Crypto-Backed Loans: How They Work and What the Risks Are

Crypto-Backed Loans: How They Work and What the Risks Are

A crypto-backed loan gives you money without selling your coins. The trader keeps their position in bitcoin or ether and receives stablecoins or fiat for other purposes.

Below, we look at how such loans work, what LTV and collateral liquidation are and how a loan is used to fund an arbitrage trade.

How a crypto-backed loan works

The borrower pledges coins as collateral to a lender or a smart contract. In return, they receive a loan for less than the value of the collateral, and the difference serves as a cushion in case the price falls.

Until the debt is repaid, the collateral is locked. Once the loan is repaid with interest, the coins go back to the owner.

How a CeFi loan differs from a DeFi loan

CeFi is a loan from a company: an exchange, a bank or a lending platform. DeFi is a loan from a protocol, where the rules are written in a smart contract.

In our view, neither option is safer by default. In CeFi you trust a company, in DeFi you trust code, and both kinds of trust need to be checked.

What LTV is and how to calculate it

LTV (loan-to-value) is the ratio of the debt to the current value of the collateral. The higher the LTV, the smaller the cushion before liquidation.

LTV changes every second along with the collateral price. If bitcoin falls, LTV rises, even if you have not borrowed a single extra dollar.

What a margin call and collateral liquidation are

A lender usually has two thresholds. At the first one, you get a margin call: a request to add collateral or partially repay the debt while there is still room before a forced sale.

At the second one, the collateral is sold without your involvement.

In a liquidation, the borrower loses more than just part of their coins. A penalty is often added, and the sale happens at the worst possible moment, in a falling market.

A hypothetical calculation

All numbers are hypothetical. A trader pledges 1 BTC at a price of 80,000 dollars and takes a loan of 30,000 dollars in stablecoins.

• starting LTV: 30,000 / 80,000 = 37.5%
• margin call at 65% LTV: a bitcoin price of about 46,150 dollars
• liquidation at 75% LTV: a bitcoin price of 40,000 dollars
• to bring LTV back to 37.5% at a price of 60,000, you need to repay 7,500 dollars of debt or add roughly 0.33 BTC

The cushion in this example looks large. But the market has already seen bitcoin halve within a few weeks, so the liquidation threshold should always stay in view.

Who offers bitcoin-backed loans in 2026

The topic is quickly moving beyond crypto exchanges. We have already written that South Korea's Jeonbuk Bank launched the country's first bank loans backed by bitcoin: the money goes to companies for working capital, and only BTC serves as collateral.

Another example is Kalshi Prime. Clients can borrow against bitcoin, ether and qualifying stablecoins held with BitGo and use the money as margin for futures.

From what we see, such products appear wherever crypto starts to be treated as an ordinary collateral asset. This is a good sign for the whole market.

How to use a loan to fund an arbitrage trade

An arbitrage trader needs a crypto-backed loan for one reason: to get stablecoins without selling long-term coins. Those stablecoins become the working capital of the trade.

• count the loan rate as one more cost of the trade, alongside fees and funding
• keep LTV well below the margin call threshold and have a reserve for adding collateral
• do not send the entire loan to one exchange: it is wiser to split capital
• remember that a trade may earn less than the loan costs, and then the loan works at a loss

We believe a loan is justified only if the trade's net yield after all costs is consistently higher than the interest rate. Otherwise, you are simply paying for the risk of collateral liquidation.

Our tools

Borrowed capital gets more expensive every day, so it pays to find trades quickly, with prices from every exchange on one screen. Our arbitrage screener keeps dozens of venues in one window, refreshes quotes every second and shows each gap together with the volume actually behind it. The spread calculator helps you check what survives fees, network costs and slippage at your size. The bot is fully manual. It never connects to your exchange API keys.

To test the tools on a live market, ArbitrageScanner offers one day of free access to the whole ecosystem.

FAQ (Frequently Asked Questions)

1. How does a bitcoin-backed loan work?

You pledge bitcoin as collateral to a lender or a smart contract and receive a loan for less than the collateral's value. Once the debt is repaid with interest, the coins are returned.

2. What is LTV in a crypto loan?

It is the ratio of the debt to the current value of the collateral. When the collateral price falls, LTV rises and the cushion before liquidation shrinks.

3. What happens to the collateral if bitcoin falls sharply?

First comes a margin call asking you to add collateral or repay part of the debt. If LTV reaches the liquidation threshold, the collateral is sold by force, often with a penalty.

4. How does a CeFi loan differ from a DeFi loan?

In CeFi, the lender is a company or bank, and the collateral is held by them or a custodian. In DeFi, a protocol issues the loan, and liquidation happens automatically via a smart contract.

5. Which banks offer bitcoin-backed loans?

In South Korea, Jeonbuk Bank issues won loans to companies backed by bitcoin. Kalshi Prime offers loans against bitcoin, ether and qualifying stablecoins for futures margin.

6. Can a crypto loan be used for arbitrage?

Yes, if the trade's net yield after all costs exceeds the loan rate. Count the rate as a cost and keep LTV well below the margin call threshold.

Conclusion

A crypto-backed loan gives you money without selling your coins, but in return you need to keep a constant eye on LTV. Margin calls and liquidation are triggered by a falling collateral price, not by new borrowing.

For an arbitrage trader, such a loan is a way to get working stablecoins. It only makes sense when the trade earns more after all costs than the loan costs.

IMPORTANT! We are software developers. We do not give recommendations or promises of earnings and we do not advise you to invest your money anywhere. Our software is fully manual, all your money stays under your own control. We show examples of how our clients have earned on arbitrage in the past, but we do not advise repeating those actions one to one. Your earnings depend solely on your own actions and on market factors.