How Crypto Lending Companies Work: Rates, LTV Rules, and What Borrowers Miss

Crypto lending companies allow borrowers to deposit cryptocurrency as collateral in exchange for fiat or stablecoin loans without selling the underlying asset. Loan-to-value ratios typically cap borrowing at 40% to 60% of collateral value. Taking the loan is generally not a taxable event under IRS guidance classifying crypto as property, but a forced liquidation triggered by a price drop almost certainly is.

Crypto lending companies let you borrow cash or stablecoins against your Bitcoin, Ethereum, or Solana without selling the underlying asset. The mechanics are straightforward: you deposit crypto as collateral, the lender extends a loan at a specified loan-to-value ratio, and you repay principal plus interest over the agreed term. What most guides skip is the cascade risk: a mid-loan price drop that triggers a margin call, then partial liquidation, then a surprise tax bill from the IRS. Understanding LTV math, custody arrangements, and the regulatory gray zone around these platforms matters more than chasing the lowest advertised APR.

Pour comprendre le fonctionnement de ces prêts, il est crucial de se pencher sur les mécanismes détaillés du crypto lending explained.

What Crypto Lending Companies Actually Do

A crypto lending company accepts your cryptocurrency as collateral and extends a loan in US dollars or stablecoins. You retain ownership of the underlying asset, meaning you benefit from any price appreciation during the loan term. The lender holds your crypto in custody and charges interest on the borrowed amount.

The core tradeoff: you access liquidity without triggering a taxable sale, but you accept the risk that a sharp price decline could force liquidation of your collateral. Platforms split into two broad categories: centralized finance (CeFi) companies that operate like traditional lenders with KYC requirements, and decentralized finance (DeFi) protocols governed by smart contracts with no identity verification.

Loan terms vary widely. Some platforms offer fixed-rate, fixed-term loans of 12 to 36 months. Others provide open-ended credit lines with variable rates. Minimum loan amounts range from a few hundred dollars on DeFi protocols to $10,000 or more on institutional-grade CeFi platforms. Payouts come in USD wire transfers, ACH deposits, or stablecoins like USDC, depending on the lender.

CeFi vs. DeFi: Two Very Different Risk Profiles

CeFi platforms like Arch Lending and Figure operate under US regulatory frameworks. They require identity verification, maintain relationships with qualified custodians, and issue loans in USD. Your collateral sits with a third-party custodian, not on a smart contract. The tradeoff: lower technical risk, but you must trust the platform and its custodian.

DeFi protocols like Aave and Compound run on public blockchains through immutable smart contracts. No credit check, no KYC, no human intermediary. You deposit crypto into a liquidity pool and borrow against it algorithmically. The smart contract handles everything, including liquidations. When it works, the system is permissionless and fast. When it fails, whether through a code exploit or an oracle manipulation, your collateral can vanish with no legal recourse. DeFi also enables flash loans: uncollateralized loans that must be borrowed and repaid within a single blockchain transaction, used almost exclusively for arbitrage and protocol interactions.

Why Borrowers Use Crypto-Backed Loans Instead of Selling

Selling cryptocurrency triggers a taxable event. Under IRS guidance (IRS, 2014, updated in subsequent notices), cryptocurrency is treated as property. A sale means you realize a capital gain or loss, reportable on Form 8949 and Schedule D of your Form 1040. For long-term holders sitting on substantial unrealized gains, selling could mean a six-figure tax bill.

A collateralized loan avoids this. The IRS does not consider borrowing against an asset to be a disposition. You receive liquidity, keep your crypto, and defer the taxable event. This mirrors the strategy long used by wealthy stock holders who borrow against their portfolios rather than selling appreciated shares. The loan also preserves upside exposure: if Bitcoin doubles during your loan term, you capture that gain when you repay and reclaim your collateral.

