Crypto News
How Does a Bitcoin Loan Work?

Bitcoin has shown itself among the best-performing assets in the last decade. In 2023, it outperformed the S&P 500, high-yield corporate bonds, and gold, soaring as much as 156 percent in a year.
Today, Bitcoin demand is reaching record highs as the approval of new spot Bitcoin ETFs has created a wave of institutional interest.
Although dubbed a risky and volatile asset, Bitcoin remains a profitable investment, especially for its earliest investors. When it was launched in 2009, it was practically worthless. In 2010, it traded at $0.10.
By 2013, it was hitting highs of $250—a 250,000 percent growth for early investors. Those who invested in 2017 would look at gains of over 6,700 percent in 2024 as the crypto asset briefly touched $70,000 recently.
With this kind of growth, it’s no wonder that investors view it as a long-term investment, preferring to “HODL” until it reaches new price highs.
However, any long-term BTC holder knows the path toward profitability isn’t always smooth sailing. Sometimes, you need to sell or take profits to sustain expenses or meet emergency cash needs.
As a result, you surrender part of your BTC holdings and reduce its long-term earning potential. Those intent on replenishing their Bitcoin also end up re-purchasing the asset at many times the price of the original buy.
What if there were another way to gain access to much-needed funds without selling your BTC? Bitcoin loans offer a solution that provides access to liquidity without letting go of your holdings.
How does a Bitcoin loan work? Here, we delve into the unique mechanics of a Bitcoin loan. We discuss how the world’s leading cryptocurrency is revolutionizing the world of finance beyond trading by providing alternative means to secure loans while retaining access to potentially higher returns in the future.
Understanding Bitcoin and Crypto Lending
Bitcoin loans are a form of crypto lending. Crypto lending platforms allow BTC investors to borrow against their deposited assets. They can also lend out their BTC holdings to earn interest in crypto rewards. In 2020, crypto lending platforms began gaining significant traction. They have since expanded to hold billions in total value locked (TVL) across several platforms.
You can divide crypto lending into two components. Crypto or BTC deposits that earn interest and crypto loans. Deposit accounts on such platforms behave like regular bank accounts. You can deposit BTC and earn interest. The platform can use the deposited funds to lend to borrowers or for other investments—similar to how a bank operates.
Typically, crypto loans are offered as collateralized lending products. They require users to deposit a 100 percent minimum to access the loan. Some require up to 150 percent—thus becoming overcollateralized loans.
How To Secure a Bitcoin Loan
A Bitcoin or Bitcoin-backed loan is a US dollar loan that BTC collateralizes. To secure this type of loan, you send BTC to a lending platform as collateral. In return, you receive a loan in stablecoin or US dollars.
The mechanics of Bitcoin-backed loans are similar to traditional secured loans, except BTC is the collateral. Such loans eliminate the need for extensive credit checks. The steps include account creation, brief onboarding, key upload, and loan application submission. In decentralized platforms, the process could be even more straightforward.
Once your BTC deposit is confirmed on the blockchain, US dollars or an equivalent in stablecoin is sent to your bank account or crypto wallet. The interest on the loan is paid in regular intervals. For example, interest payments could be due every 30 days and will go on until the loan matures. The final interest payment and the principal amount will be due upon maturity.
The amount you receive is based on the value of your BTC holdings and the platform’s LTV (loan-to-value) ratio. The LTV ratio is determined based on risk factors associated with the crypto market’s volatility. Should the value of Bitcoin drop, the platform may require you to add more collateral to equalize the borrowed amount. If you don’t add collateral, you risk liquidating your BTC holdings.
Factors To Consider When Applying for a Bitcoin-backed Loan
Bitcoin loans are not risk-free. While they offer many benefits, consider the following before deciding to lend out your BTC holdings:
Risks associated with rehypothecation
Some Bitcoin lenders mimic the processes of banks, which means your deposited BTC may be subject to rehypothecation. Rehypothecation is the process of lending out client assets posted as collateral.
Thus, the BTC is put at risk. The lending platform, in turn, earns interest by utilizing your digital assets for various purposes, including re-lending. Some Bitcoin-backed loan providers lend clients’ Bitcoin to third parties.
