A crypto loan is a secured loan in which a borrower pledges cryptocurrency as collateral to receive funds, commonly in fiat currency, stablecoins, or another digital asset. Like an auto or student loan, the collateral helps the lender reduce risk, but in crypto lending the pledged asset is typically held in a wallet or smart contract until the loan is repaid.
How crypto loans work
In a typical setup, a borrower deposits collateral such as BTC or ETH and receives a loan amount based on a loan-to-value (LTV) ratio. Because crypto prices can be volatile, platforms often require overcollateralization, meaning the collateral value is higher than the amount borrowed. If the collateral value falls and the LTV rises beyond a threshold, the borrower may face a margin call, needing to add collateral or repay part of the loan. If they do not, the collateral can be liquidated to cover the debt.
Crypto loans can be offered by centralized lenders that manage custody and underwriting, or by decentralized finance (DeFi) protocols where smart contracts automate borrowing, interest, and liquidations. In DeFi, users typically interact directly with on-chain pools and the terms are enforced programmatically, while centralized platforms rely more on company policies and internal risk controls.
Practical uses and key risks
A common use case is accessing liquidity without selling a long-term crypto position, for example borrowing stablecoins against BTC to fund expenses or move capital between strategies. However, risks include liquidation during sharp market moves, smart contract vulnerabilities in DeFi, and counterparty or custody risk on centralized platforms.