Bitcoin in Credit Lending: 2025 Overview

• Custody and Valuation: Borrowers deposit their Bitcoin with a custodian—often a crypto lending platform like BlockFi, Celsius (before its collapse), or newer regulated players. The platform assesses the Bitcoin’s market value, which fluctuates, and assigns a loan-to-value (LTV) ratio, typically ranging from 20% to 70%. For example, if you deposit $100,000 worth of Bitcoin with a 50% LTV, you could borrow up to $50,000 in fiat (like USD) or stablecoins (like USDT).
• Risk Management: Because Bitcoin’s price is volatile, lenders use mechanisms like margin calls or automatic liquidation. If Bitcoin’s value drops below a certain threshold, the borrower must add more collateral or repay part of the loan, or the platform sells the Bitcoin to cover the debt.
• Advantages: This allows Bitcoin holders to access liquidity without selling their assets, preserving potential upside if Bitcoin’s price rises. It’s especially appealing in a bull market or for those who view Bitcoin as a long-term store of value.

• Wrapped Bitcoin (WBTC): Since Bitcoin’s native blockchain isn’t designed for smart contracts, WBTC—an ERC-20 token pegged 1:1 to Bitcoin—bridges it into DeFi ecosystems. Users lock their BTC with a custodian, receive WBTC, and use it on platforms like Aave, Compound, or MakerDAO.
• Overcollateralized Loans: DeFi lending typically requires borrowers to overcollateralize—e.g., locking $150 worth of WBTC to borrow $100 in stablecoins. This protects lenders from volatility and default risk, as the collateral can be liquidated if the loan isn’t repaid.
• Interest Rates: Rates are algorithmically determined based on supply and demand. For example, if many people want to borrow against WBTC, rates rise; if more WBTC is supplied to lending pools, rates drop. Rates can range from 2% to 20% annually, far more dynamic than traditional banking.
• Benefits and Risks: DeFi offers permissionless access and transparency, but smart contract bugs and liquidation risks during price crashes (e.g., a 20% BTC drop in a day) can wipe out borrowers.

• Crypto Banks and CeFi Platforms: Centralized finance (CeFi) platforms like Nexo or Genesis (before its 2023 fallout) facilitate Bitcoin-backed loans for institutional clients. These platforms often custody Bitcoin, lend it out to borrowers (retail or institutional), and pay depositors interest (e.g., 4-8% annually).
• Securitization: Some institutions bundle Bitcoin-backed loans into financial products, akin to mortgage-backed securities, allowing investors to gain exposure to crypto lending yields without directly holding BTC.
• Regulatory Evolution: By 2025, frameworks like the EU’s MiCA and U.S. SEC guidelines have made institutional participation safer, though strict KYC/AML rules apply, contrasting with DeFi’s anonymity.

• Mechanism: Platforms like Bitfinex or Hodl Hodl allow users to post Bitcoin as collateral and negotiate loan terms (interest, duration) directly with lenders. Smart contracts or multisig wallets ensure trust—e.g., Bitcoin is released to the lender only if the borrower defaults.
• Use Case: This is popular in regions with limited banking access, where Bitcoin serves as both collateral and a hedge against local currency depreciation.

• CeFi Yields: Platforms might lend Bitcoin to traders for margin funding, generating 3-10% annual returns for depositors.
• DeFi Pools: WBTC in liquidity pools (e.g., Uniswap) can be lent out, with yields boosted by governance tokens or fees.

• Volatility: Bitcoin’s price swings complicate lending. A sudden crash can trigger mass liquidations, as seen in 2022 with Celsius and Voyager.
• Regulation: Jurisdictions differ—some treat BTC as property (taxable on loans), others as currency, affecting lending profitability.
• Custody Risk: Centralized platforms can fail (e.g., FTX), while self-custody in DeFi requires technical savvy.
• Default Risk: Unlike traditional lending, crypto loans lack credit scores, relying solely on collateral, which can be insufficient in extreme downturns.