How Bitcoin Loans Fail
Understanding failure modes helps you make better decisions.
Bitcoin-backed loans can fail in several ways. Understanding these failure modes—and which loan structures eliminate them—helps you choose the right solution for your situation.
Liquidation: Forced Sales at Worst Times
How it happens:
Asset Mismatch Creates Risk
You stake Bitcoin as collateral but receive USD/USDC. Your loan amount is fixed in fiat, but your collateral value fluctuates with Bitcoin's price.
Price Drop Worsens LTV
Bitcoin price drops 30-40%. Your collateral value decreases, but your loan amount stays the same. Your loan-to-value (LTV) ratio worsens from 50% to 70%+.
Liquidation Threshold Breached
Most lenders liquidate at 80-85% LTV. When Bitcoin drops further, your LTV hits this threshold. The lender automatically sells your Bitcoin to cover the loan.
Losses Compound
Your Bitcoin is sold at depressed prices during a crash. You lose not just the loan amount, but also liquidation fees, slippage, and any recovery potential.
Real-World Example
Scenario: Stake 10 BTC ($1M at $100k/BTC), borrow $500k USD (50% LTV).
Bitcoin crashes 40% to $60k: Your collateral is now worth $600k, but you still owe $500k. LTV is 83%—above the 80% liquidation threshold.
Result: Lender automatically sells your Bitcoin at $60k to cover the loan. You've lost 40% of your collateral value due to forced liquidation during a crash.
How BTC-to-BTC Prevents This
BTC-to-BTC loans eliminate liquidation risk because both collateral and loan are the same asset. If Bitcoin halves, both sides move together—the LTV ratio stays constant. No liquidation mechanism can exist. Learn more about zero liquidation risk.
Margin Calls: The Stress and Uncertainty
How it happens:
When Bitcoin price drops, fiat-denominated loans trigger margin calls as LTV ratios worsen. You must either:
- Add more Bitcoin collateral (often when prices are already low)
- Repay part of the loan in USD (when you may not have liquidity)
- Accept liquidation if you can't meet the margin call
The Real Cost of Margin Calls
Financial Stress
Margin calls typically happen during market downturns when you're already stressed about prices. This compounds psychological pressure.
Forced Decisions
You must make quick decisions under pressure: add collateral at low prices, find USD to repay, or accept liquidation.
Uncertainty
Not knowing if a price drop will trigger margin calls creates constant anxiety. You can't plan confidently with this hanging over your position.
Additional Costs
Meeting margin calls often means selling assets at bad prices or locking up more capital during already-stressed times.
How BTC-to-BTC Prevents This
Margin calls are impossible with BTC-to-BTC loans. Since both collateral and loan are Bitcoin, price changes don't affect the LTV ratio. You never receive margin calls because the math doesn't allow it. See why margin calls are impossible.
Counterparty Risk: Lender Failure
How it happens:
If a lender fails or ceases operations, borrowers face several risks:
- Collateral held by lender: Your staked Bitcoin may be locked up or lost in bankruptcy proceedings
- Fiat loans: If you received USD/USDC, you're left holding fiat currency while Bitcoin continues to appreciate
- Recovery complexity: Getting collateral back from a failed lender can be lengthy and uncertain
Historical Example: Celsius, BlockFi, etc.
Multiple Bitcoin lenders failed in 2022. Borrowers who had staked Bitcoin and received fiat loans found themselves holding fiat while Bitcoin prices recovered, losing both their collateral and any potential appreciation.
How BTC-to-BTC Reduces This
With BTC-to-BTC loans, you receive borrowed Bitcoin upfront. Even if the lender fails, you still hold the borrowed Bitcoin—you retain your side of the trade. While you may lose staked Bitcoin, you've already received value in Bitcoin, not fiat. For secure custody of your Bitcoin stack, see The Bitcoin Adviser's collaborative security.
Oracle Risk: Price Feed Manipulation
How it happens:
Fiat-denominated loans rely on price oracles to determine Bitcoin's USD value. If these oracles fail, malfunction, or are manipulated, incorrect LTV calculations can trigger unwarranted liquidations or margin calls.
How BTC-to-BTC Eliminates This
BTC-to-BTC loans don't rely on price oracles for loan terms. Since both sides are Bitcoin, there's no need to calculate USD value for LTV ratios. Oracle risk doesn't exist in this model.
Why BTC-to-BTC Eliminates These Failure Modes
Liquidation
Problem: Asset mismatch creates liquidation risk
BTC-to-BTC solution: Same asset on both sides makes liquidation impossible
Margin Calls
Problem: Price drops trigger margin calls in fiat loans
BTC-to-BTC solution: LTV ratio stays constant regardless of price
Counterparty Risk
Problem: Lender failure leaves you holding fiat
BTC-to-BTC solution: Borrowed BTC delivered upfront reduces exposure
Oracle Risk
Problem: Price feeds can fail or be manipulated
BTC-to-BTC solution: No price oracles needed for loan terms
Related Reading
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Model your scenario using the calculator, or review how the structure works before deciding if it's appropriate.
Important: Loan My Coins acts solely as an introducer. All loans and agreements are entered into directly with an independent loan provider. This educational content is for informational purposes only. We do not provide financial advice. Always do your own research.