How Loan-to-Value (LTV) Ratios Work, and Why They Define Your Risk

LTV is the single most important number in any crypto-backed loan. It measures how much you can borrow relative to the value of your collateral, expressed as a percentage. A 50% LTV on $50,000 worth of Bitcoin means you can borrow $25,000. The lower the LTV, the more breathing room you have before a margin call.

Most CeFi platforms cap initial LTV between 40% and 60%. Arch Lending discloses LTVs up to 60% on its platform (archlending.com, 2025). YouHodler is noted for high-LTV positioning among major providers (CoinLedger, 2026). DeFi protocols often offer higher maximum LTVs but enforce them more aggressively: smart contracts liquidate automatically when LTV breaches a threshold, with no grace period and no human review.

Lenders structure their risk management in tiers. The first level is a notification when LTV approaches a warning threshold, typically around 65-70%. The second is a margin call requiring you to deposit additional collateral or repay part of the loan. The third is partial liquidation, where the lender sells just enough collateral to bring the LTV back to a safe level. Full liquidation, where the entire position is sold, is the final and most severe outcome.

The LTV Formula Every Borrower Must Know

The formula is simple:

LTV (%) = (Loan Amount ÷ Collateral Value) × 100

If you borrow $20,000 against 1 BTC worth $50,000, your LTV is 40%. If BTC drops to $40,000, your LTV rises to 50%. If it drops to $28,571, your LTV hits 70%, which is the typical margin call threshold across major CeFi platforms.

Each lender sets its own initial LTV cap and its own liquidation LTV threshold. These two numbers define your risk corridor. A platform with a 50% initial LTV and a 70% liquidation threshold gives you a 20-percentage-point buffer. Narrower buffers mean less room for error and higher probability of forced liquidation during volatile markets. Always confirm both numbers before signing a loan agreement.

Worked Example: $50,000 BTC Collateral at 50% LTV

Take a concrete scenario. You deposit 1 BTC worth $50,000 as collateral. The lender offers a 50% initial LTV, so you borrow $25,000.

Now BTC starts falling. At a 70% LTV, the platform issues a margin call. At what BTC price does this occur? Divide the loan amount by the target LTV: $25,000 ÷ 0.70 = $35,714. When 1 BTC drops from $50,000 to $35,714, a decline of roughly 28.6%, the margin call fires.

If you cannot add collateral or repay part of the loan, the LTV continues climbing. At 85% LTV, the platform initiates partial liquidation. The math: $25,000 ÷ 0.85 = $29,412. That is a 41.2% drop from your entry price. The lender sells a portion of your BTC at this depressed price to bring the LTV back to a safe level. You now hold less Bitcoin, realized a taxable sale, and still owe the remaining loan balance.

Margin Calls and Partial Liquidation: The Cascade Risk

The margin call cascade is what catches borrowers off guard. A 25% price dip feels manageable in a historically volatile asset class. But that dip can arrive in hours, not days. Crypto markets trade 24/7, and sharp corrections during weekends or holidays can trigger liquidations before you have time to react.

Platforms differ in how they handle margin calls. Some CeFi lenders give you 24 to 48 hours to post additional collateral. Others send an email and start liquidating within hours. DeFi protocols have no grace period whatsoever: the smart contract executes liquidation the moment the oracle price feed crosses the threshold. Partial liquidation compounds the problem: once a portion of your collateral is sold, you hold fewer coins to capture any subsequent recovery. You lock in the loss on the liquidated portion while still carrying the debt on the remainder.

The classic mistake borrowers make is taking the maximum LTV at origination, leaving zero buffer for volatility. A 60% LTV loan on volatile collateral is a liquidation waiting to happen. Experienced borrowers typically target 30-40% LTV to build in a cushion against 40-50% drawdowns.

Comparing the Main Crypto Lending Companies in the US

The US crypto lending market spans three distinct categories: regulated CeFi platforms with institutional custody, DeFi protocols with no intermediaries, and commercial lenders serving business borrowers. Each category suits a different borrower profile, and the differences go far beyond advertised APRs.

