The Investor’s Guide to Bitcoin-Backed Lending
Bitcoin exposure and product development among TradFi institutions are booming, regulations are becoming clearer, and political interest continues to rise.
CeFi is essential to this progress, with North American institutional giants like BlackRock relying heavily on CeFi platforms to support its foray into the space. The impact on CeFi companies has been substantial; the CeFi share of overall crypto activity in North America reached all-time highs in 2024, while the percentage on a global scale neared levels not seen since 2022.
In parallel, the Bitcoin DeFi (BTCFi) sector has seen massive growth since January 2024, surging from $300 million in TVL to over $5.5 billion today.
The result of all this activity: Bitcoin holders are looking for ways to leverage their most prized asset, outside of holding for price appreciation, than ever before. One use case in particular, Bitcoin-backed lending, has undertaken a resurgence in popularity and is predicted to grow to $45B by 2030 ($8.5B as of August 2024).
Notably, this isn’t a fresh new category with infant companies searching for a working formula. The Bitcoin-backed lending wave is supported by mature institutions with proven track records like Ledn, which did $114 million in retail-backed loans in January 2025 alone.
Get a loan: Create a Ledn account
For investors looking to understand the mechanics, risks, and opportunities of Bitcoin lending, you’ve found the right place. This investor’s guide will help you get ahead of the mainstream curve and begin your BTCFi journey with Bitcoin-backed lending.
Let’s begin.
Why Bitcoin-backed lending?
Bitcoin has a problem.
As of August 2024, 75% of BTC hadn’t moved in over 6 months. This matters because, in order to build a global economy backed by Bitcoin, we need holders to be able to access liquidity without having to sell. Once this matter is sorted, today’s idle liquidity will flow throughout the ecosystem, and as a bonus, the selling pressure generated by liquidity-short holders will fade.
Alongside solutions like liquid staking and restaking, Bitcoin-backed lending is helping advance this vision. And it even has shiny benefits outside of liquidity access that are important for Bitcoin holders to consider:
Liquidity Access Without Selling Holdings
The key use case of Bitcoin-backed loans is that they empower Bitcoin investors to access liquidity without selling their BTC. This approach allows borrowers to preserve their Bitcoin exposure, benefit from potential price appreciation, and still secure the cash they need for immediate financial needs. It’s the best of both worlds: retain your Bitcoin while tapping into its value.
Tax Benefits
Utilizing Bitcoin-backed loans offers significant tax advantages for holders.
In the United States, the IRS classifies cryptocurrency as property, meaning that selling Bitcoin typically triggers capital gains taxes on any appreciated value. However, by leveraging Bitcoin as collateral for a loan instead of selling it, holders can access liquidity without incurring a taxable event, thereby deferring capital gains taxes.
It’s important to note that while the act of borrowing against Bitcoin doesn’t constitute a taxable event, certain scenarios can lead to tax implications. For instance, if the value of Bitcoin decreases significantly and the collateral is liquidated to cover the loan, this forced sale may result in a taxable event, potentially leading to capital gains or losses.
Additionally, repaying the loan with appreciated cryptocurrency could trigger capital gains taxes, as the IRS may view this as a disposal of the asset.
Clear demand
The Bitcoin-backed lending market has demonstrated substantial and growing demand, distinguishing itself from other emerging BTCFi use cases. As of August 2024, the market was valued at approximately $8.6 billion, with projections estimating growth to $45.6 billion by 2030. This surge reflects a robust appetite for liquidity solutions that allow Bitcoin holders to access funds without liquidating their assets.
Leading companies in the sector have reported impressive loan origination volumes, underscoring this demand. Ledn, for example, has originated $9 billion in loans since its inception in 2018—$2.4 billion in 2024 alone. Notably, the aforementioned $114 million in January 2025 loans was nearly half of Thorchain’s entire book and close to double Coinbase’s cbBTC/USDC pair at Morpho.
Bitcoin is the ultimate collateral asset
Bitcoin’s deep market liquidity sets it apart from other assets used as loan collateral.
With a global trading volume that consistently dwarfs altcoins and even some traditional commodities, BTC ensures stable loan valuation and reliable price discovery across market cycles. Borrowers can access liquidity without the risk of drastic slippage, and lenders benefit from a collateral base that remains highly liquid, even during periods of heightened market volatility.
Beyond liquidity, Bitcoin’s reputation as the most secure and resilient digital asset further strengthens its position as the ideal collateral. With over a decade of uninterrupted operation, the Bitcoin network has proven itself impervious to attacks that have compromised lesser blockchain systems. This security—combined with BTC’s decentralized nature—instills confidence in borrowers, lenders, and institutions integrating Bitcoin-backed lending solutions.