With rehypothecation, the loan provider earns interest from both the borrower’s interest payments and the proceeds of lending the BTC collateral to other parties. The lender passes a portion of the interest to the borrower of US dollars through a marginally lower interest rate. However, some of the borrower’s collateral—or even 100 percent—is at risk.
Borrowers are unaware of the counterparty risk surrounding BTC-backed loans. Their holdings are exposed to multiple layers of counterparty risk. Lenders who rehypothecated collateral, therefore, expose borrowers to risk when either party becomes insolvent.
Thankfully, some BTC loan providers do not rehypothecate. It is up to the user or client to select the features of a lending platform and decide how much risk they can take on.
Annual percentage rate (APR)
The annual percentage rate, also known as the APR, is the yearly interest rate generated by a sum charged to borrowers or paid to investors. The APR is a percentage representing the annual cost of funds over a loan term or an investment’s earned income.
In other words, it annualizes the total cost of a loan. The value includes additional costs or fees associated with the transaction. APR does not factor in compounding.
The APR provides platform users a bottom-line number to compare investment products and lenders. Some lending companies offer low interest rates but charge high origination fees. This feature will cause the APR to increase significantly. A higher APR means it is more expensive for the borrower when multiple loans originate in a single year.
A short-term loan will promise low interest rates. However, you need to check the origination fee. It will be cheaper to take out a twelve-month loan at a slightly higher interest rate with a one-time origination fee than getting a three-month loan with a 1 percent origination fee and renewing it.
LTV requirement
The LTV or loan-to-value requirement must be considered when you take out a Bitcoin-backed loan. For example, a 40 percent LTV means a $10,000 loan will require $25,000 worth of BTC as collateral. The ratio aims to prevent collateral liquidations as the market price fluctuates.
Some lenders offer low interest rates and lower LTV ratios. A lower LTV ratio could range from 20 to 30 percent. Therefore, the clients must deposit more BTC to access the loan. This practice is done to have the ability to lend out or rehypothecate the collateral to others. Another reason for a low LTV is that higher collateral means less risk when they lend.
Collateral to principal (CTP) vs. loan to value (LTV)
The CTP, or collateral-to-principal ratio, is the LTV’s inverse value. For example, an LTV at 40 percent equates to a CTP of 250 percent. CTP helps users understand the current status of their collateral ratio. This value is instrumental when the BTC price drops.
Tax implications
Tax legislation around Bitcoin loans is still evolving. It is crucial to consult a tax professional about your possible tax obligations, even if it is reasonable to expect BTC-backed loans to be treated analogously to traditional lending practices by the IRS.
The IRS declared in 2014 that virtual currencies be treated as property when it comes to tax treatment.
Therefore, they trigger capital gains taxes when sold. Borrowing against Bitcoin or crypto, however, would not trigger those taxes.
Nonetheless, consulting a tax expert regarding current and future tax issues with Bitcoin loans is best.
What are the benefits of Bitcoin loans?
Bitcoin-backed loans offer several advantages, especially for long-term holders. The most obvious benefit is access to liquidity without the need to sell off BTC holdings. Bitcoin loans preserve your digital asset holdings. They also save you capital gains tax as a result of not selling.
Photo by Dmytro Demidko on Unsplash
Moreover, BTC loans tend to offer a higher level of privacy versus those from traditional financial institutions. They don’t typically require extensive credit checks and disclosure of extensive personal information. To secure a Bitcoin loan, you will only disclose minimal information for identity verification.
Another benefit of Bitcoin loans is speed. Some Bitcoin-collateralized loans can be obtained within days, hours, or even minutes.
Bitcoin Loans: An Alternative To Selling Your Bitcoin
Owning Bitcoin offers many advantages, including generating significant growth in your investment and having a scarce asset that doubles as a decentralized mode of payment.
Hence, holders understandably think twice about selling BTC to fund urgent expenses in US dollars. However, we all need to take care of our financial needs.
Bitcoin-backed loans bridge the gap between owning a profitable investment with high growth potential and temporarily meeting fiat-based expenses. Several platforms offer Bitcoin-backed loans with varying features and requirements. You must evaluate the pros and cons of each platform and use the ones that balance risk with the most significant financial benefits.
As you hold your Bitcoin long-term, you can explore novel products and services that protect your wealth as they offer an avenue to meet financial needs, invest in other assets, and take advantage of business opportunities.