Pour trouver les meilleures options adaptées à vos besoins, il peut être utile de consulter une liste des best crypto collateral loans disponibles sur le marché.

CeFi platforms like Arch Lending and Figure prioritize compliance and custody. Arch Lending offers rates starting at 7.25% APR with collateral held by Anchorage Digital, a federally chartered bank, backed by $100 million in Lloyd's of London insurance coverage and a stated policy of zero rehypothecation (archlending.com, 2025). Figure markets same-day approval on BTC, ETH, and SOL collateral with no credit score requirement (figure.com, 2025). These platforms serve borrowers who want USD payouts, clear loan documentation, and regulatory accountability.

DeFi protocols like Aave and Compound operate on a fundamentally different model. No application, no credit check, no human review. You connect a wallet, deposit collateral, and borrow stablecoins instantly. Aave pioneered flash loans: uncollateralized loans that exist for a single transaction block, used for arbitrage and DeFi composability. The rates are algorithmically determined based on pool utilization and can swing dramatically. The cost of this permissionless access is smart contract risk: a bug in the code or a manipulated price oracle can drain your collateral with no path to recovery.

Commercial lenders like Unchained target business borrowers with larger minimums and custom structures. CoinLedger notes that Unchained offers Bitcoin-backed loans for businesses at relatively high APRs (CoinLedger, 2026). Wirex, also mentioned in CoinLedger's 2026 guide, offers no-deadline repayments, which appeals to borrowers who want flexibility over fixed terms. These platforms tend to require more documentation and higher minimum loan amounts.

CeFi Platforms: Regulated Custody and USD Payouts

Centralized platforms bridge traditional finance and crypto. They hold your collateral with qualified custodians, issue IRS-reportable loan documents, and disburse funds via wire or ACH. For US borrowers concerned about legal clarity and audit trails, CeFi is the more conservative choice.

Arch Lending exemplifies this model: Anchorage Digital custody, federally chartered, insured, with a transparent rehypothecation policy. Figure competes on speed and simplicity, targeting borrowers who need fast liquidity and already hold BTC, ETH, or SOL. The tradeoff is that CeFi platforms require KYC, report to credit bureaus in some cases, and may restrict availability by state depending on lending licenses. Rates also tend to be fixed rather than floating, which benefits borrowers in rising-rate environments but can look expensive if market rates decline.

DeFi Protocols: No Credit Check, Smart Contract Risk

DeFi lending removes every intermediary. Aave and Compound, both deployed on Ethereum and multiple layer-2 networks, let you borrow against dozens of crypto assets with no application. The protocol sets parameters algorithmically: each asset has a collateral factor (the inverse of LTV) and a liquidation threshold. If your borrowed amount exceeds the liquidation threshold of your collateral, anyone can call the liquidation function and earn a bonus for doing so.

Aave's flash loans deserve a specific mention because they illustrate what DeFi enables that CeFi cannot. A flash loan lets you borrow millions in crypto with zero collateral, provided you repay the principal plus a 0.09% fee within the same transaction block. If repayment fails, the entire transaction reverses as if it never happened. These are tools for developers and arbitrageurs, not retail borrowers, but they demonstrate the programmability of DeFi lending. For individual borrowers, the main appeal is access: no paperwork, no waiting, no rejection. The main risk is that smart contract bugs and oracle failures have caused hundreds of millions in losses across DeFi protocols since 2020.

Commercial and High-Value Crypto Financing

For loans above $100,000, the market shifts. Unchained and specialized brokers like Enness serve business borrowers, institutional investors, and high-net-worth individuals who need tailored terms, multi-signature custody arrangements, and larger loan amounts than retail platforms accommodate.

These loans often involve negotiated LTVs, customized interest rate structures, and additional collateral monitoring. The cost is higher: APRs reflect the bespoke nature of the arrangement and the credit analysis involved. Minimum loan amounts at this tier typically start at $50,000 to $100,000. For a Bitcoin mining company financing equipment or a fund manager bridging a liquidity gap, these platforms fill a niche that neither CeFi retail lenders nor DeFi protocols address effectively.

