Can You Borrow Against Your Bitcoin Without Selling It? Costs and Risks You Should Know

Borrowing Against Bitcoin Without Selling: Costs and Risks You Should Know

Loan Options and Risks

Companies like Arch, SoFi, and Coinbase offer Bitcoin-backed loans, allowing users to borrow up to 60% of their holdings at 7.25% interest. However, if the price drops significantly, lenders can sell the collateral, triggering a chain of forced sales and unexpected tax bills.

How Loan-to-Value (LTV) Works

Loan-to-Value (LTV) is an important metric that compares the size of the loan to the current value of the Bitcoin. If the price drops, the LTV increases, even if the borrower doesn't borrow more money. For example, if a user takes out a $60,000 loan against $100,000 worth of Bitcoin, their initial LTV is 60%. If the price falls by 25%, their LTV jumps to 80%.

Tax Implications and Rehypothecation

Borrowing against Bitcoin is generally not taxable, but a forced liquidation counts as a sale for tax purposes, which could trigger a tax bill on top of losses. Lenders like Celsius and BlockFi have faced significant issues after mishandling customer assets. It's essential to choose a lender that maintains its collateral in qualified custody and never rehypothecates it.

Conclusion

While borrowing against Bitcoin can be a viable option, it's crucial to understand the risks and costs involved. Users should carefully evaluate their financial situation and choose a reputable lender to minimize potential losses.