bitcoin and borrow $10,000, and your LTV is 50%. Platforms typically cap the starting LTV between 50% and 70%. Borrowing at the maximum leaves almost no cushion before a price drop triggers a margin call, which is why experienced borrowers tend to start at 50% or lower.
Interest rates from regulated lenders currently run from about 8% to 12% APR, depending on loan size, LTV, and the asset pledged. DeFi protocols sometimes advertise lower rates but recover the difference elsewhere. Interest accrues daily on your outstanding principal.
Origination fees on centralized platforms generally run 0.5% to 2% of the loan principal and are charged once, when the loan funds. DeFi protocols often skip this fee and compensate with higher interest.
Accepted collateral almost always includes Bitcoin and Ethereum, and often large-cap tokens and major stablecoins like USDC. The more volatile the asset, the lower the LTV a lender will offer against it.
Network fees for moving crypto to and from the platform are separate from loan costs. As of early 2026, average Bitcoin and Ethereum transaction fees run well under a dollar in normal conditions, though they can spike during heavy network demand.
Centralized Platform or DeFi Protocol
These are two very different experiences, and the choice carries real trade-offs in convenience, privacy, and risk.
Centralized platforms operate like traditional lenders. They require Know Your Customer and Anti-Money Laundering checks, so you submit government-issued photo ID and proof of address before borrowing. The company holds your collateral in its own custody systems. Terms feel familiar: fixed rates, scheduled repayments, customer support if something goes sideways. Verification typically takes 24 to 48 hours. The catch is that your collateral sits on someone else’s balance sheet, which matters a great deal if the company becomes insolvent.
Decentralized protocols run on smart contracts. You connect a compatible crypto wallet, authorize the protocol to interact with your tokens, and deposit collateral directly into the contract. No personal information is collected. The process is faster and available globally, but there is no customer support, smart contract bugs can put your collateral at risk, and you are responsible for verifying every wallet address and transaction detail yourself. One mistake can mean permanent loss.
How the Loan Gets Made
On a Centralized Platform
- Create an account and complete identity verification with your photo ID and proof of address.
- Choose your collateral asset, loan amount, and preferred LTV. The platform shows your interest rate, repayment schedule, and any origination fee.
- Transfer your crypto from your personal wallet to the platform’s deposit address. You pay a network fee for this transfer.
- Once the blockchain confirms your deposit, the platform disburses the loan. Cash goes to your linked bank account by wire or ACH and can take one business day. Stablecoin loans arrive in your platform wallet within minutes.
On a DeFi Protocol
- Connect a compatible crypto wallet to the protocol’s interface.
- Select the collateral asset and loan amount. The protocol shows real-time LTV and interest rate.
- Approve the smart contract to access your tokens, then confirm the collateral deposit in your wallet.
- The protocol sends your loan, usually in stablecoins, directly to your wallet once the deposit is confirmed on-chain. The whole process can wrap up in minutes.
Margin Calls and Liquidation
This is where crypto-backed loans get dangerous, and it is the part most borrowers underestimate until prices are already falling.
Your LTV does not stay fixed. It moves with the market price of your collateral. If Bitcoin drops 30% overnight, your LTV jumps proportionally, and once it crosses certain thresholds the lender acts to protect itself. The exact numbers vary, but a common structure looks like this:
- Margin call, around 65% to 75% LTV. You get a notification that your collateral has fallen too close to your loan balance. You typically have 24 to 72 hours to add collateral or repay part of the loan to bring the LTV back down.
- Automatic liquidation, around 80% to 90% LTV. If your LTV keeps climbing, the platform sells enough of your collateral to cover the balance. On DeFi protocols, this happens instantly with no warning beyond what the smart contract was coded to send. Centralized platforms may give a final notification before executing.
Liquidation does not just cost you your crypto. On DeFi protocols, liquidation penalties can add 5% to 15% on top of the amount needed to cover your loan, so you lose more collateral than the debt itself required. And as explained below, a forced sale creates a taxable event whether you wanted to sell or not.
The best protection is starting with a conservative LTV. At 50%, your collateral would have to lose roughly 40% of its value before automatic liquidation kicks in. At 70%, a 15% to 20% drop can put you in the danger zone. In a market that can move 10% in a single day, that buffer matters more than most borrowers realize.