The IRS Tax Treatment of Crypto-Backed Loans

The IRS has not issued standalone guidance on crypto-backed loans. However, its long-standing position on virtual currency provides the framework: cryptocurrency is property (IRS Notice 2014-21). This classification, combined with general tax principles on collateralized borrowing, produces three distinct tax outcomes that every borrower must understand.

The core distinction is between voluntary borrowing and forced liquidation. A loan you take out is not income and not a sale: no tax event occurs at origination. A forced liquidation triggered by a margin call is a disposition of property by the lender acting on your behalf, and that sale creates a taxable event for you. The difference can be tens of thousands of dollars in unexpected capital gains tax. What follows is general information based on IRS guidance as of 2025, not personalized tax advice. Consult a qualified tax professional before borrowing.

Borrowing Against Crypto: Not a Taxable Event

When you deposit Bitcoin as collateral and receive a $25,000 loan, the IRS does not consider this a sale or exchange. You still own the Bitcoin. The loan proceeds are not income because you have an obligation to repay. This is the same principle that applies to a home equity loan or a margin loan against a stock portfolio.

You retain your original cost basis in the cryptocurrency. If you bought 1 BTC at $20,000 and later borrow against it when it is worth $50,000, your cost basis remains $20,000. No gain is recognized at borrowing. If you later sell the BTC, your gain is calculated from the original $20,000 basis, not from the value at the time you took the loan. This deferral is the primary tax motivation for crypto-backed borrowing, particularly for holders with large unrealized long-term gains.

Forced Liquidation: The Hidden Tax Trap

The trap snaps shut when the platform liquidates your collateral. A forced liquidation is, for tax purposes, a sale of your cryptocurrency by the lender. The proceeds go toward repaying your loan, but you still recognize a capital gain or loss equal to the difference between the liquidation price and your original cost basis.

Return to the worked example: you bought 1 BTC at $20,000, later borrowed $25,000 against it at $50,000, then watched BTC drop to $29,412 where the platform partially liquidates. On the liquidated portion, you realize a capital gain: sale price minus your $20,000 basis. If the liquidation happens less than 12 months after you acquired the BTC, it is a short-term gain taxed at ordinary income rates, up to 37% federally. If held longer than 12 months, the long-term capital gains rate applies, generally 0%, 15%, or 20% depending on your income. You owe this tax regardless of whether you received any cash from the liquidation: all proceeds went to the lender to cover your debt.

This is the most common and most expensive mistake crypto borrowers make. They focus on the APR and the LTV at origination and never model what a 40% drawdown does to their tax position.

Interest Payments: What You Can and Cannot Deduct

Interest paid on a crypto-backed loan may be deductible, but only under specific conditions. If you use the loan proceeds for an investment purpose, such as buying more cryptocurrency or securities, the interest may qualify as investment interest expense deductible on Schedule A up to your net investment income for the year. If you use the loan for personal expenses, such as buying a car or funding a home renovation, the interest is generally not deductible.

If you use the proceeds for a business purpose through a properly structured entity, the interest may be deductible as a business expense. The key is tracing: the IRS looks at what you actually did with the borrowed funds, not what the loan agreement says. Keep clear records of how loan proceeds are spent, because the deductibility determination happens at tax time, not at loan origination. If you mix personal and investment uses of the same loan, you may need to allocate the interest proportionally.

SEC Oversight and the Regulatory Landscape for Crypto Lenders

The SEC has made clear through enforcement actions that certain crypto lending products fall within its jurisdiction as unregistered securities. In February 2022, the SEC charged BlockFi with failing to register its crypto lending product, resulting in a $100 million settlement: $50 million to the SEC and $50 million to state regulators (SEC, 2022). That case established a precedent that continues to shape the regulatory environment.

