Why borrow against crypto instead of selling?
The single biggest reason crypto holders take loans against their positions is tax deferral. Selling $100k of Bitcoin with a $20k cost basis triggers $80k of long-term capital gains — $16k at the 20% federal rate plus state tax. Borrowing $40k against the same Bitcoin triggers zero taxable event. You get liquidity without realizing gains. The trade-off is liquidation risk and interest cost. For long-term holders who don't want to sell but need liquidity, crypto-backed loans are often the cheapest option available.
LTV: the only number that matters
Loan-to-value ratio is the loan size divided by the collateral value. If you have $100k of ETH and borrow $40k, your LTV is 40%. Protocols set a maximum LTV (you can't borrow more than X% of collateral) and a liquidation LTV (when the position gets force-closed). On Aave, ETH has a 75-80% max LTV and 82.5% liquidation LTV. On MakerDAO, ETH vaults have a 150% minimum collateralization ratio — equivalent to 66.7% max LTV. Lower LTV means more breathing room before liquidation.
Calculating liquidation price
The calculator above derives the price drop that triggers liquidation. At 40% LTV with a 75% liquidation threshold, your collateral can drop 46.7% before liquidation. At 60% LTV, only 20%. At 70% LTV, only 6.7% — any minor market dip liquidates you. This is why experienced crypto borrowers stay at 25-40% LTV on volatile collateral. Our leverage liquidation calculator handles the leveraged-long version of the same math.
Interest rate economics
DeFi lending rates float with borrow demand. Aave USDC borrow rates range from 3-15% APR depending on market conditions. MakerDAO's DAI stability fee has ranged from 0.5% to 8% over the last three years. CeFi lenders like Nexo and Ledn offer fixed-rate loans at 6-15% APR. For a $40k, 2-year loan at 7% APR, you'd pay about $5,800 in interest. That's real money, but may be cheaper than the $16k+ tax bill of selling. Use our stablecoin APY comparison to see what the lender is paying depositors — the spread is the protocol's profit.
Liquidation mechanics and penalty
When your LTV crosses the liquidation threshold, anyone can trigger the liquidation for a reward. The protocol sells your collateral at a 5-15% discount (the liquidation penalty) to repay the loan. You keep whatever's left after the loan is repaid, but you've just paid a 5-15% penalty plus any slippage on the forced sale. On a $100k position, a liquidation costs you $5k-15k instantly. Worse, liquidations cluster during market crashes, meaning your sale happens at the worst possible price. Avoid at almost all costs.
Managing a loan through volatility
Three tools to stay safe: (1) set price alerts at 60% and 80% of your liquidation price so you have time to add collateral or repay; (2) keep a liquidity buffer — USDC or bank cash — equal to 20% of your loan so you can pay down if prices crash; (3) use lower LTV than you think you need. A 30% LTV is uncomfortably low during a bull run and exactly right during a crash. If you've never been liquidated, you're probably not borrowing aggressively enough; if you've been liquidated more than once, you're borrowing too aggressively.
Tax treatment
Loan proceeds are not taxable income in the US. Interest is potentially deductible if the loan is used for investment purposes (tracing rules apply). Selling collateral to repay the loan is taxable. If your collateral gets liquidated, the forced sale triggers capital gains on the collateral — one of the nastier surprises of liquidation. Run a test through our crypto tax calculator before borrowing.
NFT loans: higher rates, lower LTVs
Blue-chip NFTs (CryptoPunks, Bored Apes, Azukis) can collateralize loans on NFTfi, Arcade, and Blur. Typical terms: 30-40% LTV, 20-80% APR, 30-90 day duration. The high rates reflect illiquidity and valuation uncertainty. For most NFT holders, the math rarely works — you're paying 40%+ interest for a 30-day liquidity window. Only useful if you need capital for a clearly profitable 30-day opportunity.