Crypto-Backed Loans: How They Work, Costs and Liquidation
You hold Bitcoin and need liquidity without selling it today. A crypto-backed loan can provide that liquidity, but it creates a debt and puts your collateral at risk if its value falls.
A crypto-backed loan lets you pledge Bitcoin or another eligible asset and borrow cash or stablecoins against it. The collateral is restricted under the lender's or protocol's rules until repayment, and some or all of it can be sold if your position reaches its liquidation threshold.
The concept is straightforward. The details, however, vary enormously depending on where you go.
How a Crypto-Backed Loan Works
The basic process has four steps.
First, you choose a provider and pledge eligible collateral, such as Bitcoin or Ethereum. Depending on the product, the asset enters company custody, a multisignature vault, or an on-chain lending market.
Second, the platform calculates your maximum loan based on a loan-to-value (LTV) ratio. If the LTV is 50% and you deposit $20,000 of Bitcoin, you can borrow up to $10,000.
Third, you receive the loan. This might be USDC, USDT, a bank transfer in fiat, or a protocol-native stablecoin depending on the platform.
Fourth, you repay the principal plus any accrued interest or agreed fees, then recover the remaining collateral. If the collateral loses value or debt grows, liquidation can occur before you repay.
That is a crypto backed loan in plain terms.
Loan-to-Value (LTV) Explained
LTV is the ratio of what you borrow to what you deposit as collateral.
A 50% LTV means you can borrow half the value of your collateral. If Bitcoin is worth $100,000 and you deposit 1 BTC, you can borrow $50,000.
Lower starting LTV generally leaves more room for a price decline before liquidation. Higher LTV provides more proceeds but starts closer to the provider's liquidation threshold. Interest and fees can also raise LTV by increasing the debt.
Maximum starting LTV and liquidation thresholds vary by provider and collateral type; they are different numbers. Review both in the current offer, then calculate the BTC price at which your own position would become eligible for liquidation.
Liquidation: What Happens When Price Drops
Liquidation is the biggest risk in a crypto backed loan.
If Bitcoin's price falls, debt divided by collateral value rises. At the product's liquidation threshold, a lender or liquidator may sell some or all of the pledged BTC to reduce or repay the debt. The sale price, penalties, and any remaining balance depend on the terms; receiving the loan proceeds does not guarantee you can keep the full collateral value.
Some products liquidate an entire position; others sell only part. Alerts and opportunities to add collateral vary, and a fast price move may leave little time to respond. Check the exact trigger and process before borrowing.
Example: you pledge 1 BTC worth $100,000 and borrow $50,000, starting at 50% LTV. If the illustrative liquidation threshold is 75% LTV and debt stays at $50,000, the trigger is about $66,667 of collateral value ($50,000 ÷ 0.75). If you instead borrow $30,000 against the same BTC, starting at 30% LTV, the same threshold is reached at $40,000 of collateral value ($30,000 ÷ 0.75). This ignores interest, fees, and price-feed differences, which can move the real trigger.
Calculate that trigger using the terms of your own loan, leave room for volatility, and monitor the position.
CeFi vs DeFi: Key Differences
Centralised (CeFi) lenders and on-chain protocols use different custody and enforcement arrangements. A consumer app can also provide access to an on-chain market, as Coinbase does with Morpho on Base. The label alone does not tell you who can move collateral or what happens during liquidation.
| Platform | Type | Collateral arrangement | Access | Example collateral |
|---|---|---|---|---|
| Ledn | CeFi loan | Custodied BTC; terms permit limited re-posting for USD funding | Identity and location checks | BTC |
| Nexo | CeFi credit line | Platform account and collateral terms | Account and location checks | BTC, ETH, other eligible assets |
| Coinbase | Coinbase interface to Morpho on Base | BTC becomes cbBTC for a BTC-backed USDC loan | Verified eligible account | BTC and other eligible assets |
| Aave | On-chain protocol | Smart contracts on supported networks | Wallet; interface restrictions may apply | Market-specific tokens, including ETH and tokenised BTC |
| Ducat | Bitcoin L1 protocol | 2-of-2 Taproot vault with borrower and Guardian signing | Closed alpha; jurisdiction limits | Native BTC |
CeFi products can offer fiat disbursement and customer support, but custody and permitted uses of BTC differ. Ledn's current explanation says collateral may be re-posted to a USD funding partner but may not be lent onward to generate yield. Read the actual loan agreement, including insolvency and recovery terms.
On-chain products rely on software, price feeds, tokens, signing arrangements, and sometimes a company's interface. Aave lists smart-contract, oracle, collateral, and network risks. A non-custodial label does not remove those dependencies or liquidation risk.
