What is a bitcoin-backed loan?

A bitcoin-backed loan, or BTC loan, is a loan secured by bitcoin. The borrower pledges BTC, receives cash or a stablecoin, and gets the bitcoin back after repaying the loan and interest. It is the most common form of crypto-backed loan, and it works much like a pawn loan or a margin loan. The broader mechanics are in crypto lending and borrowing.

How does bitcoin-backed lending work?

The loan size is set by loan-to-value, or LTV. Decrypt reported in October 2026 that typical LTVs run from about 30% to 70%, with many lenders starting at 50%. At 50%, bitcoin worth $100,000 supports a $50,000 loan. There is usually no credit check, because the collateral protects the lender.

Terms vary. Decrypt describes some loans with fixed 12-month terms and monthly interest, and others, such as Coinbase's, with no monthly payments or deadline while interest builds on the balance. Origination, prepayment and liquidation fees can push the real cost above the headline rate.

What happens if bitcoin's price falls?

LTV rises, and that is the main risk. Coinbase's help page, for loans it offers through the Morpho protocol, defines a liquidation LTV for each market. In its example of an 86% limit, an LTV of 77.4% puts the loan in danger and triggers an email, and at 86% the collateral is liquidated automatically. LTV also creeps up as interest accrues. Borrowers can lower it by adding collateral or repaying part of the loan.

Centralized lenders may issue a margin call first, Decrypt notes, while DeFi smart contracts act automatically. What follows a forced sale is covered in what happens if you get liquidated in crypto.

Can you use bitcoin as collateral and still keep it safe?

That depends on the lender's model:

• Centralized lenders such as Ledn, Strike, Unchained, Nexo and Coinbase run identity checks, and the company or its custodian holds the bitcoin, according to Decrypt. Unchained uses a 2-of-3 multisig vault so no single party can move the coins alone.
• Rehypothecation, meaning re-using collateral, varies. Ledn says the bitcoin in its custodied loans may be re-posted to an institutional funding partner but not lent out for interest, and is held in segregated addresses. Decrypt notes that re-lending of collateral contributed to customer losses when Celsius and BlockFi failed in 2022.
• DeFi protocols such as Aave and Morpho hold collateral in smart contracts, usually with bitcoin wrapped into a token like WBTC. Aave lists smart contract, oracle and liquidation risks for users.

Is a BTC loan taxable?

Decrypt says borrowing is often not a taxable event in many places, while selling usually is. In the US, the IRS says selling or exchanging crypto produces a capital gain or loss, so a liquidation that sells the collateral can create one even though the borrower never chose to sell.

Rules differ by country and change often. Check the tax authority or a qualified professional for your own situation.