Say you bought Bitcoin a couple of years ago and it’s up nicely. Then a big bill lands: a house deposit, a tax payment, a car repair.
Selling would solve it in minutes, but you’d also be out of a position you believed in, possibly just before the next leg up.
Selling is the simplest way to turn crypto into cash, and it’s also final. You give up any future upside, and in many countries you may trigger a taxable event too. That’s why some holders now look at the alternative: borrow against crypto instead of selling it.
Crypto Loan vs. Traditional Lending
A crypto-backed loan works much like a mortgage or a car loan. You pledge your crypto as collateral, and it determines how much you can borrow. You receive cash or stablecoins, and when you repay, you get your coins back.
Two things set it apart from a traditional loan. The first is that lenders typically don’t run credit checks. There’s no paperwork and no credit score involved, because the loan is secured by your collateral.
That makes a loan against crypto open to anyone with enough assets, including people with no credit history yet.
The loan also doesn’t affect your credit score, and you can spend the money on anything, from an emergency to a planned purchase.
The second is that these loans are over-collateralized, which protects the lender when prices swing. You borrow less than your crypto is worth, and the exact ratio (loan-to-value, or LTV) depends on the lender.
For example, if you deposit $10,000 of Bitcoin, you might be able to borrow up to around $7,000 (70% LTV).
In most apps with a loan feature, the process looks like this:
- Choose the asset you want to use as collateral and the one you want to borrow.
- Enter an amount and check the maximum you’re eligible for.
- Confirm, and the funds usually land in your balance within moments.
Fixed Loan or Credit Line?
A standard crypto loan has a fixed term, typically from a few months up to a year. A credit line is the flexible version, also borrowed from traditional finance.
There’s no fixed term and no repayment schedule, and the line stays open as long as you keep enough collateral.
Some platforms reward conservative borrowers with lower rates.
On Clapp, for instance, the interest on a credit line depends on your LTV and can be as low as 0% in the lowest band.
Its credit line also works as a multi-collateral pool: you can borrow against up to 25 different assets at once, and you can reshuffle that stack while the line is active.
If you want to add some ETH or rebalance after a big price move, there’s no need to close the line and start over.
That flexibility is handy when markets shift, because the mix of assets backing your line affects your LTV. And since LTV moves with prices, it’s worth checking it now and then.
So What’s the Catch?
Crypto is volatile. If your collateral drops far enough in value, your LTV can cross the lender’s liquidation threshold, which typically falls between 75% and 85%, depending on the platform, asset, and loan terms.
At that point the lender may sell part or all of your collateral to cover the loan.
This tends to happen in fast-falling markets. Many platforms warn you when your LTV gets close to the limit, so you have time to add collateral or repay part of the loan. Borrowing well below your maximum gives you a bigger cushion.
Why Borrowing Can Beat Selling
The first advantage is that you keep your position. A crypto loan with collateral can get you the cash and let you hold on to your coins at the same time.
As long as the collateral stays in place, you keep your exposure to price moves. If the market rises, you benefit as if you’d never borrowed.
The second is tax. In many jurisdictions, selling crypto counts as a disposal and can trigger a tax bill, while borrowing against it generally doesn’t, unless the collateral gets liquidated.
If you’re weighing a crypto loan in the UK, for example, selling is generally treated as a disposal for Capital Gains Tax purposes. Rules differ by country and situation, so check your local guidance or talk to a tax adviser first.
Crypto Loan, UK and Beyond: How Tax Treatment Differs
In the UK, HMRC treats selling crypto as a disposal for Capital Gains Tax purposes, so a sale can lead to a tax bill.
Borrowing against crypto is generally not treated as a disposal. If the collateral is liquidated, though, the lender’s sale may count as one.
The US follows a similar logic. The IRS treats crypto as property, so selling at a profit triggers capital gains tax, much like stocks.
Other countries have their own rules, and some treat crypto-backed borrowing differently, so local guidance or a tax adviser is the safest source before borrowing.
The Takeaway
Before you sell, ask whether you actually need to. If you only need cash for a while, a crypto collateral loan can bridge the gap without closing your position.
Keep your LTV conservative and read the liquidation rules. How your local tax rules treat both options is worth confirming too.
The post Don’t sell your Bitcoin: how a crypto-backed loan works appeared first on Invezz
