How to Borrow Against Bitcoin Safely

The hardest part about owning Bitcoin has never been buying it; it has been hanging on through periods where money was needed elsewhere.

Ultimately, a factor will come into play: a medical bill, a property down payment, an opportunity you cannot afford to pass up. The natural reaction is to take some out, secure the profit, and keep going. This works fine, but it is a one-way door: once sold, you lock the profits in and close the trade out.

Using your Bitcoin as collateral to get a loan keeps this door open. You put your crypto up as security for the loan, withdraw the cash or stablecoin, and remain exposed to the future. Mismanagement of this process might just quietly rob you of your Bitcoin in the end.

What Does It Mean to Borrow Against Bitcoin

Borrowing against Bitcoin means using BTC as collateral to obtain a loan. As with any other loan, the Bitcoins serve as collateral, the platform provides the borrower with a loan in cash or stablecoins which needs to be returned later. This type of loan can be called a secured loan since it is comparable with a mortgage.

The advantage of borrowing Bitcoin is easy to notice and these benefits often overlap:

• You keep the cryptocurrency. If the price of BTC increases during the borrowing process, you keep all the gains from it.
• You keep your liquidity. With the help of the loan, you convert the long-term investment into spendable money.
• You do not have to close your position. A loan lets you turn your Bitcoin into spendable value without selling it.

How Bitcoin-Backed Loans Work

To sum up the process of borrowing against BTC, there are four key actions:

1. You put BTC as the collateral.
2. Then the platform calculates your borrowing capacity.
3. You receive the loan and pay interest on it.
4. You return the loan and get your BTC back.

Here is where the difference between the conventional bank loan and the cryptocurrency one comes in. While the former takes your income and credit history into account, the latter does not have anything to do with the borrower besides his or her collateral. Thus, crypto loans become instant once your assets are deposited, and you don’t even need a credit check since your BTC becomes the security.

The whole life of the loan will depend on its collateral’s market value, so in case BTC plummets, you will have to add more collateral.

Collateral, LTV and Overcollateralization

In a collateralized loan in bitcoin, the key indicator will be the Loan-to-Value (LTV) ratio. Simply put, LTV equals your loan amount divided by your collateral amount, expressed as a percentage.

If you put 10,000 USD worth of BTC into the contract and borrow 2,000 USD on top of it, your LTV will equal 20%. The lower the ratio, the larger the safety margin in which your collateral can drop without causing problems. Increasing the loan size makes your LTV ratio grow and reduces the safety margin.

As the value of your cryptocurrency is not stable, all crypto loans with collateral are overcollateralized. The collateral is worth more than your loan, providing a buffer before the loan becomes risky. The crypto loan is overcollateralized because of the high volatility of Bitcoin. Overcollateralization acts as an additional buffer for volatility.

The amount of money that you can take on the loan depends on the type of the asset and the platform. The more volatile the crypto asset, the lower its LTV cap. In the same way, the more stable the asset, the higher its cap. Most crypto-backed loans have an LTV cap of 50% – 75%.

The LTV ratio can increase in case your collateral goes down in value even if the loan amount did not change. For instance, if your initial 10,000 USD of BTC become worth only 8,000 USD while your loan amount is still 2,000 USD, the LTV ratio will grow from 20% to 25%, despite nothing changing on your side.

Reaching the threshold of the platform means that your collateral will be partially liquidated. Liquidation is an automatic forced sale of a part of your collateral. The whole process of dealing with crypto loans and LTV ratios can be described as avoiding liquidation.

Loan Currencies: Fiat, Stablecoins and Crypto

Depending on the platform, you will receive money in one of the three currencies:

• Fiat currency (dollars, euros, pounds etc.) transferred to your bank account. Mostly used by centralized lenders.
• Stablecoin (USDC, USDT etc.). It stays on-chain and can easily be transferred or spent.
• Other crypto. It’s possible, but uncommon for everyday borrowing.

While fiat currency requires additional efforts when it comes to spending, stablecoin provides the simplest option – it holds its value relative to the dollar, and you can transfer it straight onto your debit card or use it as you borrow, going from collateral straight to spending. XPlace, for example, lets you borrow in USDC, so the funds you borrow and spend are in a dollar-pegged stablecoin.

