Frequently Asked Questions

Bitcoin-backed loans differ from traditional loans in several key ways:

There are several potential advantages to borrowing against your Bitcoin rather than selling it:

• Tax advantages: In many jurisdictions, loans are not taxable events, whereas selling Bitcoin may trigger capital gains taxes.
• Retain upside potential: If you believe Bitcoin will appreciate in value, a loan allows you to keep your BTC exposure while accessing cash.
• Avoid emotional selling: Loans provide liquidity without forcing you to sell during market downturns.
• Leverage: You can potentially use the borrowed funds for other investments while still maintaining your Bitcoin position.

Of course, these benefits must be weighed against the interest costs and liquidation risks associated with Bitcoin-backed loans.

Most lenders offer loans at 30%-70% of your Bitcoin's value (Loan-to-Value ratio or LTV). For example:

• With $10,000 worth of Bitcoin and a 50% LTV, you could borrow around $5,000
• With $100,000 worth of Bitcoin and a 50% LTV, you could borrow around $50,000

Lower LTV ratios (e.g., 30-40%) typically offer better interest rates and lower liquidation risk, but provide less immediate capital. Higher LTV ratios (e.g., 60-70%) provide more immediate capital but come with higher interest rates and increased liquidation risk if Bitcoin's price falls.

Interest rates for Bitcoin-backed loans typically range from:

• 5-8% APR for lower LTV loans (30-40% LTV)
• 8-12% APR for medium LTV loans (40-60% LTV)
• 12-15%+ APR for higher LTV loans (60-70% LTV)

Some decentralized finance (DeFi) platforms might offer lower rates, while some services charge additional origination fees (typically 1-2% of the loan amount). Interest rates can also vary based on loan duration, market conditions, and whether you're borrowing fiat currency or stablecoins.

Many Bitcoin lenders don't require credit checks since the loan is secured by your cryptocurrency collateral. This is one of the main advantages of Bitcoin-backed loans—approval is based on the collateral, not your credit history.

However, there are some important considerations:

• Most regulated services will still require KYC (Know Your Customer) verification to comply with anti-money laundering regulations
• Some traditional financial institutions that offer crypto-backed loans might still consider credit scores
• Decentralized finance (DeFi) platforms typically require no KYC or credit checks at all

Each lending service has different requirements, so check with the specific provider you're considering.

If Bitcoin's price drops significantly while you have an active loan, your collateral value might fall below the lender's required threshold. This triggers a series of events:

1. Margin call: You'll receive a notification (email, SMS, or app alert) asking you to add more collateral or partially repay the loan to restore the required loan-to-value ratio.
2. Grace period: Most lenders provide a time window (typically 24-72 hours) for you to respond to the margin call.
3. Liquidation: If you don't add more collateral or partially repay during the grace period, the lender will automatically sell some of your Bitcoin collateral to bring the LTV back to an acceptable level.

The specific thresholds and processes vary by lender. For example, with a 50% LTV loan, a margin call might be triggered if the LTV reaches 65-70%, and liquidation might occur at 75-80% LTV.

Security varies significantly depending on the type of lending platform:

• Custodial services: These platforms take full custody of your Bitcoin. Look for those with strong security measures like cold storage, insurance coverage, and third-party audits.
• Multi-signature solutions: These services use multi-signature wallets where you, the platform, and sometimes a third party each hold a key. This provides better security than fully custodial options.
• Non-custodial/DeFi platforms: These use smart contracts to lock your collateral, avoiding single points of failure. Your funds are controlled by code rather than a company.

When choosing a platform, consider:

• Their security track record and history of breaches
• Insurance coverage for digital assets
• Regulatory compliance and jurisdiction
• Proof of reserves attestations
• Whether they practice rehypothecation (reusing customer collateral)