Bitcoin is also pristine collateral due to its universal parity. Unlike real estate or equities, which can be subject to local market conditions, 1 BTC holds the same value whether in the U.S., Australia, or Thailand. This global fungibility opens up lending opportunities for borrowers across jurisdictions without the barriers of currency exchange risks or regional financial restrictions.
Additionally, Bitcoin trades 24/7, ensuring that collateral valuation is always accessible, and loans can be managed in real-time. This is a stark contrast to traditional assets that rely on market hours and can experience valuation gaps during off-hours. The ability to instantly adjust collateral levels or close out loans at any time makes BTC-backed lending more flexible and responsive to market conditions.
Finally, Bitcoin-backed lending eliminates one of the biggest hurdles in traditional finance: credit checks. Because BTC serves as collateral, lenders do not require credit history, income verification, or lengthy approval processes. This makes capital accessible to a broader range of borrowers, including those who may not qualify for traditional bank loans but still hold substantial BTC holdings. The result? A more inclusive lending market, with Bitcoin at its core.
How Bitcoin-Backed Lending Works
Bitcoin-backed lending offers a streamlined alternative to TradFi lending, providing efficiency advantages that cater to both individual and institutional borrowers.
Efficiency Advantages
Unlike conventional loans, Bitcoin-backed lending eliminates the need for credit checks, enabling borrowers to access liquidity swiftly. This expedited process is particularly beneficial for those seeking immediate funds without the delays associated with traditional banking procedures.
The collateralization of Bitcoin reduces the lender’s risk, facilitating faster approval times and a more straightforward lending experience.
Loan Structure & Mechanics
The structure of Bitcoin-backed loans is defined by several key components:
Loan-to-Value (LTV) Ratios
The LTV ratio determines the loan amount relative to the value of the Bitcoin collateral. An industry-standard LTV is typically around 50%, meaning a borrower can obtain a loan equal to about half the value of their Bitcoin holdings
Margin Call Mechanisms
Due to Bitcoin’s inherent volatility, if the value of the collateral decreases and the LTV exceeds a predetermined threshold, borrowers may be required to add more collateral or repay a portion of the loan to maintain the agreed-upon LTV ratio. Failure to do so could result in the liquidation of the collateral to cover the loan.
Interest Rates
Interest rates on Bitcoin-backed loans vary depending on the platform. CeFi platforms often offer fixed interest rates, providing predictability for borrowers. In contrast, DeFi platforms may have dynamically adjusting rates based on market conditions and liquidity.
Investor Strategies & Real-World Use Cases
Bitcoin-backed lending has found practical applications across various sectors, enabling individuals and businesses to utilize their digital assets without liquidation.
Here are strategies that you should be aware of:
Purchase Additional Assets
One of the key advantages of using a Bitcoin-backed loan is the ability to reinvest loan proceeds into additional assets—effectively increasing market exposure without selling existing BTC holdings. To illustrate how this works, let’s use the Ledn Bitcoin Loan calculator and the current price of Bitcoin (approximately $89,000 at the time of writing) to walk through an example:
- User backs loan with 1 BTC, enabling them to receive 45,556.68 USDC
- User purchases .495 BTC using the USDC funds
- Bitcoin appreciates to $150,000, providing the user an unrealized gain of ~$74,250
- The user sells the .495 BTC, repays the loan, and has ~$28,000 worth of BTC remaining
This strategy applies to other assets as well, such as stocks, altcoins, etc.
Financing Real Estate
Investors can leverage their Bitcoin holdings as collateral to secure mortgages, enabling them to enter the real estate market without selling their crypto assets. This strategy not only preserves potential future appreciation but also allows investors to diversify their portfolio. By using Bitcoin-backed loans, borrowers can access the capital needed to purchase property while maintaining their long-term crypto exposure.
Business Expansion
Entrepreneurs can unlock capital for growth by using Bitcoin-backed loans to fund new projects, expand operations, or scale their businesses—without selling their holdings or diluting equity. This approach provides a flexible financing alternative, allowing business owners to access necessary funds while maintaining full ownership and benefiting from potential future Bitcoin appreciation.
Debt Restructuring:
Individuals facing high-interest debt can utilize Bitcoin-backed loans to consolidate and refinance their obligations. By securing a loan against their Bitcoin, they may achieve more favorable terms and reduce overall interest payments.
CeFi vs. DeFi: navigating the Bitcoin lending landscape
The Bitcoin lending ecosystem is split between CeFi and DeFi, each offering distinct advantages and challenges. Understanding these differences is crucial for investors looking to navigate BTC-backed lending effectively.
CeFi platforms like Ledn operate under centralized entities, providing a structured and user-friendly experience. Legal contracts protect both borrowers and lenders, ensuring a clear framework for dispute resolution and compliance with regulatory standards. This legal oversight fosters trust and reliability within the lending process. CeFi platforms also offer intuitive interfaces, eliminating the need for users to interact with smart contracts, making the lending process more accessible to a broader audience. CeFi lending often features stable interest rates and predefined terms, offering predictability compared to the dynamic rates commonly found in DeFi platforms.
