According to Decrypt, Bitcoin-backed loans allow holders of Bitcoin to borrow cash or stablecoins without selling their BTC holdings. The process relies on using existing BTC as collateral for the loan. LTV—loan-to-value—determines the maximum amount a borrower can receive relative to the value of their collateral. If the market value of the BTC drops, the platform may initiate liquidation to recover the loan amount.
In this model, borrowers do not need to dispose of their Bitcoin; instead, they use it as security for funds. The LTV ratio sets a safety margin based on current BTC price, ensuring the collateral remains sufficient to cover the loan plus potential market fluctuations. When liquidation occurs, the platform sells part or all of the collateral at the prevailing market rate to repay the debt.
The system is designed to balance borrower access to capital with platform risk management. Changes in BTC price directly affect LTV calculations and trigger liquidation if collateral value falls below the required threshold. Users must monitor their exposure, as price movements can lead to automatic enforcement of liquidation terms under platform rules.
