Bitcoin collateral loans: cash against coins you keep

Three numbers describe the whole arrangement, and a borrower should know all three before signing.

Loan to value is the loan divided by the market value of the pledged coins. A lender that offers 50 percent against bitcoin lends 50,000 euros against 100,000 euros of coin, and the gap is the haircut that absorbs a price fall. Bitcoin's volatility is why the haircut is this large: a lender against government bonds works with a few percent.

The margin call level is the LTV at which the lender asks for more. As the price falls, the loan stays the same and the collateral shrinks, so the ratio climbs toward that level on its own. The liquidation level sits above it, and reaching it lets the lender sell part or all of the collateral to repay the loan. Lightspark's description of the loan sets out the same sequence from pledge to release. The practical question for a borrower is how much time a margin call gives and whether the lender must warn at all, because some agreements allow an automatic sale.

This is the part that separates a sound loan from a 2022 repeat, and it is settled in the contract, not by the interest rate.

In the weakest arrangement the coins move to the lender's own wallet and sit on its balance sheet, where they are exposed to the lender's business. In a segregated arrangement the coins go to a regulated custodian in an account in your name, pledged to the lender, and a failure of the lender leaves the coins identifiable and outside its insolvency estate. A tri-party arrangement puts a third institution between borrower and lender to hold and value the collateral and to run the margin mechanics, which is how the same problem is solved in securities lending.

Rehypothecation means the lender uses your pledged coins as its own collateral somewhere else. The agreement either permits it or forbids it, and a borrower who has not read that clause does not know whether the coins are still there.

The 2022 failures of centralized crypto lenders turned this into a loss for thousands of borrowers. Firms had pledged customer collateral onward to fund their own positions, and when the market fell the coins were gone while the loans remained. Borrowers became unsecured creditors of a bankrupt company and waited years for a fraction. The question to ask a lender is therefore not what rate it offers but whether the agreement permits reuse of the collateral and which custodian holds it.

Both release cash against bitcoin and they fail in different ways.

A centralized lender runs KYC, makes a credit decision, holds the collateral and can be negotiated with. A margin call arrives as a message, and a human can grant an hour. The risk is the lender itself: its solvency, its custody practice and its right to reuse your coins.

An on-chain loan replaces the lender with a smart contract. The collateral sits in the contract, the terms are public, nobody can rehypothecate it, and liquidation runs by code with no conversation at any price. DeFi lending covers the mechanics, and the trade is clear: you exchange counterparty risk for contract risk and lose every form of forbearance. Bitcoin itself has no lending contract of its own, so an on-chain loan usually runs against a wrapped representation of the coin, which adds the issuer of that wrapper as a third exposure.

No. Pledging is not a sale, so a German private holder does not realize a gain by taking the loan, and the one-year holding period under section 23 of the Income Tax Act keeps running on coins that stay pledged. That is the tax reason the structure exists.

Liquidation changes the answer. When the lender sells the collateral to repay the loan, that sale is a disposal by you, with the gain taxable if the coins were held under a year, and you receive no cash from it because the proceeds went to the lender. A forced sale can therefore leave a borrower with a tax bill and no proceeds. Interest paid on the loan is generally not deductible for a private holder. Crypto tax in Germany sets out the rules, and the treatment of a business holder differs.

Lending cash commercially in Germany is a banking business under the Banking Act and needs a BaFin license, so the lender a German borrower deals with is a bank, a firm with a lending permission, or a foreign institution operating under a passport. Taking the bitcoin into custody is a separate regulated activity, covered by crypto custody in Germany.

The practical consequence is that one arrangement often involves two licensed firms, a lender and a custodian, with a pledge agreement between them. An offshore platform offering the same loan to a German resident without either permission is the configuration that produced the 2022 losses, and the borrower there has no deposit protection and no supervisor to complain to.

Four things, in order of how often they bite. The price falls and the margin call arrives with hours to answer it. The lender liquidates at the bottom of a move, which locks in the loss the borrower hoped to avoid by not selling. The lender fails and the collateral turns out to have been reused. And the loan proceeds were invested in something that fell at the same time as bitcoin, which turns one position into two losses.

The defense against the first two is a lower LTV than the lender offers. A loan at 25 percent of the collateral survives a fall that wipes out a loan at 50 percent, and the interest difference is small against that.