Crypto loans: What they are and how they work

A crypto loan lets you use cryptocurrency you own as collateral to access additional funds or buying power, without selling. You pledge an asset you hold, borrow against a fraction of its value, and receive the borrowed funds while keeping ownership of the collateral.

Crypto loans also let you increase the amount you can buy in a new transaction, without having to sell any coins to raise cash first. In fact, many investors borrow against their crypto specifically to fund buying more of it.

Kraken Borrow builds this directly into the buy flow as the crypto you already hold acts as buying power. This allows you to buy beyond your cash without selling any of your portfolio. When you repay the loan, your collateral is released back to you.

A traditional personal loan from a bank is often unsecured, approved mainly on your credit score, income, and history.

A crypto loan flips that model. Approval is based on the collateral you post, not your credit history or risk profile, so funding is typically much faster. The trade-off is that the loan is only ever as reliable as the value of the collateral behind it, which brings a risk a standard bank loan does not carry.

Crypto loans come in two broad categories, and the difference between them comes down to who holds your collateral.

A centralized (CeFi) loan runs through a company, such as an exchange, that takes custody of your collateral and sets the terms.

A decentralized (DeFi) loan runs through a smart contract on a blockchain rather than a company, which is also why you often keep more direct control of your assets.

At the mechanical level, every crypto loan works the same way: you lock collateral, borrow against a fraction of its value, pay interest on what you borrow, and repay to unlock your collateral. The exact thresholds and rates vary by platform, so treat the numbers below as generic illustrations rather than any specific product’s terms.

Loan-to-value, or LTV, is the size of your loan divided by the value of your collateral, expressed as a percentage. Borrow $4,000 in stablecoins against $10,000 of collateral and your LTV is 40%.

Platforms also apply a haircut, which discounts how much of an asset’s market value counts as collateral, to leave a buffer for price swings. A more volatile asset gets a larger haircut, so it supports a smaller loan.

You pay interest only on the amount you borrow, and rates can be fixed or variable depending on the platform. Some products have a fixed term with a due date. Others, like Kraken Borrow, are open-ended, meaning there is no maturity date and you repay whenever it fits you. Repaying, in full or in part, reduces what you owe and lowers your LTV.

Because the loan is backed by a volatile asset, the platform watches your LTV constantly. If your collateral drops in value, your LTV climbs. Cross a first threshold and the platform issues a margin call.

A margin call is a warning to add collateral or repay part of what you borrowed. Cross a second, lower threshold and the platform liquidates, meaning it sells some of your collateral automatically to cover the value of the loan.

If you want the full step-by-step walkthrough of LTV math, interest accrual, and exactly how a liquidation unwinds, our dedicated mechanics guide goes deeper than this overview does.

Crypto loans have two broad uses, and the second is the one most people overlook.

The classic use for a crypto loan is raising funds against your holdings without selling them. You keep your position, keep your price exposure, and get access to value you would otherwise only reach by selling.

For example, rather than sell 1 BTC to cover a $20,000 expense, you could borrow $20,000 in stablecoins against your Bitcoin and keep the position intact.

Some people only see a crypto loan as a way to pull cash out. In practice, the faster-growing use is more powerful: using the value of the crypto you already hold to buy more crypto, inside the same buy flow you would use anyway. Borrowing is the mechanism, but buying more is the point.

This is where the concept of buying power comes in.

Instead of applying for a separate loan, you see a single figure for how much you can buy, based on your cash plus the value of a crypto-backed loan available to you.

Robinhood popularized this single buying-power number for stocks, and our comparison looks at how the two platforms approach it.

Crypto loans are genuinely useful, and they carry real risks that deserve equal weight. That is why it is worth understanding both sides before you use one.

• Borrow without selling, so you keep your position and your price exposure.

• No credit check, because approval is based on collateral rather than credit history.

• Fast access to liquidity or buying power, often in minutes rather than days.

• May avoid a taxable sale in some jurisdictions (this is factual, not tax advice; see the FAQs).

Before the list, one definition: the core risk of a crypto loan is liquidation, meaning the platform selling your collateral to cover the loan when its value drops too far.

• Collateral can be liquidated if its value falls, and you may lose the crypto you posted.

• Crypto market volatility increases that liquidation risk. Bitcoin fell more than 65% during the 2022 bear market, and a move like that can turn a comfortable loan into a margin call.

• Platform or custodial risk, where the company holding your collateral fails or freezes withdrawals.

• Variable interest rates can rise, increasing your cost of carry over time.

There are several proactive steps you can take to protect yourself from the risk of liquidation.

Borrow conservatively, well below the maximum LTV, so a normal price swing does not push you near liquidation.

Monitor your collateral and your LTV, and keep a buffer of assets you can add if prices move against you.

Choose regulated, transparent providers with a track record and published proof of reserves. For non-custodial borrowing specifically, our guide covers the extra habits that keep funds safer.

Crypto lending carries real, specific risks, and how safe it is depends almost entirely on the provider you choose and how conservatively you borrow. The two biggest failure modes are liquidation of your collateral and the platform itself failing.

With a custodial (CeFi) loan, a company takes possession of your collateral for the life of the loan. That arrangement is what makes the product convenient, and it means your access depends on that company staying solvent and operational. With a non-custodial (DeFi) loan, no company holds your assets, but a bug or exploit in the smart contract can drain funds instead.

The 2022 downturn showed what custodial failure looks like. Celsius Network halted withdrawals in June 2022 and filed for bankruptcy that November. BlockFi followed into bankruptcy in late 2022 after its exposure to FTX.

Users on both platforms lost funds or waited months to recover them. Smart-contract risk is not hypothetical either. Many DeFi protocols, not just centralized platforms, have been compromised over the years.

Run a short due-diligence checklist before you borrow anywhere: how long the platform has operated, whether it holds regulatory licenses, how it stores and proves customer assets (for example, through published proof-of-reserves reports), and whether it has suffered major security or insolvency events.

Aave, for its part, has published more than ten independent audits from firms including OpenZeppelin and Trail of Bits since 2022, which is the kind of transparency worth looking for.

On Kraken, borrowing against your crypto is built into the buy flow rather than run as a separate application. Kraken Borrow lets eligible crypto you already hold, such as BTC and ETH, act as buying power so you can buy more without selling.

Situation. An active trader holds a long-term Bitcoin position she has no interest in selling. Another investment opportunity comes up, but her spare cash is limited, and selling would mean giving up conviction she still holds.

Approach. Instead of selling, she borrows against a conservative fraction of her Bitcoin, keeping her LTV low so a routine price dip will not push her near liquidation. Her original position stays intact and keeps its price exposure.

Outcome. She acts on the new opportunity while still holding her original stack. She now has two things to watch: the new position, and her collateral’s value, because a sharp drop in Bitcoin could trigger a margin call on the loan.

Lesson. Borrowing against crypto expands what you can do, but that flexibility cuts both ways. A conservative LTV and active monitoring are the difference between a useful tool and a forced liquidation. Borrowing does not remove risk. It adds a second layer of it that you have to manage.

You now know what a crypto loan is, how LTV and liquidation work, and how to weigh the risks. Here is where that knowledge turns into action.

On Kraken, you do not need a separate lending app to use it: Kraken Borrow folds a crypto-backed loan into the normal buy flow, so eligible crypto you already hold becomes buying power, your cash is spent first, and the full rate and fees appear before you confirm.

It runs on the same infrastructure behind Kraken, whose managed custodial wallets have never been breached since 2011, and it sits alongside trading, staking, and everything else in one account, so there is nowhere else you need to go to act on this.