This is a guest post by Ivan Serrano. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Discover the mechanics, benefits, and risks of Bitcoin-backed loans. Understand how to use your Bitcoin holdings and lend them out for US dollars to your advantage.
Crypto News
BitVM Just Got A Massive Upgrade

The introduction of BitVM smart contracts has marked a significant milestone in the path for scalability and programmability of Bitcoin. Rooted in the original BitVM protocol, Bitlayer’s Finality Bridge introduces the first version of the protocol live on testnet, which is a good starting point for realizing the promises of the Bitcoin Renaissance or “Season 2”.
Unlike earlier BTC bridges that often required reliance on centralized entities or questionable trust assumptions, the Finality Bridge leverages a blend of BitVM smart contracts, fraud proofs, and zero-knowledge proofs. This combination not only enhances security but also significantly reduces the need for trust in third parties. We’re not at the trustless level that Lightning provides, but this is a million times better than current sidechains designs claiming to be Bitcoin Layers 2s (in addition to significantly increasing the design space for Bitcoin applications).
The system operates on a principle where funds are securely locked in addresses governed by a BitVM smart contract, functioning under the premise that at least one participant in the system will act honestly. This setup inherently reduces the trust requirements but has to introduce additional complexities that Bitlayer aims to manage with this version of the bridge.
The Mechanics of Trust
In practical terms, when Bitcoin is locked into the BitVM smart contract through the Finality Bridge, users are issued YBTC – a token that maintains a strict 1:1 peg with Bitcoin. This peg is not just a promise but is enforced by the underlying smart contract logic, ensuring that each YBTC represents a real, locked Bitcoin on the main chain (no fake “restacked” BTC metrics). This mechanism allows users to participate in DeFi activities like lending, borrowing, and yield farming within the Bitlayer ecosystem without compromising on the security and settlement assurances that Bitcoin provides.
While some in the community might find these activities objectionable, this type of architecture allows users to get some guarantees that they previously could not hope to get with traditional sidechain designs, with the added bonus that we do not need to “change” Bitcoin to make it happen (although covenants would make this bridge design completely “trust-minimized, which would effectively make it a “True” Bitcoin Layer 2). For more details about the different levels of risks associated with sidechains designs, take a look at Bitcoin Layers assessment of Bitlayer here.
However, until such advancements come to fruition, the Bitlayer Finality Bridge serves as the best realization of the BitVM 2 paradigm. It’s a testament to what’s possible after the dev “brain drain” from centralized chains back to Bitcoin. Despite all the challenges that BitVM chains will face, I remain exceptionally excited at the prospect of Bitcoin fulfilling its destiny as the Ultimate Settlement Chain for all economic activity.
This article is a Take. Opinions expressed are entirely the author’s and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Guillaume’s articles in particular may discuss topics or companies that are part of his firm’s investment portfolio (UTXO Management). The views expressed are solely his own and do not represent the opinions of his employer or its affiliates. He’s receiving no financial compensation for these Takes. Readers should not consider this content as financial advice or an endorsement of any particular company or investment. Always do your own research before making financial decisions.
The BitLayer Finality Bridge is Delivering On The Promises of BitVM – While still far from a fully trustless system, the progress made over the past year is remarkable
Crypto News
Bitcoin Banks: We Should Build Them Ourselves

Bitcoin banks are going to happen. We already have a few of them. We’re going to have more of them. Existing legacy banks are going to start offering services. New banks are going to be founded around Bitcoin. This is completely unavoidable at this point. Bitcoin doesn’t scale. Even absent that, people value other services that inherently require other parties. Debt being the chief one.
This is an inescapable reality.
Even if we could snap our fingers and roll out every well specified opcode and covenant proposal at once, it would still take a lot of time to begin building out self-custodial layers that could compete with something like credit unions and banks offering bitcoin accounts at scale. That is not a problem that can be trivially solved overnight.
So what can we do? We need to embrace a localist attitude around making interaction with your bitcoin easy. This requires a two pronged approach, one involving technical development and the other involving, I hate to say it, lobbying.
There already exist pieces of software like LNDHub or LNBits that allow people to offer custodial accounts for Lightning. We need a lot more software like this, and we need it to be miles better. It needs to not involve tinkering around on the command line and hooking up independent software, or perusing Github to follow manual installation instructions, or fumbling around trying to fix dependencies mismatches.