Interest Rates Compared (2026)
Pricing changes with loan size, collateral, duration, location, and market demand. The table describes the published pricing model, not a guaranteed quote. Provider pages were checked on 11 October 2026.
| Platform | Borrowing Rate | Loan Currency | Notes |
|---|---|---|---|
| Ledn | Tiered fixed APR; check current offer | USD, USDC where available | 12-month loan; exact rate and fees depend on loan and location |
| Nexo | Rate depends on tier, LTV, and location | Fiat or stablecoins where available | The advertised starting rate may require a low LTV and a qualifying tier |
| Coinbase | Variable market rate plus Coinbase's ongoing fee | USDC | Morpho on Base; BTC collateral is converted to cbBTC |
| Aave | Variable by market utilisation | Market-specific tokens | Review live rate, health factor, and liquidation settings |
| Ducat | No ongoing interest; 7% (11 Oct 2026 snapshot) one-time minting charge | UNIT; verify any separate conversion | Verify current access, eligibility and net proceeds |
An upfront fee and an annual rate have different costs at three, six, and twelve months. Compare the same net proceeds and duration, including conversion costs, interest, origination charges, and any repayment or liquidation fees. Aave's rate changes with utilisation; a one-time Ducat charge does not accrue with time but can be expensive for a short loan.
Read the Bitcoin Loans guide for the broader mechanics, or the 2026 loan rates comparison for a cost-focused breakdown.
Tax Implications
Tax treatment depends on your jurisdiction, legal ownership of collateral, the asset you receive, and how the position closes. The points below are questions to check, not tax advice.
Taking a loan without selling BTC may be treated differently from selling it. But transferring crypto into a lending arrangement, converting it to a wrapped token, receiving or disposing of stablecoins, and paying with collateral can have separate consequences.
Repayment is not automatically tax-neutral either: the source and type of repayment asset, interest or fees, and any token conversions matter. Keep transaction records and the loan agreement.
Liquidation can involve a sale or other disposal of collateral, which may create a gain or loss even though the sale was automatic. Tax may also arise on related swaps or transfers. Do not assume that borrowing always defers tax until you choose to sell.
In the UK, read HMRC's individual cryptoasset guidance and its 2026 cryptoasset-loan policy paper; the latter describes proposed rules with a 2027 start date. In the US, IRS Notice 2014-21 sets out general virtual-currency treatment but does not answer every loan scenario. Ask a qualified local adviser about your structure.
A possible benefit is access to liquidity without an immediate BTC sale. Whether that benefit applies to your transaction requires a review of the actual custody, token-conversion, and repayment steps.
The Bitcoin L1 Advantage
Bitcoin-backed lending can use company custody, a collaborative or protocol vault on Bitcoin, or tokenised BTC in a lending market on another network. Coinbase's documented USDC loan, for example, converts pledged BTC to cbBTC on Morpho on Base.
Each route has different dependencies. Custody agreements determine who can use or move BTC. Tokenised BTC depends on its issuer and network, while on-chain markets depend on contracts and price feeds. A Bitcoin-native vault avoids wrapping the pledged BTC but still depends on its signing and liquidation design.
With a Bitcoin L1 vault, the pledged asset stays as native BTC on Bitcoin. That can avoid the tokenisation and second-chain dependencies of a wrapped-BTC loan. It does not make the vault risk-free: review the Guardian or cosigner role, price oracle, recovery path, and liquidation rules.
Ducat's borrow page describes borrowing UNIT against BTC on Bitcoin L1. The 11 October 2026 review recorded a 7% one-time minting charge with no ongoing interest; verify current fees, net proceeds and debt in the app. Do not assume a UNIT loan includes automatic USDC delivery. Check eligibility, available networks and any separate conversion route before borrowing.
If that model fits your needs, read how borrowing against Bitcoin without bridges works, compare non-custodial crypto loans, and review Ducat's borrowing terms.
Choosing the Right Platform
The right crypto backed loan depends on what you value most.
If you want a fiat payout and human support, a custodial lender such as Ledn may suit you. Check where BTC is held, whether it may be re-posted, and what happens if the lender or a funding partner fails.
If avoiding custodial transfer matters most, compare the specific smart-contract or vault design. Aave's markets operate on supported networks with market-specific rates and liquidation rules. Ducat keeps native BTC collateral on Bitcoin L1, but its Guardian signing, oracle, current access, and any separate conversion still deserve review.
Choose an LTV only after calculating your own liquidation price and total repayment cost. Monitor the position and know how to add collateral or repay if the market moves.
Borrowing need not sell your BTC at the start. Liquidation may sell it later.
Provider product pages and public terms checked on 11 October 2026. Rates, eligibility, and product routes can change; the offer shown before borrowing governs.
