Borrowing Against Crypto Without Selling: Process, Steps, and Risk Management #
You need liquidity but don’t want to sell your Bitcoin, Ethereum, or XRP. Selling triggers capital gains tax and forces you out of your position right when you might need to stay in. The alternative is borrowing against your crypto as collateral, which lets you access cash while maintaining your exposure. The process has specific steps, the risks are real, and the difference between doing this right and losing everything comes down to understanding loan-to-value ratios and liquidation mechanics.
The basic structure works like this: you pledge crypto as collateral to a lender, they give you fiat or stablecoins based on a percentage of that collateral’s value, you pay interest, and when you repay the loan your crypto gets returned. No credit check, no income verification, no paperwork that takes weeks. The collateral substitutes for all of that.
Entity setup matters more than people realize, especially if you’re borrowing serious amounts. Individual borrowers can access platforms directly, but institutional amounts or complex structures benefit from setting up an LLC or other entity to hold the collateral and manage the loan. This separates the liability, provides cleaner accounting, and simplifies estate planning if something happens to you. Tax treatment also differs depending on entity structure and your jurisdiction.
Custody comes next. Institutional lenders require qualified custody, meaning your crypto moves to a custodian like Anchorage Digital that operates under federal banking charter with bankruptcy-remote segregation. Collateral is stored securely with Anchorage, a leading custodian and federally chartered bank, in cold custody with top security practices. The lender doesn’t just take possession of your private keys and promise to give them back. Proper custody means legal segregation where your assets remain yours even if the lender fails.
The collateral agreement specifies exactly what happens under different scenarios. This isn’t a one-page form you click through. It’s a legal contract that defines margin call triggers, liquidation thresholds, interest rates, repayment terms, and what rights the lender has regarding your collateral. Some platforms openly state they may rehypothecate (relend your collateral to generate additional revenue). Others contractually prohibit it. That difference determines your counterparty risk.
Loan-to-value ratio is the number that controls everything. LTV as a percentage equals the loan amount divided by collateral times 100. If you deposit $100,000 worth of Bitcoin and borrow $50,000, your LTV is 50%. That ratio moves constantly as crypto prices change. When Bitcoin’s price rises, your LTV falls and your position gets safer. When the price drops, LTV rises and you approach danger zones.
Initial LTV determines how much you can borrow. LTV ratios vary by asset: BTC at 60%, ETH at 55%, SOL at 45%. More volatile assets get lower initial LTV limits because lenders need bigger buffers against price swings. Stablecoins can go up to 90% because the collateral value stays stable.
Conservative means staying well below maximum LTV. Borrowing at 30-40% LTV gives you room for price movement without triggering margin calls. Borrowing at 60-70% LTV means you’re one bad week away from forced liquidation. The extra 20-30% of loan proceeds isn’t worth the risk if it costs you your entire position.
Margin calls happen at preset thresholds. If your LTV reaches 70%, a margin call will be triggered, requiring you to lower your LTV to 60% or below by adding collateral or repaying part of your loan within 24 hours. You get notification via email, SMS, push alerts. The clock starts. Add more collateral or pay down the loan enough to bring LTV back to safe levels. Miss that window and liquidation starts.
Liquidation is automatic and immediate. If LTV ever reaches 85%, a partial collateral liquidation will be automatically triggered to return your LTV to 60%. The platform sells your crypto at market prices to pay off enough of the loan to restore the required ratio. You don’t get to choose timing or negotiate. The code executes and your position gets reduced.
The math on liquidation hurts worse than people expect. If you started with 1 BTC at $120,000 and borrowed $60,000 at 50% LTV, liquidation at 85% LTV means Bitcoin dropped to $75,000. The platform sells enough BTC to cover the $60,000 loan, leaving you with 0.2 BTC instead of the full coin. You lost 80% of your collateral because you borrowed too aggressively and the price moved against you.
Counterparty risk extends beyond the borrowing platform. Who actually holds your collateral? Where does the loan capital come from? What happens if the platform goes bankrupt? FTX commingled customer funds with proprietary trading. Celsius and BlockFi both failed while claiming customer assets were safe. The legal structure matters as much as the custody technology.