DeFi lending platforms, on the other hand, utilize smart contracts to facilitate programmatic and permissionless lending, offering greater autonomy but also introducing additional risks. These platforms operate without intermediaries, allowing users to engage directly with lending protocols, which grants them full control over their assets. BTCFi is still in its early stages, and even established platforms remain relatively young. Security vulnerabilities are an ongoing concern due to the risks posed by exploits, bugs, and misconfigurations in DeFi lending protocols.
In early 2025, THORChain paused Bitcoin and Ether withdrawals due to financial uncertainties, leading to a proposal to convert nearly $200 million of unserviceable debt into equity via a new token, TCY. Unlike CeFi, where borrowers are protected by legal contracts, DeFi operates in a more uncertain environment, making risk assessment harder for the average user. Without a legal safety net, users must rely on smart contract audits and governance structures to gauge security and reliability.
The hidden tax liability of wrapped Bitcoin
Another risk in DeFi lending is the requirement to wrap BTC for use on many lending platforms, such as wBTC. Wrapping Bitcoin can trigger taxable events, as regulators in some jurisdictions may classify the process as a disposal of the original asset, leading to capital gains implications. This added complexity makes it critical for users to assess tax risks before engaging with DeFi lending platforms.
Risk management & choosing the right lending partner
Beyond understanding CeFi and DeFi lending models, investors must conduct thorough due diligence when selecting a lending partner. The collapse of major CeFi platforms like FTX and Celsius highlighted the importance of evaluating a lender’s track record, transparency, and risk management practices. For CeFi lenders, this includes reviewing financial statements, proof-of-reserves disclosures, and regulatory compliance. For DeFi protocols, factors such as past security incidents, liquidity reserves, and governance structures play a critical role in assessing reliability.
Loan terms and fees are another critical consideration. CeFi lenders typically offer clear interest rates and withdrawal policies, but hidden fees can still exist. In DeFi, fluctuating interest rates based on supply and demand dynamics make it essential for borrowers to monitor market conditions. Understanding liquidation thresholds, withdrawal restrictions, and penalty clauses can help avoid unexpected costs.
Regulatory and tax considerations add another layer of complexity. CeFi lenders operate under varying degrees of regulatory oversight, providing some legal protection for borrowers, while DeFi platforms remain largely unregulated. As governments and financial institutions continue to refine crypto regulations, the legal landscape surrounding Bitcoin-backed lending remains in flux.
Choosing the right BTC lending partner requires a comprehensive evaluation of security, transparency, and compliance. By conducting thorough due diligence, borrowers can reduce exposure to counterparty risk, avoid unexpected costs, and ensure a safer lending experience.
The Future of Bitcoin-Backed Lending
With lending volumes surging as more investors look for ways to access liquidity without selling their Bitcoin, Bitcoin-backed lending has become a key pillar of BTCFi. As institutional interest continues to rise, it is poised to become an integral part of the broader global financial landscape.
Both CeFi and DeFi lending models will play a role in shaping the future of this sector. CeFi platforms provide stability, regulatory clarity, and a user-friendly experience, making them a preferred choice for those seeking predictable loan terms and legal protections. On the other hand, DeFi lending introduces innovation through smart contract automation but still needs improvement on key risk factors.
For investors seeking stability, transparency, and long-term viability in Bitcoin-backed lending, the choice is clear: working with established, well-regulated partners will be the key to navigating this rapidly growing sector.
Ledn has positioned itself as a trusted CeFi leader in Bitcoin-backed lending. With $9 billion in lifetime loan originations and $114 million in January loans to kick off a strong 2025 campaign, the platform has demonstrated reliability when handling your most beloved asset and has proven its ability to scale.
Open a Ledn account to start putting your idle Bitcoin to work and follow the firm on X to stay in tune with new announcements.
This content is sponsored and does not serve as an endorsement by Blockworks. The veracity of this content has not been verified and should not serve as financial advice. We encourage readers to conduct their own research before making financial decisions.
Get the news in your inbox. Explore Blockworks newsletters:
- Blockworks Daily: The newsletter that helps thousands of investors understand crypto and the markets, by Byron Gilliam.
- Empire: Start your morning with the top news and analysis to inform your day in crypto.
- Forward Guidance: Reporting and analysis on the growing intersection of crypto and macroeconomics, policy and finance.
- 0xResearch: Alpha directly in your inbox. Market highlights, data, degen trade ideas, governance updates, token performance and more.
- Lightspeed: Built for Solana investors, developers and community members. The latest from one of crypto’s hottest networks.
- The Drop: For crypto collectors and traders, covering apps, games, memes and more.