What Is a Crypto Loan? Definition, How it Works, & More

A crypto loan is a kind of overcollateralized loan that lets borrowers access cash or stablecoins by locking up a larger amount of cryptocurrency as collateral instead of selling it. These loans are often used to unlock liquidity while avoiding taxable sales, maintain exposure to the crypto market, or avoid traditional credit checks.

Crypto loans are becoming one of the most popular parts of the decentralized finance ecosystem because of their unique utility, mostly because they don’t operate like traditional loans. Instead of basing the loans on income, creditworthiness, or employment, crypto loans are mostly determined by the value of the pledged collateral.

In this guide, we will explain what crypto loans are, how they work, and the different existing models (CeFi and DeFi). We will also explore the requirements for these loans, their utility, and the advantages and disadvantages to consider before using them.

What Is a  Crypto Loan?

A crypto loan is a kind of borrowing agreement that allows users to deposit cryptocurrencies as collateral in exchange for a loan, often denominated in stablecoins. Some crypto loan platforms allow users to take out fiat currency, but most only offer stablecoin loans. This is because they are significantly easier to issue and settle, and they fit in well with DeFi apps and crypto exchanges.

As we mentioned above, the vast majority of crypto loans don’t require any kind of credit check, income information, or even employment status. Instead, they are entirely based on the value of the crypto you provide as collateral. The amount the borrower can access is determined by the lending app’s chosen Loan-to-Value (LTV) ratio, which is just the percentage of the collateral’s market value that can be borrowed.

For example, if a user puts up $10,000 in cryptocurrency with a loan platform offering an LTV of 50% for the given crypto asset, they would be able to receive a loan of up to $5,000. Once the borrower fully repays the loan and the accrued interest, the platform releases their collateral back to them. However, it’s also important to understand what happens when the value of your collateral falls below the platform’s required threshold.

When this happens, the borrower may receive a margin call, requesting more collateral to cover the position. Depending on the platform and its rules, part of the borrower’s collateral may be liquidated to restore the loan’s LTV and limit further losses for the lender. This system, combined with the immense volatility of the crypto market, is why crypto loans can be risky.

Both centralized and decentralized platforms offer crypto loans, but they often work slightly differently. Centralized loan platforms manage the custody of the collateral, the loan, and the repayment terms. Decentralized platforms essentially do all of the same things, except they use smart contracts to automatically enforce interest rates, collateral requirements, and liquidations.

How Does a Crypto Loan Work?

Before we take a deep dive into how crypto loans work, we should note that the exact steps, requirements, and risks all depend on the platform and kind of loan you use. That being said, let’s explore exactly how crypto loans work,  step-by-step.

Step 1: Deposit Cryptocurrency as Collateral

The first step of getting a crypto loan, aside from picking a platform and signing up (if necessary), is to deposit your chosen crypto as collateral. Most borrowers use more stable assets like a stablecoin, Bitcoin, or Ethereum. Note that even BTC and ETH can be volatile enough to lead to margin calls or even liquidations if you aren’t careful (or are just unlucky).

Your LTV ratio will depend on the coin you choose as collateral. Generally, the most stable and trusted coins like USDC will offer the highest LTV rates, meaning that you can borrow more for the same value of collateral. This is because the lender is taking on less risk compared to accepting a more volatile asset.

The next step depends on whether the user wants to borrow from a centralized or decentralized platform. With centralized lenders, users typically have to deposit the coins they want to use as collateral into a custodial wallet. With decentralized protocols, they connect their own, non-custodial wallet to the app and lock their coins into a smart contract.

Note that once the loan is active, the borrower cannot simply trade or withdraw the collateral. However, many platforms allow borrowers to repay the loan at any time to receive the collateral back.

Step 2: Determine Loan Size With LTV

Now the platform has to determine the size of the loan using its LTV ratio. Remember that LTV simply represents the percentage of the collateral’s current market value that can be borrowed. Let’s look at an example where a user supplies $10,000 in ETH as collateral, and the platform offers a 50% LTV ratio for ETH. The user would be able to receive up to $5,000.

However, it’s often not ideal to borrow the maximum amount available, as it would leave you with little or no buffer against regular market volatility. If the value of your collateral falls even a small amount, you may be hit with a margin call or even a partial liquidation. It’s also possible to face margin calls or liquidations when your collateral asset remains stable if the asset you borrowed increases in value.

Step 3: Issue the Loan

Now that the collateral has been deposited, the LTV has been calculated, and the borrower has decided how much they want to borrow, the funds are deposited into their wallet. While the vast majority of crypto loans are issued in cryptos and particularly stablecoins, some centralized platforms offer fiat currency withdrawals.