Institutional custody lending through federally chartered custodians provides bankruptcy-remote protection. Custodial assets are not available to creditors of an insolvent bank, they are segregated from the bank’s assets and would not be subject to the same risk of loss. Your collateral sits in a segregated account with clear legal title. If the custodian fails, your crypto isn’t part of the bankruptcy estate fighting with other creditors.
Interest rates reflect risk and market conditions. Rates range from 9.5% APR for conservative programs to 18.9% for variable-rate lines of credit. Fixed rates give you predictability. Variable rates move with market conditions, which can work for or against you. Origination fees, liquidation fees, and other charges add to the total cost. A 12.95% APR sounds reasonable until you add a 1.5% origination fee and discover you’re actually paying closer to 14.5% effective rate.
Repayment terms vary. Some platforms require monthly interest payments with principal due at maturity. Others let interest accrue and you pay everything at the end. Monthly payments keep your LTV stable because you’re servicing the debt. Payment at maturity means your LTV creeps up over time as interest accrues, eating into your buffer before a margin call.
The receive fiat step is straightforward once everything else is in place. Wire transfer, ACH, stablecoin transfer to your wallet. Same-day funding is common. You get the liquidity you needed without selling your position and without triggering a taxable event (though check with your tax advisor because rules vary by jurisdiction).
Managing the loan requires constant monitoring. LTV tracking tools show your current ratio in real time. Alert systems notify you when you approach margin call territory. Auto-top-up features can automatically transfer additional collateral from linked accounts if LTV climbs too high. These tools only work if you actually use them and have reserves ready to deploy.
The risks compound during volatility. Bitcoin drops 20% in a week and your $100,000 collateral is now worth $80,000. Your $50,000 loan at 50% LTV just became 62.5% LTV. You’re past the warning threshold and approaching margin call territory. Markets don’t care about your liquidity situation. They move, your LTV spikes, and you either act immediately or face liquidation.
Conservative LTV ratios are the only defense that actually works. Stay at 30-40% LTV maximum. Yes, you borrow less than you could. Yes, you leave potential leverage on the table. But you also don’t lose your entire position because the market had a bad day. The opportunity cost of borrowing less is trivial compared to the permanent loss from liquidation.
Clean custody starts with self-custody for assets you’re not willing to pledge. D’Cent hardware wallets keep your reserve holdings completely separate from any lending relationship. Biometric authentication, certified security chips, offline storage. Those assets stay liquid and accessible regardless of what happens with your collateralized position. Never put your entire stack at risk to access liquidity on a portion of it.
For pledged assets, institutional custody with bankruptcy-remote segregation provides the highest level of protection. Federally chartered custodians, crime insurance covering the actual assets, transparent reporting, and legal structures that survive if the custodian fails. The custody quality determines whether you get your collateral back when something goes wrong.
The tax considerations are nuanced. Borrowing against crypto generally isn’t a taxable event because you haven’t disposed of the asset. But if your collateral gets liquidated, that’s a sale that triggers capital gains or losses. The timing and price of liquidation determine your tax liability, and forced liquidations rarely happen at advantageous times or prices.
Use cases matter. Borrowing to invest in a business or real estate that generates returns above your borrowing cost makes economic sense. Borrowing for consumption or to speculate on more crypto amplifies your risk without creating productive value. The worst outcome is borrowing to buy more crypto, watching the price drop, facing liquidation on both the collateral and the newly purchased position, and ending up with nothing.
Digital Wealth Partners handles wealth management and custody for clients who need access to liquidity while maintaining crypto positions. Digital Ascension Group coordinates family office services when your financial situation includes complex entity structures, multi-generational planning, and integrated wealth strategies across traditional and digital assets.
Borrowing against crypto works. The steps are entity setup, qualified custody, collateral agreement, conservative LTV setting, and receiving fiat. The risks are liquidation at bad prices, margin calls during volatile markets, and counterparty failure if custody isn’t structured correctly. Keep LTV under 40%, use bankruptcy-remote institutional custody, and maintain separate reserves in D’Cent self-custody for assets you won’t risk.
Contact Digital Ascension Group to learn how our family office services can coordinate your complete financial picture.
