The Renaissance of Bitcoin-Backed Lending: Stack Stats While Putting Them to Work

Bitcoin-backed lending is experiencing a resurgence, driven by the growing demand for liquidity without sacrificing long-term exposure to bitcoin, and because of the potential tax advantages that loans offer for those who have seen their assets appreciate greatly. Both individual and institutional borrowers are using these instruments more and more as a tool in their treasury management arsenal as bitcoin becomes a staple in portfolios, and investors look for more ways to benefit from their holdings.

The popularity of these instruments grew as the bitcoin price rose in 2024 and is accelerating into 2025. In the first half of 2024, crypto lender Ledn saw $191 million worth of bitcoin-backed loans. In just the first month of 2025, Lendn has seen over $100 million in bitcoin-backed loans.

What makes individuals and institutions move to bitcoin for loans, and how do they pick a provider? In this article, we’ll take a look at the mechanics, benefits and inherent risks of this growing market and contrast centralized and decentralized approaches to bitcoin lending to find what strategy works best for you.

Bitcoin-backed lending is one of the fastest growing digital finance opportunities on the market. For borrowers, it’s a way to unlock capital without having to part ways with their coins.

For individuals, bitcoin-backed loans offer the opportunity to use loans to buy real estate, start businesses, pay debt and more. For institutions, it offers a unique way to hedge additional investments or business ventures with the market depth and liquidity only offered by bitcoin.

Whether you’re an institution or an individual, bitcoin-backed lending offers the strong foundation of bitcoin as a collateral, with benefits that go far beyond the usual buying and selling, like tax planning.

Bitcoin is king for collateral

Bitcoin remains the most liquid cryptocurrency, with a deep market that ensures deep liquidity even during periods of volatility. Bitcoin’s proven resilience since its inception makes it the most trusted cryptocurrency. Its robust security and widespread adoption further solidify its position as the premier collateral asset. While bitcoin is a robust collateral asset, its price swings can impact loan-to-value management. Borrowers must carefully monitor their positions to avoid margin calls and forced liquidations.

Benefits beyond buy/sells

One of the most compelling reasons for bitcoin-backed lending is the ability to access liquidity without selling bitcoin. This is particularly valuable for long-term holders who believe in bitcoin’s future potential, but need cash for personal expenses, investments or business operations. By using bitcoin as collateral, borrowers can retain their exposure to potential price appreciation while meeting their immediate financial needs.

Additionally, selling bitcoin can trigger significant capital gains taxes, depending on the jurisdiction. Bitcoin-backed lending allows borrowers to avoid these immediate tax consequences.

However, it’s crucial to understand the implications of loan-to-value ratios, margin calls and bitcoin’s inherent volatility. A well-managed loan can provide financial flexibility, but poor risk management can lead to forced liquidations and unexpected tax liabilities.

Understanding the process, risk considerations and finding your lender

The process works by using bitcoin as collateral to secure loans in fiat currency or stablecoins, typically operating with a 50% loan-to-value (LTV) ratio. This means if you deposit $100,000 in bitcoin, you can borrow up to $50,000, providing a substantial buffer against bitcoin’s notorious price volatility. The actual rate varies by provider and the terms can differ depending on whether you are using a centralized (CeFi) or decentralized (DeFi) platform.

DeFi

DeFi lending is driven by smart contracts, eliminating the need for intermediaries. However, this also introduces code and operational risks. With CeFi, borrowers and lenders rely on contractual agreements and established compliance measures, providing a clear legal framework that provides legal protection and security that cannot be offered in DeFi.

Smart contracts are only as secure as the code they’re built on. Vulnerabilities can lead to significant losses, as seen in high-profile hacks. Take THORChain, for example, which saw its lending service become insolvent due to how it designed its risk management system and incentive mechanism. This resulted in over $200 million in user funds being impacted.

Finally, there’s the consideration of wrapping your bitcoin to access DeFi protocols: the process of bringing your bitcoin onto platforms that allow for decentralized finance smart contracts. While the key advantage of lending is to avoid potential taxable events and maintain your bitcoin holdings, users need to give up control of their bitcoin in order to have it “wrapped,” and they receive a bitcoin “IOU” on a different chain. As a result, this process can introduce tax complications and additional risks.

CeFi

Centralized platforms like Ledn offer a simpler, regulated approach to bitcoin-backed lending when compared to DeFi. CeFi platforms are often easier to navigate, with straightforward interfaces.

CeFi platforms operate within established regulatory frameworks, offering greater transparency and security. While bitcoin may be the leading disruptor in the finance industry, safeguards already exist around lending. These existing frameworks, along with crypto-friendly regulatory frameworks being developed internationally, offer a clear path for understanding and enforcing your rights in crypto lending.

Risk and platform management

Risk management is fundamental to bitcoin lending, with platforms employing sophisticated safeguards like margin calls and automatic liquidation protocols to protect lenders from significant price fluctuations. While these measures provide essential protection, successful participation in bitcoin-backed lending requires a comprehensive approach to platform selection and risk assessment.

When choosing a lending platform, thorough counterparty due diligence becomes crucial . Borrowers must carefully evaluate the platform’s solvency, reputation and security infrastructure – particularly in centralized finance, where the platform’s risk management capabilities directly impact loan security.

Beyond security considerations, users must also navigate the complexities of fee structures, withdrawal policies and service-level agreements, as hidden costs or ambiguous terms can significantly impact the lending experience.

For those considering bitcoin-backed lending, success lies in not only understanding these various elements, but also in recognizing that platform-specific terms, security protocols and tax implications in their jurisdiction form an interconnected web of considerations that must be carefully evaluated before committing to any lending program.