Quick answer: Borrowing against digital assets means pledging crypto such as Bitcoin or Ethereum as collateral for a loan of cash or stablecoins, without selling the crypto. You keep your position and its upside, and in most cases the loan itself is not a taxable sale. The tradeoff is real risk: if the collateral’s price falls, you can face a margin call or forced liquidation, and if the platform holding your coins fails, you may lose them. It can be a useful tool, but it is not free liquidity.
Prefer the app?Watch on YouTube
By Jake Claver. Educational content, not investment advice.
The pitch is straightforward: instead of selling crypto and triggering a taxable event, you borrow against it and keep your exposure. That structure is real and widely used, but the mechanics and the failure modes deserve as much attention as the benefits. For Jake Claver’s full walkthrough and examples, watch the video above. Below is a grounded explainer of how these loans work and where they go wrong.
How crypto-backed lending works
You deposit crypto as collateral and receive a loan, usually in dollars or a stablecoin. The size of the loan is governed by the loan-to-value ratio, or LTV: borrow $4,000 against $10,000 of Bitcoin and your LTV is 40 percent. Lower LTV means more cushion before trouble. You pay interest, and when you repay the principal and interest you get your collateral back. Because you have not sold the asset, the loan is generally not a disposal for tax purposes, though the IRS digital assets guidance treats crypto as property, and an actual sale or forced liquidation of your collateral is a taxable event.
The risks you have to weigh
This is the part the marketing tends to underplay. Crypto is volatile, and the CFTC states plainly that the digital asset marketplace is largely unregulated and that fraud is a significant risk (see the CFTC digital assets resources). The specific dangers of borrowing against crypto include:
- Liquidation from price swings. If your collateral falls in value, your LTV rises. Cross a threshold and the lender can sell your collateral automatically, often at the worst possible moment, to protect the loan.
- Margin calls. Some platforms demand you add collateral quickly when prices drop, and failing to do so triggers liquidation.
- Rehypothecation. Some lenders reuse or lend out the crypto you posted. If their bets sour, your collateral can be caught up in their losses.
- Platform failure. The 2022 collapses of lenders such as Celsius, Voyager, and BlockFi froze and in cases wiped out customer balances. Crypto held on a platform is not covered by FDIC deposit insurance, which protects bank deposits, not crypto lending accounts.
CeFi versus DeFi lending
Centralized finance (CeFi) lenders operate like a company: you trust them to custody your collateral and honor the loan, and you rely on their solvency and risk controls. Decentralized finance (DeFi) protocols run on smart contracts, so the rules are transparent and automated, but you take on smart-contract bugs, oracle failures, and the reality that a mistaken transaction usually cannot be reversed. Neither model removes risk; they relocate it. CeFi concentrates counterparty risk in one firm, while DeFi concentrates it in code.
Where a crypto loan can make sense
Used conservatively, borrowing against digital assets can provide liquidity for a purchase or expense without selling a long-term holding and realizing gains. The people who tend to survive downturns keep their LTV low, understand the liquidation price in advance, and avoid borrowing against an asset they cannot afford to see cut in half. Treating a volatile asset as if it were stable collateral is how borrowers get liquidated.
Why this matters
Crypto-backed lending sits exactly where the technology story and the investment risk meet. The ability to access cash without selling is genuinely useful, but the same volatility that makes crypto attractive is what makes it dangerous collateral. Knowing the liquidation mechanics and the platform’s track record before you borrow is the difference between a planning tool and a forced sale at the bottom.
Common questions
Is borrowing against crypto a taxable event?
Taking out a loan is generally not a sale, so it usually does not trigger tax by itself. However, the IRS treats crypto as property, and if your collateral is liquidated or you sell it, that disposal can be taxable. Confirm your situation with a tax professional.
What is loan-to-value and why does it matter?
Loan-to-value is the loan amount divided by the value of your collateral. A lower LTV leaves more room for prices to fall before you risk a margin call or liquidation, so it is the main lever for managing risk.
Can I lose my crypto in a crypto-backed loan?
Yes. A sharp price drop can trigger liquidation of your collateral, and a platform failure or hack can put your funds at risk. Crypto on a lending platform is not FDIC insured.
What is the difference between CeFi and DeFi lending?
CeFi lending relies on a company to custody your collateral and manage the loan, concentrating counterparty risk in that firm. DeFi lending uses automated smart contracts, which are transparent but expose you to code bugs and irreversible transactions.
What happened to crypto lenders in 2022?
Several large lenders, including Celsius, Voyager, and BlockFi, collapsed and froze customer withdrawals during the 2022 downturn. Those failures are a reminder that lending platforms carry real solvency and custody risk.
This content is educational only. It is not tax, legal, or investment advice. Check primary sources and speak with a qualified professional before making financial decisions.
Background reading: how asset tokenization works.
Part of our guide: Crypto Taxes.
