Understanding the mechanics of crypto loans: how LTV works

An Alternative to Traditional Credit Systems

In the conventional financial market, banks assess borrowers using credit scores. The lower your score, the higher the risk you are considered to the lender, leading to smaller loan amounts or higher interest rates. Crypto lending has revolutionized this approach: instead of checking your credit history, platforms accept cryptocurrency as collateral.

What does LTV mean in the context of crypto loans?

LTV (Loan-to-Value) is the ratio of the amount you borrow to the value of the cryptocurrency collateral you provide. In simpler terms, it indicates how much you could borrow based on your assets.

For example, if you deposit $10,000 in Bitcoin and receive a loan of $5,000, your LTV is 50%. This means you are using only half of the potential value of your collateral.

Practical benefits of LTV for both parties

For lenders: LTV is a risk management mechanism. A low ratio means the collateral significantly exceeds the loan amount. If the value of the cryptocurrency drops by 30%, the lender still has adequate coverage.

For borrowers: LTV offers the opportunity to obtain larger loans under less strict conditions. However, you need to be prepared for liquidation risk if the market value of your collateral falls.

How is LTV calculated?

The formula is straightforward: LTV = Unpaid Loan Amount / Current Market Value of Collateral

Imagine a scenario: you borrow $6,000 while collateral is worth $12,000. Your ratio would be 50%.

However, crypto markets are volatile. If the value of your collateral drops to $10,000 while your position remains at $6,000, your LTV increases to 60%. This brings you closer to the platform’s liquidation threshold.

Managing changes in your ratio

To bring your LTV back to a comfortable level, you have two options:

1. Provide additional collateral – deposit more cryptocurrency to reduce the ratio
2. Repay part of the loan – decrease your debt amount

Monitoring your ratio should be continuous, especially during market volatility. Most platforms offer tools to track LTV in real-time.

Why is LTV critical in crypto lending?

The LTV system is the main pillar of crypto lending because it replaces what is lacking in the digital environment – trust and verified credit history. Instead, the market relies on mathematics and asset collateral that can be trusted.