Everyone says "borrow against your Bitcoin instead of selling." Almost nobody explains what actually happens after you make the deposit.
Here's the full picture โ step by step.
Step 1: You send BTC to the platform's custody wallet. No sale. No tax event. You still legally own the Bitcoin.
But here's the thing nobody mentions: what happens to that wallet while your loan is active depends entirely on which platform you chose. More on that in a moment.
Step 2: The platform calculates your loan based on LTV. Loan-to-value ratio. If you deposit $90,000 worth of BTC and choose 40% LTV, you get $36,000. Choose 65% LTV, you get $58,500.
The platform has a ceiling. You choose where within it to borrow. That choice is the most important decision you'll make.
Step 3: Funds arrive. Stablecoins in minutes. Fiat in up to 24 hours. Spend them however you want.
Step 4: Your LTV starts moving. This is where people stop paying attention โ and where the risk lives.
Your loan balance is fixed. Your collateral value isn't. Every time Bitcoin drops, your LTV goes up. At 40% entry LTV, a 20% BTC drop puts you at 50% LTV โ fine. At 65% entry LTV, the same 20% drop puts you at 81% LTV โ margin call.
Step 5: Margin call (if LTV hits ~75โ80%). The platform notifies you. You have roughly 24โ72 hours to add more collateral or repay part of the loan.
At 30โ40% LTV this requires a 40โ60% BTC crash to trigger โ days to respond. At 65%+ LTV this can trigger on a bad afternoon.
Step 6: Liquidation (if LTV hits 85โ90%). Automated. No call. No approval required from you. The platform sells your Bitcoin to repay the loan. You get back whatever's left above the loan balance โ which during a fast move might not be much.
And that forced sale is also a taxable event.
Step 7: Repay the loan, get your BTC back. On repayment, the collateral is returned. Simple โ unless you're on a pooled-custody platform that's having operational problems. Then it depends on their liquidity. Which brings us to the part most people skip entirely.
What actually happens to your Bitcoin while the loan is active?
Three scenarios:
Pooled custody โ your BTC sits on the platform's balance sheet with everyone else's. If the platform collapses, you're an unsecured creditor waiting in line. Celsius 2022: borrowers in perfectly good standing waited two years and got back about 65 cents on the dollar.
Segregated custody โ your BTC is in its own ring-fenced wallet. If the platform collapses, yours is legally separate from their estate. BetterLending and APX Lending operate this way.
Rehypothecation โ some platforms lend your Bitcoin to third parties to earn yield while it's sitting as your collateral. If those third parties fail, your BTC is gone โ regardless of your LTV, regardless of how perfectly you managed the loan.
BetterLending prohibits rehypothecation. Others don't. This is one of the first things to check.
Full breakdown โ the complete 7-step loan lifecycle, custody model comparisons, crash scenarios, and how to evaluate platforms correctly:
โ https://betterlendingnet.blogspot.com/2026/05/how-bitcoin-backed-loans-actually-work.html
Bitcoin-backed loans from 7% APR, segregated BitGo custody, no rehypothecation: โ https://betterlending.net/loans
Not financial advice. Always do your own research and consult a qualified professional before pledging Bitcoin as collateral.