It needs to just work.
Click, sync to the network, done. It needs to be something that power users who are still not very tech savvy can run safely, and not lose other people’s money. It needs to support more than basic accounts for Lightning. Ecash offers privacy, which would be something important when it comes to small groups of people who know each other. You don’t want your friend seeing what you spend your money on. It needs to support things like Unchained or Nunchuck style on-chain self custody. People aren’t going to want to hold all their friends and family’s life savings, but holding a recovery key to safeguard them from their own mistakes is another matter.
We need the software that will actually scale this type of user interaction beyond a bunch of activist nerds online.
We also need a regulatory carve out. There needs to be a clear acknowledgement that running this type of software for friends and family with trivial amounts of money, say thousands of dollars, and without charging anything for it, is an unregulated activity. Helping friends and family interact with Bitcoin safely and easily, and for free, does not make you a bank. The idea of a few thousand dollars needing to comply with the regulations banks managing billions of dollars do is frankly absurd.
This is the path forward given the current constraints of Bitcoin, and the reality of growing and accelerating adoption, that leads us away from a system that eventually becomes completely captured and neutered by legacy financial institutions.
Instead of depending on them to deal with the current scaling limitations of Bitcoin, we depend on each other.
This article is a Take. Opinions expressed are entirely the author’s and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Bitcoiners shouldn’t sit around and wait for fiat banks and financial companies to offer services built on Bitcoin, we should do it ourselves.
Crypto News
Galoy Launches Bitcoin-Backed Loan Software, Sets Groundwork For Open-Source Banking

Founder: Nicolas Burtey
Date Founded: September 2019
Location of Headquarters: United States
Number of Employees: 11
Website: https://www.galoy.io/
Public or Private? Private
Last week, Galoy launched Lana, software that enables banks to accept bitcoin as collateral for loans.
Lana helps community and challenger banks (the banks with which Galoy is looking to work) to offer bitcoin-backed loans to various types of customers.
“Some banks might want to use it to sell to retail, and some might want to use it to sell commercial customers or high-net-worth individuals,” Burtey told Bitcoin Magazine.
In offering such loans to a wide array of customers, Burtey believes that the high cost of borrowing currently associated with such products will come down.
“Today’s interest rates are 12% to 15% if you want to get a loan using your bitcoin as collateral,” said Burtey.
“The rates are high because there are so few financial institutions offering this type of product. We see an opportunity now that the regulations are allowing banks to do things with bitcoin,” he added.
“We think a lot of banks will want to enter this market.”
If Burtey is correct in his prediction that banks are keen to offer bitcoin-backed loans, this will not only lower rates for such loans, but it will also introduce open-source Bitcoin software into the world of banking, which could initiate a new trend in the industry.
But more on that in just a minute. First, some background on Galoy.
Galoy’s History: From Blink Wallet To Lana
Founded in September 2019, Galoy had intentions to enable banks to use bitcoin from the start, but it had to hold off on doing so due to an unfriendly regulatory environment.
So, instead, it focused its efforts on creating and supporting Blink wallet (which was originally called the Bitcoin Beach wallet and which Galoy recently sold), a custodial Bitcoin and Lightning wallet predominantly used at first in El Salvador and then in Bitcoin circular economies globally.
“Galoy’s mission was to onboard banks to Bitcoin five years ago,” said Burtey.
“But the regulatory environment was so bad during the last five years that we decided to create Blink. The reason we are now focusing on our original mission is because with the end of Choke Point 2.0 and the repeal of SAB 121, we think now is the perfect time to help banks adopt Bitcoin.”
Burtey spoke about his work in creating and growing Blink fondly and shared that he had to stop working on the project only because it would be too difficult to continue managing it while also aiming to serve a new type of clientele.
“Blink is a B2C (Business-To-Customer) play, and it’s hard as an early-stage startup to focus on too many things,” explained Burtey.
“Galoy is a B2B (Business-To-Business)-driven business, and we want to work with banks and financial institutions,” he added.
“It’s good to be focused on just one thing.”
And, as mentioned, that one thing will now be Lana.
How Lana Works
Lana is software that Galoy helps banks integrate and manage for a subscription fee. With this software, banks can issue bitcoin-backed loans under the terms they create.
