Bitcoin-backed loans let holders access liquidity by pledging BTC as collateral—no forced exit into taxable events.
The mechanism is straightforward: deposit Bitcoin with a lending platform, receive a loan in dollars or stablecoins like USDT or USDC. The platform holds your BTC. You keep exposure to upside.
Loan terms are structured on loan-to-value (LTV) ratios. Typical LTVs run 30 to 70 percent depending on the lender and spot volatility. The lower the LTV, the more conservative the terms.
Margin calls come if Bitcoin price crashes hard enough to breach your LTV threshold. Miss the call—add collateral or pay down the loan—and the platform liquidates your BTC at market to cover the loan plus accrued interest. This is the real risk.
Centralized platforms like BlockFi and Genesis Global Capital handle KYC and AML checks, manage collateral custody, and set loan terms. You trust them with your keys and your collateral.
DeFi protocols offer on-chain alternatives: smart contracts handle collateral and liquidations with no intermediary. Platforms like Aave and Compound let you pledge Bitcoin (or wrapped Bitcoin on Ethereum) for loans without counterparty risk to a company—only to code.
The tax advantage is real. Selling BTC triggers a taxable event. A loan against BTC does not. You preserve position size and upside while moving fiat.
The risk tradeoff: centralized platforms carry counterparty and custody risk; DeFi carries smart contract risk. Liquidation in a sharp drawdown is the same across both. Know your LTV buffer and watch volatility.