Types of BTC Loans and Crypto-Backed Lending

All BTC loans are not created equally; there are different models depending on the custody of your collateral, loan pricing, and repayment methods. The most distinct category is that of centralized finance (CeFi) versus decentralized finance (DeFi), while ongoing borrowing vs term loans form another one.

CeFi BTC Lending Platforms and Custodial Loans

CeFi borrowing is carried out by a company. You provide your BTCs to the platform, the company determines the amount that you may borrow, and you receive a loan. CeFi lending sites seem fairly conventional – there’s customer support, they accept fiat payments, and the flow is similar to an application form.

But there’s a problem of custody. On most CeFi lending platforms, the collateral remains on the company’s balance sheets, which means that you should trust that company to remain solvent and to return your Bitcoins on request.

The safety here is not guaranteed either. The European Supervisory Authorities (EBA, EIOPA and ESMA) warn that there may be little consumer protection when it comes to crypto lending providers, and recommend checking that a company is authorized before depositing money there. Regulations also differ a lot from one country to another, so your jurisdiction plays an important role.

In addition, some CeFi lending providers reserve the right to rehypothecate your collateral for earning some extra revenue. Rehypothecation will help to reduce interest rates but make it more difficult to withdraw the collateral in case the lending company fails. So when a provider doesn’t confirm the possibility of rehypothecation, you should assume it anyway.

DeFi Crypto-Backed Lending Protocols

DeFi lending replaces a company with code. Smart contracts manage the collateral, set the interest rates through supply and demand, and execute liquidations automatically. Thus, you retain on-chain ownership without transferring it to a company.

This eliminates the counterparty risk that has brought down many CeFi lending platforms. On the other hand, DeFi lending introduces smart-contract risk – bugs can still exist even in audited software. Smart contracts carry inherent risk, which audits reduce but never fully remove.

On Solana, Kamino Finance is currently a leading platform for crypto-backed lending, and among the largest lending protocols within the ecosystem. One peculiarity about Bitcoin: it does not exist on smart-contract chains. Therefore, most lending protocols need to wrap it into a token (such as cbBTC) before allowing it to be used as backing for bitcoin-based loans. Find out whether the platform wraps Bitcoin in some tokens.

Ongoing Borrowing vs Fixed-Term Loans

Here is another choice that you might consider. Fixed term loans provide you with a certain amount of money at once for a certain period of time with a certain deadline of repaying the loan. This is quite useful if you have one-time needs and if you know the amount and period beforehand.

Ongoing borrowing works somewhat differently. You do not receive one-off lump sums, but rather get access to a borrowing limit which you can draw on whenever necessary, usually as you spend, repaying according to your schedule. Nothing will be borrowed until you take advantage of it, and no interest is charged on the part you have not drawn. So, if you rely on the value of your crypto investment portfolio for earning, then ongoing borrowing would be more suitable than a lump-sum amount.

Borrow Against Your Bitcoin and Keep Your Upside with XPlace

The entire concept of XPlace is based on the idea of spending without selling. This is a non-custodial Visa card on Solana that enables you to borrow against your Bitcoin and other cryptocurrencies right during the payment.

Card spending is backed by borrowing against on-chain collateral. Supported assets can be used as collateral instead of being sold upfront, so you can access liquidity while keeping your crypto position. Just turn on Credit Mode in your card and your Collateralized Borrowing Limit becomes available once you tap.

Supported collateral includes BTC (as cbBTC), ETH (as wETH), SOL, jitoSOL, and USDT. Non-custodial throughout – your funds stay in your own wallet, or in audited smart contracts when you borrow. Not held by us.

Step-by-Step: How to Borrow Against Your Bitcoin

The specifics may differ slightly on different platforms, however, the overall structure of how to borrow against Bitcoin remains the same:

1. Pick your borrowing model. Determine whether you want CeFi or DeFi and choose between a fixed-term loan and ongoing borrowing. Compare custody services, audit, asset support and usage of the funds.
2. Provide your collateral. Send BTC (wrapped, e.g. cbBTC) or other assets accepted by the service to its smart contract or account. The deposit will set up the upper boundary of your borrowing capacity.
3. Set an adequate LTV. Borrow well below the limit. Setting a low initial LTV means your collateral will have plenty of buffer space before any liquidation will be triggered.
4. Receive the funds in fiat or stablecoin, or spend directly as you borrow. In the case of XPlace, the process of obtaining funds takes place during payments.
5. Repay what you borrowed. Repay the partial or full amount of the balance with interest and get your collateral released in the process. With ongoing borrowing, repayment is flexible.

