Crypto collateralized borrowing: how it works
Crypto collateralized borrowing locks crypto to borrow stablecoins, and a fall below the liquidation threshold can force a sale of that crypto.
Vahe HakobyanEditor-in-chief
Updated Oct 6, 20263 min readFact-checked
On this page
- Adding collateral helps, but a fast drop can outrun it.
- A lower threshold usually means a higher rate.
- Keep records of loans, interest, and liquidations for taxes.
The process runs from depositing collateral to repaying the loan and getting your crypto back. Along the way you check the ratio and watch the interest.
What is crypto collateralized borrowing?
You lock crypto as collateral and borrow stablecoins or other crypto against it. You deposit the asset into a smart contract and receive the loan. A minimum collateralization ratio is the lowest level a loan may reach before the contract sells collateral.
What you need before you start
The loan-to-value ratio determines how much you can borrow against your collateral. A lower starting ratio leaves more room for a price drop, and platforms can lower that ratio later.
How to borrow against crypto step by step
Screens differ, but the sequence is much the same: deposit collateral, open the loan, and track the ratio.
- 1Deposit collateralSend the crypto to the contract. Check the address and network first.
- 2Set the borrow amountEnter the amount, then check your room for a price drop.
- 3Confirm the loanApprove it. Interest accrues, and the rate can change.
- 4Watch the ratioA fall below the minimum lets the platform sell your collateral.
- 5Repay and withdrawPay the principal plus interest, then withdraw your crypto.
After you borrow: records and safety
Keep records of each loan, the interest, and any liquidation, because the IRS treats crypto as property. A platform can freeze withdrawals or fail.
Frequently asked questions
Often yes, if the platform allows it. A fast drop in price can still outrun the deposit.
Your collateral can stay locked during a freeze. Some platforms have failed, and contracts can carry bugs.
Usually not, because the collateral covers more than the loan. A centralized platform may ask for ID.
Usually not for a personal loan. Interest on money borrowed to buy investments may count as investment interest, deductible within limits.
