Crypto-Backed Loans: How They Work and What Borrowers Need to Know in 2026
A crypto-backed loan lets you borrow cash or stablecoins using Bitcoin, Ethereum, or other supported cryptocurrencies as collateral. Instead of selling your assets and losing market exposure, you lock your crypto with a lender and access liquidity — while retaining full ownership of your position.
This article covers the core mechanics. For the complete guide including lender comparisons, rate breakdowns, and custody checklists, see the BetterLending Crypto Loans Guide.
How a Crypto-Backed Loan Works
The process follows the same core model across all platforms:
You submit a loan application specifying how much you want to borrow, what collateral you are pledging, and your chosen loan-to-value (LTV) ratio. The lender verifies your identity, you send your collateral to a designated wallet, and once the lender confirms receipt on-chain, funds are disbursed — typically in USDC or USDT.
From that point, your primary obligation is monitoring your loan health. If the value of your collateral falls and your LTV rises above the lender's threshold, a margin call is triggered. If you cannot add collateral or repay part of the loan, liquidation follows. When you repay the loan in full, your collateral is released.
Borrow vs Sell: When Does It Make Sense?
Borrowing makes sense when you want to maintain upside exposure to your crypto assets, avoid triggering a taxable disposal, or access short-term liquidity without permanently exiting a position. In most jurisdictions, taking out a crypto-backed loan is not a taxable event — you are not selling, you are borrowing against an asset you still own.
Selling may make more sense if you want to de-risk, if you believe the asset is overvalued, or if the liquidity you need exceeds what a safe LTV ratio allows.
For UAE residents specifically, neither borrowing nor selling triggers personal income tax or capital gains tax. The decision is almost entirely driven by market conviction and leverage discipline.
The Risks Borrowers Must Understand
Liquidation risk is the most significant. If your collateral value drops sharply, your LTV breaches the liquidation threshold and the lender sells your collateral to recover the loan. Staying below 50% LTV significantly reduces this risk.
Counterparty risk is often underestimated. Platforms that pool collateral, store assets in hot wallets, or rehypothecate borrower funds introduce risk that has no connection to Bitcoin's price. The collapse of several major crypto lenders between 2022 and 2024 was a direct result of these practices.
Custody transparency is the key differentiating factor between safe and unsafe lenders. If you cannot verify your collateral on-chain at any time, you cannot verify its safety.
What to Look for in a Crypto Lender
Before committing collateral, verify that the lender:
Uses segregated cold storage, not pooled wallets
Is regulated in a recognised jurisdiction
Carries insurance on custodied assets
Publishes liquidation LTV thresholds clearly
Provides on-chain verification of your collateral
Does not rehypothecate borrower funds
Avoid platforms that offer unusually low rates without disclosing custody arrangements, operate offshore without regulatory oversight, or cannot demonstrate proof of reserves.
Tax Treatment: A Brief Overview
In most jurisdictions, borrowing against crypto is not taxable. The loan proceeds are a liability, not income, and no disposal of the underlying asset occurs at the point of borrowing. Liquidation is treated differently — if a lender sells your collateral to recover a loan, this may constitute a taxable disposal depending on your jurisdiction.
Interest on business loans may be deductible depending on how the funds were used. Tax laws vary significantly by country. Consult a qualified tax adviser for advice specific to your situation.
For the full guide — including a detailed lender comparison, LTV strategy, custody checklist, rate analysis, and step-by-step borrowing walkthrough — visit the BetterLending Crypto Loans Guide.
This article is for informational purposes only and does not constitute financial, tax, or legal advice.