For borrowers, the regulatory status of a platform matters. An SEC-registered offering provides disclosures, audited financials, and a legal framework for recourse if something goes wrong. An unregistered platform operating in a gray zone may offer better rates but leaves borrowers with fewer protections if the platform fails. Since 2022, several platforms have restricted or eliminated US customer access to their lending products, a signal that the regulatory cost of serving American borrowers exceeds the business benefit.

State-level regulation adds another layer. Lending is primarily regulated at the state level in the US, and crypto lending companies must navigate a patchwork of state lending licenses, usury caps, and money transmitter requirements. A platform available in Wyoming may not serve borrowers in New York or California. Always check whether a platform is licensed to lend in your state before applying.

Why the SEC Matters for Crypto Borrowers

The SEC's authority over crypto lending hinges on whether a lending product constitutes a security under the Howey test: an investment of money in a common enterprise with an expectation of profits derived from the efforts of others. The SEC argued in the BlockFi case that the lending product met this definition and should have been registered. The settlement did not resolve the legal question definitively, but it signaled that the SEC will pursue enforcement.

For a borrower, the practical implication is straightforward. A platform facing active SEC scrutiny carries operational risk. It may freeze withdrawals, halt new loans, or enter receivership. The Celsius and BlockFi bankruptcies in 2022 demonstrated that when a crypto lending platform fails, customers become unsecured creditors in a bankruptcy proceeding. Recovering collateral can take years, if it happens at all.

Platforms Restricting US Customers: What It Signals

When a major platform geo-blocks US users from its lending products, it is usually responding to regulatory pressure. This is not a sign that the platform is unsafe, but it does indicate that the legal basis for offering the product in the US is uncertain. Some platforms maintain separate US entities with restricted feature sets. Others exit the US market entirely.

Before depositing collateral, confirm that the platform explicitly accepts US borrowers, discloses its US regulatory status, and has a verifiable US legal entity. A platform that is vague about where it is incorporated or which regulator oversees it should raise immediate concerns. The most transparent platforms publish their lending licenses, custody arrangements, and regulatory disclosures directly on their websites.

Key Risks Every Borrower Should Weigh Before Applying

Crypto-backed loans carry risks that do not exist in traditional collateralized lending. A home equity loan is secured by an asset that rarely drops 30% in a week. A margin loan against a stock portfolio operates within regulated broker-dealers with SIPC protection and well-established liquidation procedures. Crypto lending removes these safeguards and adds new ones: smart contract risk, platform insolvency risk, and rehypothecation risk.

Each of these risks has materialized in real-world failures. Celsius and BlockFi, two of the largest crypto lending platforms, both filed for bankruptcy in 2022. Their customers' collateral became tied up in Chapter 11 proceedings, with recovery rates still uncertain years later. DeFi protocols have lost billions to exploits since 2020. These are not hypothetical risks; they are documented events that should inform every borrowing decision.

Counterparty and Custody Risk

When you deposit crypto with a lending platform, you are trusting that the platform and its custodian will remain solvent and return your collateral when you repay. The Celsius collapse showed what happens when that trust breaks: the platform lent customer deposits to risky counterparties, suffered losses, and could not meet withdrawal requests. Customers became unsecured creditors.

Qualified custodians like Anchorage Digital, which holds collateral for Arch Lending under a federally chartered bank charter, provide a higher standard of protection. They segregate customer assets, maintain insurance, and are subject to regulatory oversight. Platforms that use qualified custodians and explicitly state they do not rehypothecate collateral offer a fundamentally different risk profile than platforms that commingle customer assets and lend them out. Before depositing, ask: who holds my collateral, is it segregated, and what happens to it if the platform fails?

Smart Contract Risk in DeFi Lending

DeFi protocols run on code. A bug in that code, an exploit in a dependency, or a manipulation of the price oracle that feeds the protocol can result in total loss of deposited collateral. These are not recoverable through insurance, legal action, or protocol governance. The code is the law, and when it fails, the loss is permanent.

