Crypto loans

A crypto loan lets you get one asset, usually a stablecoin such as USDT or USDC, without selling the coins you already hold. You lock those coins as collateral, borrow against them, pay interest while the loan is open, and get the collateral back once you repay. Exchanges offer these loans as a product of their own, and DeFi protocols run them through smart contracts.

Typical use: you hold BTC, need dollars for a few weeks and do not want to sell. You pledge BTC, borrow USDT, spend or trade it, then repay the USDT plus interest and unlock your BTC. Traders also borrow one coin against another to take a position or to cover a short-term need on another market.

How it works

Almost every crypto loan is overcollateralized: the collateral is worth more than the loan. The key number is the loan-to-value ratio (LTV), which is the loan amount divided by the current collateral value.

• Initial LTV: the most you can borrow at the start, often 50% to 80% depending on the coin.
• Margin call LTV: the level where the platform warns you to add collateral or repay part of the loan.
• Liquidation LTV: the level where the platform sells some or all of your collateral automatically to repay the debt, often with a penalty fee on top.

Example: you pledge 1 BTC worth $100,000 and borrow 50,000 USDT, so your LTV is 50%. If the liquidation LTV is 83%, liquidation starts when BTC falls to about $60,240 (50,000 / 0.83). Interest that builds up also raises your LTV over time.

Interest is usually charged hourly or daily on what you owe. Rates depend on the asset, demand from other borrowers and the loan term.

Types of crypto loans

On the other side of the market, lenders deposit coins that others can borrow and earn interest on them. That is closer to an earn product than to a loan, and staking is a different thing again.

Why people use them

• Keep your position: you get cash flow without selling, so you keep any upside and do not trigger a sale.
• No credit check: the collateral secures the loan, so approval is fast and does not depend on credit history, though exchanges still require KYC.
• Choice of assets: you can usually borrow stablecoins or major coins against a range of collateral.

Tax rules vary by country. In many places, borrowing against crypto is not a taxable sale, but a liquidation usually is. Check your local rules.

Limits and risks

• Liquidation: crypto prices can move 20% or more in a day. A sharp drop can liquidate your collateral before you react, and the penalty fee adds to the loss.
• Capital tied up: overcollateralization means you lock far more than you borrow.
• Rate changes: flexible rates can rise sharply when many users want to borrow the same coin.
• Platform risk: a centralized lender holds your collateral. Several lenders froze withdrawals and went bankrupt in 2022. Proof of Reserves helps you judge an exchange but is not a full audit.
• Smart contract and oracle risk in DeFi: bugs or bad price feeds can cause losses or wrong liquidations.
• Leverage loops: using borrowed funds for futures trading or more collateral multiplies liquidation risk.

What to check when comparing platforms

• Which coins you can borrow and which you can pledge, plus the initial, margin call and liquidation LTV for each.
• The interest rate, how often it is charged and whether it is fixed or variable.
• Liquidation penalty, and whether liquidation is partial or total.
• Alerts for margin calls, and whether you can add collateral or repay part of the loan at any time.
• Minimum and maximum loan sizes, terms and early repayment fees.
• Whether pledged collateral is reused or lent out, plus the platform's licensing, reserves and availability in your country.