Unlike traditional loans, the borrower doesn’t have to follow a fixed repayment schedule. Interest on the loan accrues continuously and, with most platforms, the borrower can repay the loan whenever they want.

Step 4: Managing and Monitoring the Crypto Loan

It is absolutely essential to constantly monitor a crypto loan, especially if it has a high LTV ratio or if it’s denominated in an especially volatile coin. The volatility inherent in the crypto market can easily lead to liquidations within minutes or even seconds. Here are the two main ways that platforms respond when the LTV ratio rises above the threshold.

• Centralized platforms may send you a margin call, requesting more collateral to secure the loan.
• Both centralized and decentralized platforms may liquidate some or all of the position to restore the LTV.

It’s important to note that while some centralized lenders may issue margin calls via emails or app notifications, DeFi platforms usually use automatic liquidations, executed by smart contracts with no warnings.

Benefits and Limitations of Crypto Loans

Borrowing money with cryptocurrencies offers significant benefits compared to traditional loans, especially for investors looking to unlock liquidity. However, it also comes with multiple major downsides and risks that must be carefully considered.

Here are the main benefits of crypto loans:

• Potentially low interest rates: Depending on the app and assets, some crypto loans offer relatively low interest rates compared to traditional loans.
• Immediate approval: As long as you have the necessary collateral, you can borrow with crypto in seconds.
• No credit check: Most crypto lenders don’t require any kind of credit or income check.
• Flexible use of funds: Borrowed funds can usually be allocated for any legal purpose, from paying debts to investing in new assets.
• Tax efficiency: Crypto loans can be used to gain liquidity without a taxable event, deferring capital gains taxes, depending on the jurisdiction and individual tax circumstances.

It’s also vital to carefully assess the downsides and risks of these kinds of loans. Here are the main factors that you need to know:

• Liquidation risk:  If the value of the provided crypto collateral drops significantly, the collateral may be partially or entirely liquidated to maintain the LTV, potentially leading to permanent loss of funds.
• Margin calls: Additional injections of cryptocurrencies may be required to restore the LTV.
• Limited access to collateral: While the loan is active, the collateral assets are locked and cannot be traded or transferred elsewhere.
• Market volatility: The volatility of cryptocurrencies can quickly compound risk, potentially leading to liquidations or large margin calls.

What Is the Future of Crypto Loans?

While crypto loans have relatively limited use cases because of their major collateral requirements, they will likely remain a powerful tool for some crypto traders looking for liquidity without selling their assets. Crypto loans have been around for nearly a decade now, slowly evolving and maturing over the years, leading to a much more standardized and transparent tool.

Despite their utility in certain use cases, it’s essential to always carefully consider the risks of these kinds of tools as they can be devastating if used incorrectly. Most of the risk comes down to market volatility, which can quickly lead to massive margin calls or liquidations, but there are also plenty of platform-specific risks like counterparty exposure or smart contract vulnerabilities.

At least for the time being, it seems like crypto loans aren’t going anywhere, and they will likely continue to evolve and become more useful over time. They are often not a great substitute for traditional borrowing, but they can be a powerful tool for those who understand the risks and know how to use them strategically.

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Julia Sakovich

Senior Editor, 1256 posts

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I’m a content writer and editor with extensive experience creating high-quality content across a range of industries. Currently, I serve as the Editor-in-Chief at Coinspeaker, where I lead content strategy, oversee editorial workflows, and ensure that every piece meets the highest standards. In this role, I collaborate closely with writers, researchers, and industry experts to deliver content that not only informs and educates but also sparks meaningful discussion around innovation.

Much of my work focuses on blockchain, cryptocurrencies, artificial intelligence, and software development, where I bring together editorial expertise, subject knowledge, and leadership experience to shape meaningful conversations about technology and its real-world impact. I’m particularly passionate about exploring how emerging technologies intersect with business, society, and everyday life. Whether I’m writing about decentralized finance, AI applications, or the latest in software development, my goal is always to make complex subjects accessible, relevant, and valuable to readers.

My academic background has played an important role in shaping my approach to content. I studied Intercultural Communications, PR, and Translation at Minsk State Linguistic University, and later pursued a Master’s degree in Economics and Management at the Belarusian State Economic University. The combination of linguistic, communication, and business training has given me the ability to translate complex technical and economic concepts into clear, engaging narratives for diverse audiences.

Over the years, my articles have been featured on a variety of platforms. In addition to contributing to company blogs—primarily for software development agencies—my work has appeared in well-regarded outlets such as SwissCognitive, HackerNoon, Tech Company News, and SmallBizClub, among others.