Bitcoin-backed lending is experiencing a resurgence, driven by the growing demand for liquidity

Bitcoin-backed lending is one of the fastest growing digital finance opportunities on the market.

Bitcoin-backed lending is one of the fastest-growing digital finance opportunities, driven by the increasing demand for liquidity without sacrificing long-term exposure to bitcoin, and the potential tax advantages that loans offer for those who have seen their assets appreciate. 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, Ledn has seen over $100 million in bitcoin-backed loans.

But 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.

Why bitcoin-backed lending?

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 loans offer the strong foundation of bitcoin as a collateral, with benefits that go far beyond the usual buying and selling, like tax planning.

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.

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 will vary by provider, and the terms can differ depending on whether you are using a centralized (CeFi) or decentralized (DeFi) platform.

DeFi lending, driven by smart contracts, eliminates 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. Any vulnerabilities can lead to significant losses, as seen in high-profile hacks and the closure of DeFi lending services. For example, THORChain's lending service became insolvent due to how it designed its risk management system and the internal token economics used to incentivize cooperation in its system. This ultimately impacted over $200 million in user funds.

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.

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