XPlace additionally describes the process of issuing the card, thus you can go through the steps one by one.

Use Cases for BTC Lending and Crypto Loans with Collateral

Crypto loans are usually effective for some standard occasions:

• Everyday and major purchases. Whether it’s a large bill or a deposit on a car, you spend by borrowing against your crypto and keep your Bitcoin invested instead of selling it off piece by piece.
• Liquidity bridging. You need cash now but expect future revenues or more profitable closure. A crypto loan helps you bridge the period without liquidating your asset.
• Staying invested. You keep your Bitcoin and its potential upside instead of selling it to raise cash.

Use XPlace as Your Non-Custodial Financial OS for Borrowing Against BTC

Typically, crypto debit cards convert your crypto into fiat behind the scenes to make a transaction, which means selling the crypto and leaving your position just to pay for something else. XPlace turns this concept upside down.

It is an all-in-one place where you can earn, borrow, and spend using your digital wealth. You make a deposit into the wallet and let it earn a variable yield through Kamino Finance while backing your borrowing, thus completing two functions with a single operation.

Credit Mode makes borrowing of Bitcoin possible without having to sell it, thus keeping you in possession of your position all along. XPlace is non-custodial, your private keys remain yours, and your collateral is kept inside the audited smart contract rather than the company’s balance sheet. Of course, the risk remains present: there is liquidation risk in borrowing and variability of yields, which are never guaranteed.

Yield is variable and not guaranteed. Withdrawals depend on protocol liquidity and may be temporarily limited during market stress. Past performance does not predict future results. Using assets as collateral exposes you to liquidation risk. You may lose your collateral if the market moves against your position.

Risks of Borrowing Against Bitcoin

No responsible advisor would ever try to hide the risks from you, so let’s list the major risks involved when borrowing on your BTC:

• Liquidation. This is the most serious one. If the price of BTC falls and your Loan-to-Value ratio crosses the threshold, a portion of your funds will be sold to repay the loan, mostly during unfavorable times. The lower LTV keeps you far from that line.
• Volatility. Bitcoin may move drastically during one day, and an unexpected drop in price will bring a healthy position closer to the margin call in no time.
• Risk of platform and custodial issues. When borrowing using a custodial platform, you have to trust the company being solvent enough to return your funds back. It varies by each individual company and jurisdiction.
• Smart contract risk. Using DeFi loans means you put your funds into a smart contract. Even with audits, bugs are still possible.
• Legal regulation. Different regulations for different countries, and in some cases, they are not fully formed yet.

The vast majority of losses are caused by two mistakes only: borrowing excessively on a volatile asset or using an unreliable platform.

How to Borrow Against Bitcoin Safely

The secret to borrowing safely isn’t some fancy trick; it’s simply adopting certain practices to stay out of the risk zone:

• Maintain a conservative LTV ratio. Borrowing closer to the limit puts your account in danger of being liquidated by any price movements. With a conservative LTV ratio, you will need to see a significant decrease in the value of your collateral for the risk of liquidation to start materializing.
• Monitor your position. You need to monitor your LTV ratio and set up alerts if needed. Usually, most platforms have notifications set up in case of a threat to liquidate your position.
• Consider using audited or non-custodial platforms. It makes sense to choose between platforms with independent audit or those offering a non-custodial way to keep ownership of your BTC.
• Get familiar with the terms of service. Understand how interest rates are calculated, how they change, how you can repay your borrowings and whether your collateral may be rehypothecated or not.
• Have a solid reason to borrow. Borrowing Bitcoin to increase the volume of your investment is one thing; using borrowed money to buy Bitcoin is quite another approach.

Conclusion

Bitcoin borrowing enables long-term investors to make profit from their cryptocurrency without selling. You hold both your asset and its appreciation, simply using it to secure a loan instead of selling. The asset acts as collateral, the LTV defines your proximity to liquidation, and the decision between CeFi and DeFi boils down to your trust.

The benefit of all of that lies in the non-custodial solution, which means you retain full ownership of everything while borrowing money.

XPlace fits this approach well: you borrow without selling your Bitcoin, your assets keep working while they back your borrowing, and the setup stays non-custodial – your funds remain in your own wallet, or in audited smart contracts while you borrow.