Step-by-step guide to borrowing money against your Bitcoin holdings without selling.
Borrowing against Bitcoin allows you to unlock the value of your Bitcoin holdings without selling them. This strategy is popular among long-term Bitcoin holders who need liquidity but want to maintain their BTC position and avoid taxable events.
Step-by-Step Process
To borrow against Bitcoin: (1) Choose a lending platform (CeFi or DeFi) that fits your needs and risk tolerance, (2) Complete any required KYC verification (for CeFi platforms), (3) Transfer your Bitcoin to the platform or deposit it into a smart contract (for DeFi), (4) Select your loan amount based on the available LTV ratio - most platforms offer 25% to 70% LTV, (5) Review and accept the loan terms including interest rate, liquidation threshold, and repayment terms, (6) Receive your loan funds (typically in USD, USDT, or other stablecoins), and (7) Set up monitoring and alerts to track your loan health and prevent liquidation.
Understanding Loan-to-Value (LTV) Ratios
The Loan-to-Value ratio is the percentage of your Bitcoin's value that you can borrow. For example, if you have $10,000 worth of Bitcoin and take a loan with 50% LTV, you can borrow $5,000. Your LTV ratio changes as Bitcoin's price fluctuates. If Bitcoin's price drops to $8,000, your $5,000 loan now represents 62.5% LTV ($5,000 / $8,000). This is why monitoring is critical. Most platforms start liquidating collateral when LTV reaches 70-90%. Choose a conservative initial LTV (30-50%) to give yourself a buffer against price volatility.
Collateralization and Security
When you borrow against Bitcoin, your BTC is locked as collateral. In CeFi platforms, the company has custody - your Bitcoin is held in their wallets, often with insurance and security measures. In DeFi protocols, your Bitcoin (usually wrapped as WBTC or similar) is locked in a smart contract that automatically handles liquidations based on predefined rules. Neither method is inherently more secure - CeFi introduces counterparty risk (the platform could be hacked or become insolvent), while DeFi introduces smart contract risk (bugs or exploits in the code). Research the platform's security track record before depositing significant Bitcoin.
Tax Advantages
One of the primary reasons to borrow against Bitcoin rather than selling is tax efficiency. In most jurisdictions, selling Bitcoin triggers a capital gains tax event. If you bought Bitcoin at $10,000 and it's now worth $60,000, selling would create a $50,000 taxable gain. Borrowing against it instead allows you to access liquidity without triggering this tax event. You maintain full exposure to your Bitcoin's future price appreciation, and when you eventually sell (ideally in a year with lower income or after holding for long-term capital gains treatment), you may face a lower tax burden. Always consult with a tax professional for your specific situation.
When to Borrow Against Bitcoin
Borrowing against Bitcoin makes sense in several scenarios: (1) You're a long-term holder who needs short-term liquidity, (2) You're confident Bitcoin will appreciate or remain stable, (3) You want to avoid capital gains taxes, (4) You need funds but don't want to sell at what you consider a low price, (5) You want to leverage your Bitcoin for investments or purchases without losing BTC exposure, or (6) You're implementing a strategic financial plan that includes both crypto holdings and traditional finance needs. Borrowing against Bitcoin is not ideal if you need long-term debt (interest costs accumulate), if you're already highly leveraged elsewhere, or if you can't monitor and respond to margin calls.
Monitoring and Maintaining Your Loan
Active monitoring is essential when borrowing against Bitcoin. Bitcoin's price volatility means your LTV can change significantly in hours. Best practices include: checking your LTV daily (or using automated tools like Margin Watch that monitor 24/7), setting up email or SMS alerts for LTV thresholds (e.g., alert at 60% LTV if liquidation is at 75%), maintaining cash reserves equal to 10-20% of your loan value to add collateral if needed, understanding your platform's margin call process and timelines, and having a plan before Bitcoin drops 20-30%. The 14-day risk outlook feature in Margin Watch shows you how your loan would perform in various bear market scenarios, helping you prepare and avoid surprises.
Calculate Your Liquidation Price
Use our free Bitcoin liquidation calculator to see your exact risk level and liquidation price based on your loan details. Includes bear market scenarios and safety margin analysis.
Open Calculator →Protect Your Bitcoin Loan with Margin Watch
Don't just learn about loan risks - actively monitor and prevent them. Margin Watch tracks your LTV 24/7, sends instant alerts, and provides 14-day risk outlooks.
Frequently Asked Questions
What is the minimum amount I can borrow against Bitcoin?
Minimum loan amounts vary by platform. CeFi platforms typically have minimums ranging from $500 to $5,000, while DeFi protocols often have no fixed minimum (though gas fees may make very small loans impractical). The minimum depends on your collateral value and the platform's LTV ratio. For example, with a $1,000 minimum loan and 50% LTV, you'd need at least $2,000 worth of Bitcoin as collateral.
Can I repay my Bitcoin loan early?
Yes, most platforms allow early repayment without penalties. In fact, early repayment is encouraged as it reduces your risk and total interest paid. With DeFi protocols, you can typically repay at any time and immediately withdraw your collateral. CeFi platforms may have specific processes but generally support early repayment. Check your platform's terms, as some may have minimum interest periods.
What if I want to withdraw some Bitcoin while maintaining the loan?
You can only withdraw Bitcoin that exceeds the collateral requirement for your loan. For example, if you have $10,000 worth of Bitcoin collateral and a $3,000 loan with 50% LTV, you're only using $6,000 worth of Bitcoin as required collateral ($3,000 / 0.5 = $6,000). You could potentially withdraw $4,000 worth of Bitcoin. Most platforms provide calculators showing how much collateral you can safely withdraw without triggering liquidation.
How do I avoid liquidation when borrowing against Bitcoin?
To avoid liquidation: (1) Start with a conservative LTV ratio (30-50% instead of the maximum), (2) Monitor your loan health daily or use automated tools like Margin Watch, (3) Set up alerts for LTV thresholds well before liquidation levels, (4) Keep reserve funds ready to add collateral or pay down the loan, (5) Act quickly when you receive margin call warnings - don't wait until the last minute, and (6) Consider your Bitcoin price outlook and market conditions before taking a loan.
Is borrowing against Bitcoin better than selling it?
It depends on your situation. Borrowing is generally better if: (1) You believe Bitcoin will appreciate and want to maintain exposure, (2) Selling would trigger significant capital gains taxes, (3) You need short to medium-term liquidity, and (4) You can actively monitor and manage the loan. Selling might be better if: (1) You believe Bitcoin's price will decline significantly, (2) You need long-term, not short-term funds (ongoing interest costs), (3) You cannot actively monitor a loan, or (4) You're already highly leveraged. Consider both options carefully based on your financial situation and Bitcoin outlook.
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