Smart contract audits reduce this risk but do not eliminate it. Audited protocols have been exploited; the audit proves someone reviewed the code, not that the code is flawless. DeFi borrowers should limit exposure to amounts they can afford to lose entirely, use protocols with the longest track records and the largest bug bounties, and monitor oracle dependency. A protocol that relies on a single price feed is far more vulnerable than one that aggregates multiple sources.

Rehypothecation: Ask Before You Deposit

Rehypothecation means the lender uses your collateral for its own purposes, such as lending it out to other borrowers or deploying it in DeFi to generate yield. This generates additional revenue for the platform but creates a chain of counterparty risk. If the entity that borrowed your collateral from the platform fails, your collateral may not be recoverable.

Some platforms explicitly prohibit rehypothecation. Arch Lending states zero rehypothecation with segregated wallets held by Anchorage Digital (archlending.com, 2025). Others disclose rehypothecation in their terms of service but bury it in dense legal language. Before depositing collateral, ask the platform directly: "Do you rehypothecate my collateral?" If the answer is yes, understand that your collateral is exposed to third-party risk beyond the platform itself. If the answer is evasive, treat it as a yes.

How to Evaluate a Crypto Lending Company Before You Borrow

Every crypto lending platform markets its lowest APR and its highest LTV. Neither number tells you what you actually need to know. A checklist approach, run before depositing a single satoshi, separates platforms that protect borrowers from platforms that exploit inattention.

The following items should be verifiable from the platform's published documentation, not from a customer service chat or a marketing page. If a platform cannot point you to a public, dated document confirming each item, treat the absence as a red flag. Loan terms in this market can change rapidly. Re-read the loan agreement at origination, even if you have borrowed from the same platform before. What was true six months ago may not be true today.

• Custody arrangement: Who holds your collateral? Is it a qualified custodian regulated under US law? Is it segregated from platform assets?

• Rehypothecation policy: Does the platform lend out, stake, or otherwise use your collateral? Get this in writing.

• LTV tiers and margin call thresholds: At what LTV does the platform notify you? At what LTV does it margin call? At what LTV does it liquidate? These three numbers define your entire risk exposure.

• APR structure: Fixed or variable? If variable, what index does it track and how often does it reset? What fees sit outside the APR: origination fees, custody fees, early repayment penalties?

• US state availability: Is the platform licensed to lend in your state? Does it maintain a US legal entity? Check the platform's regulatory disclosures and licensing page.

• KYC and AML requirements: What identity verification is required? Will the loan be reported to credit bureaus or to the IRS via Form 1099?

• Regulatory disclosures: Has the platform faced SEC, CFTC, or state regulatory action? Search the SEC's EDGAR database and your state's financial regulator website.

A platform that answers all seven items clearly and publicly demonstrates operational maturity. A platform that cannot answer three of them is not ready for your collateral, regardless of the APR it advertises.

Key points

• Borrowing against crypto is not a taxable event, but forced liquidation triggered by a margin call almost always is.
• LTV ratios across US CeFi platforms typically cap at 50-60%, and borrowers who take the maximum LTV leave zero buffer for the 30-40% drawdowns common in crypto.
• CeFi platforms like Arch Lending use qualified custodians with zero rehypothecation; DeFi protocols like Aave offer permissionless access but carry smart contract risk.
• The SEC's 2022 BlockFi enforcement action established that crypto lending products can be unregistered securities, and platforms that restrict US access are often responding to regulatory pressure.
• Before depositing collateral, verify seven things: custody, rehypothecation, LTV thresholds, APR structure, state availability, KYC requirements, and regulatory history.

Sources

• irs.gov
• sec.gov
• archlending.com
• coinledger.io

The information provided here is general in nature and is not a substitute for advice from a licensed financial advisor. Review your situation with a professional before committing.