Repaying and Getting Your Collateral Back
Closing the loan means paying the full principal plus accrued interest through the platform’s repayment interface. Most platforms allow partial repayments along the way, which cuts your balance and lowers your LTV, but your collateral stays locked until the debt is fully satisfied.
On DeFi protocols, the smart contract releases your collateral automatically the moment it detects the final payment. On centralized platforms, a withdrawal request goes through a security review that can take several hours before your assets are returned. Either way, you receive a blockchain transaction hash confirming the transfer.
If you miss the maturity date, the platform liquidates your collateral to recover what is owed. Most platforms offer no grace period, so treat the maturity date as a hard deadline.
What the IRS Treats as Taxable
Taking a loan against your crypto is not a taxable event. The IRS treats digital assets as property, and federal tax law triggers capital gains or losses only when you sell or otherwise dispose of property.1Internal Revenue Service. Digital Assets Pledging crypto as collateral is not a sale or disposition; you are borrowing against it, not transferring ownership.2Office of the Law Revision Counsel. 26 USC 1001 – Determination of Amount of and Recognition of Gain or Loss That tax-deferred access to liquidity is the main reason people borrow against crypto rather than selling it.
Liquidation changes the picture. When a lender sells your crypto to cover a margin call or default, that is a disposition. You owe capital gains tax on the difference between your original cost basis and the liquidation price. If you bought Bitcoin at $20,000 and it was liquidated at $50,000, you owe tax on the $30,000 gain even though you never chose to sell.2Office of the Law Revision Counsel. 26 USC 1001 – Determination of Amount of and Recognition of Gain or Loss
Interest you pay on a crypto-backed loan may qualify as a deductible investment interest expense if you itemize and the loan proceeds were used for investment purposes. The deduction is capped at your net taxable investment income for the year, and unused amounts carry forward. Report it on Schedule A, and you may need Form 4952. Broker reporting requirements for certain crypto lending transactions are on hold pending further IRS guidance, so keep thorough records of every transaction yourself.1Internal Revenue Service. Digital Assets
If the Lender Goes Under
The collapses of several major crypto lenders in 2022 and 2023 exposed a risk many borrowers never thought about: what happens to your collateral if the platform itself goes bankrupt.
When Celsius Network filed for bankruptcy, the court ruled that crypto in certain account types belonged to the company’s bankruptcy estate, not to customers. Account holders who thought they owned segregated collateral were reclassified as unsecured creditors, last in line behind secured creditors. Celsius customers lost roughly $5 billion.
This risk is specific to centralized platforms that take custody of your assets. Terms of service, which almost nobody reads carefully, often grant the platform broad rights over deposited crypto, including the right to re-lend it. If the platform becomes insolvent while holding your coins, you may have no legal claim to get those specific assets back.
DeFi protocols carry a different kind of risk. Your collateral sits in a smart contract rather than on a company’s balance sheet, so there is no corporate bankruptcy to worry about. But smart contracts can have bugs and design flaws. DeFi exploits over the past decade have cost users billions, and only about 20% of hacked protocols had been professionally audited beforehand, so a completed audit is not a guarantee of safety either.
Before choosing any platform, read the terms of service and understand what happens to your collateral after you deposit it. Is it kept segregated? Can the platform lend it out? What protections exist if the company fails? If the answers are not clear, look elsewhere.
How Your Collateral Is Legally Classified
Under the Uniform Commercial Code, how a lender’s security interest in your crypto is classified affects who has rights to the assets if there is a dispute. Cryptocurrency has traditionally been classified under UCC Article 9 as a “general intangible” or as “investment property.”3Legal Information Institute. Uniform Commercial Code 9-102 – Definitions and Index of Definitions When you transfer crypto to a lender’s custody or deposit it into a smart contract, the lender perfects its security interest, making its claim legally enforceable against other creditors.4Legal Information Institute. Uniform Commercial Code 9-312 – Perfection of Security Interests in Chattel Paper, Deposit Accounts, Documents, Goods Covered by Documents, Instruments, Investment Property, Letter-of-Credit Rights, and Money
A newer framework, UCC Article 12, creates a specific category called “controllable electronic records” designed for digital assets. About half the states plus the District of Columbia have enacted a version of Article 12 as of 2026, with more expected to follow. The regulatory environment is still unsettled, and platforms available today may face new compliance requirements as federal guidance develops. When you successfully repay your loan, the lender’s security interest terminates and it has no further claim to your assets.