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Bitcoin-backed loans allow cryptocurrency holders to leverage their Bitcoin as collateral to obtain cash or stablecoins without selling their assets. These loans provide liquidity while enabling users to retain ownership of their Bitcoin. The loan amount is typically determined by the loan-to-value (LTV) ratio, which assesses the value of the Bitcoin collateral.
To obtain a Bitcoin-backed loan, borrowers deposit their Bitcoin into a lending platform. The platform then evaluates the collateral and determines the loan amount based on the LTV ratio. Once approved, the borrower receives the loan in the desired currency. The Bitcoin collateral is held securely by the platform until the loan is repaid, including any interest.
There are two main types of Bitcoin-backed loans: centralized finance (CeFi) and decentralized finance (DeFi) loans. CeFi loans are offered by traditional financial institutions and crypto exchanges, providing more stability and security. DeFi loans, on the other hand, are managed through decentralized platforms using smart contracts, offering greater flexibility and often lower interest rates but with higher risks.
Bitcoin-backed loans offer several benefits, including preserving Bitcoin holdings, quick access to liquidity, and potentially lower interest rates compared to traditional loans. However, they also come with risks such as the volatility of Bitcoin, which can affect the collateral value, and the potential for margin calls if the Bitcoin price drops significantly. Borrowers must carefully manage these risks and choose reputable lending platforms.
