Borrowing against digital assets works differently than a traditional loan. You put up crypto as collateral, and depending on the platform, you can be funded in under an hour with no credit check. There’s no underwriting in the traditional sense because the loan is collateralized well above the amount borrowed.
How the structure works
A common setup is a 45% loan-to-value ratio, meaning you’re posting roughly two dollars of collateral for every dollar borrowed. Many advisors consider a lower LTV, in the 20 to 30% range, a more conservative and responsible way to use this structure, since it leaves more room before a margin call. These loans typically carry simple interest with a balloon payment at the end, though many lenders let you roll the balance forward instead of paying it off in full.
Here’s what that looks like in practice. Say you put up $1 million in assets and borrow at 20% LTV, that’s $200,000. At roughly 12% annual interest, you’d owe about $24,000 a year, or roughly $2,000 a month, just in interest. When the loan term ends, you can pay off the balloon, sell a portion of your holdings to cover it, or roll the loan and keep paying interest. Which option makes sense depends on whether your collateral has appreciated and how much liquidity you actually need at that point.
Why the counterparty structure matters
The difference between this kind of collateralized lending and a decentralized smart contract loan shows up most clearly during a liquidation event. Anyone holding a position through a smart contract during a sharp price drop typically gets liquidated automatically once the loan-to-value ratio breaches its threshold, no negotiation, no grace period. With a managed counterparty relationship, capital calls can be met directly instead of triggering an automatic sale, which is what determines whether you keep your position or lose it outright.
The tradeoffs to weigh
This is not a strategy without risk. Interest still accrues, collateral value can drop, and a margin call still needs to be met one way or another, whether through additional collateral or liquidation. It’s a tool for people who have a specific reason to access liquidity without selling their position outright, not a default move, and it should be sized conservatively rather than aggressively. Anyone considering it should understand the LTV math, the interest cost, and exactly what happens if the collateral value drops before deciding it’s the right structure for their situation.
Educational only, not tax, legal, or investment advice. Check primary sources and speak with a qualified professional before making financial decisions.
