Loan-to-Value (LTV): How It Works in Crypto Loans

What Exactly Is Loan-to-Value?

In the traditional financial landscape, lenders rely on credit scores to assess risk. In the world of cryptocurrencies, the situation is different: this is where the Loan-to-Value (LTV) parameter comes into play, a fundamental metric that measures the percentage ratio between the loan amount and the value of the deposited collateral.

In practice, LTV represents a protection mechanism for both parties. The lender reduces their risk because they can liquidate the collateral in case of default, while the user can access more generous financing with lower interest rates, without going through traditional credit checks.

How to Calculate Loan-to-Value: Two Common Scenarios

Initial Scenario - During Loan Disbursement:

Imagine you want to borrow money using bitcoin as collateral. The formula is simple:

LTV = (Loan amount) ÷ (Market value of collateral) × 100

If you deposit $10,000 in bitcoin and receive a $5,000 loan, your LTV will be 50%. This means your collateral covers twice the amount borrowed.

Subsequent Scenario - During Active Monitoring:

Once the loan is active, your LTV continues to fluctuate based on cryptocurrency price movements. You will use this formula to constantly monitor the situation:

LTV = (Remaining debt balance) ÷ (Current value of collateral)

The Critical Role of Volatility

Here’s the key point: if the price of bitcoin drops, the value of your collateral automatically decreases, causing an increase in your LTV ratio. If the bitcoin you deposited loses 30% of its value, your LTV could rise from 50% to 71%, dangerously approaching the liquidation threshold.

To keep your LTV at its original level and avoid the risk of forced liquidation, you may be required to provide additional collateral or repay part of the loan.

Why Loan-to-Value Is Essential in Crypto Lending

The main advantage of LTV lies in its ability to minimize the lender’s risk through an objective and transparent mechanism. For borrowers, it offers an opportunity to access larger amounts of capital while maintaining competitive interest rates, all without going through traditional bureaucracy.