“We’re not the ones deciding how much interest will be charged or anything like that,” explained Burtey.
“We give banks the platform to do this, and then they can figure out their cost of capital, the duration of the loan, the liquidation price for the bitcoin in the loan and the rate at which they want to lend,” he added.
“We’re giving you software, and helping you run and automate that software.”
Something else that Galoy doesn’t do for banks is custody the bitcoin provided as collateral for the loans they issue. Each of the banks with whom the company works is responsible for selecting their own custodian.
“You can go to BitGo or Fireblocks or each loan can have its own multisig,” said Burtey. “We’re agnostic on custody.”
With that said, Lana helps banks monitor the bitcoin in custody so that banks can be aware of whether or not collateral is nearing liquidation levels.
“A key piece of this product is risk management,” said Burtey.
“Bitcoin is volatile, and the bank will need a tool to show that it’s taking calculated risk. So, we’ll provide banks with a dashboard to monitor this risk,” he added.
Who Will Use Lana?
Galoy is targeting community banks and other smaller financial institutions with this new product mostly because they think these smaller players will benefit most from it — and because the big banks likely won’t need such a product.
“We don’t think JP Morgan will really want to work with us,” said Burtey. “They’re probably building something like this themselves, whereas a smaller bank, a credit union or small company probably isn’t.”
Burtey also understands that smaller lenders’ incorporating Lana as opposed to building something comparable themselves can save these financial institutions a significant amount of time and effort.
“Our goal is to say, ‘Look, you can develop this internally, and it will take you six months, a year or longer depending on how much you know about Bitcoin,’” said Burtey. “‘Or we have a lending product as a service for you, and you can launch it much more quickly.’”
And as Burtey and his team onboard their first round of smaller banks, they’ll not only be making history in enabling more banks to accept bitcoin as collateral for loans, but they’ll potentially be altering the trajectory of banking in general by introducing open-source software to it.
Open-Source Bitcoin Banking
Burtey’s long-term vision for Galoy is to do much more than just help banks issue bitcoin-backed loans. He’s looking to introduce open-source software into banking as more banks begin to embrace Bitcoin.
However, it’s important to note that Lana isn’t open-source just yet. It’s fair-source software, and, under such a license, code becomes open-source after two years.
“It’s a delayed open-source system, but it’s all available on GitHub,” said Burtey. “You can go and try it, test it, and play with it on your own.
Under the fair-source license, no company other than Galoy can sell the product to a bank right now, allowing Galoy to profit while still building with auditable code.
“We sell the deployment, and we help banks to plug in to their custodian,” explained Burtey. “We’re building in the open — but we also want to generate revenue.”
Beyond helping banks implement Lana, Burtey’s wants to develop open-source “core banking software,” as he’s looking to disrupt the “core ledger” oligopoly.
“The core ledger is where banks store the account data, customer information and transaction details,” said Burtey. “It’s the source of truth for banks.”
And only three companies — FIS, Fiserv and Jack Henry — have the core ledger market cornered.
“These are all like hundred billion dollar companies that you’ve probably never heard about because all they do is focus on selling software to banks,” said Burtey.
“Our long-term goal is to disrupt this industry by making something that is open source,” said Burtey. “Today, there is no company that does core banking with the idea of open source, and so we’re working towards this.”
Burtey envisions a world in which open-source software can make it much easier for someone to start a Bitcoin bank. (For those who wince at the words “Bitcoin” and “bank” being used in tandem, might I remind you that it was the legendary Hal Finney himself who wrote that bitcoin-backed banks would serve as a scaling solution.)
“To start a bank today is a very expensive and complicated process,” said Burtey. “You have to pay $100,000 plus just to purchase the core ledger technology.”
Burtey then referenced his own experience in starting Blink wallet, essentially a bitcoin bank run on open-source code, before continuing.
“I just went to El Salvador and started what was effectively my own bank because I wanted to,” said Burtey.
“We need to reinvent how core banking software is being made in the world of Bitcoin, and I think this is where open-source becomes relevant,” he added.
“This is really why I think the world of banking and Bitcoin will be very different from the world of banking with fiat, and I think we’re one of the companies at the forefront of this.”
Galoy founder and CEO Nicolas Burtey wants to help more borrowers use bitcoin as collateral for loans while introducing open-source software into the traditional banking stack.
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