What is a Bitcoin-backed loan?

Find answers to common questions about borrowing cash using Bitcoin with Xapo Bank.

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A BTC collateral loan is a type of secured loan where your Bitcoin serves as collateral. As this is a crypto loan, and unlike traditional loans, this loan type offers a simple and efficient way to borrow cash by using your Bitcoin as collateral.

With a Bitcoin-backed loan, you can access US Dollars without selling your Bitcoin.

How does a Bitcoin-backed Loan work?

To get a BTC collateral loan, deposit your Bitcoin into your secure BTC Vault in the Xapo Bank app. Based on the value of your Bitcoin, you can borrow up to a specified amount in USD. The loan comes with a variable interest rate linked to the Federal Reserve rates and includes a fixed repayment period.

What are the benefits of a Bitcoin-backed Loan?

The main benefits include:

Retaining your Bitcoin investment while accessing liquidity.
Avoiding the need to sell your Bitcoin.
Potentially benefiting from Bitcoin price appreciation.
Using your Bitcoin as collateral means you can borrow cash without selling it, potentially avoiding taxable events. Remember to consult a tax professional to understand how this applies to your specific situation. This is not tax advice and your tax liability could vary depending on where you live and your personal circumstances.

What is a variable interest rate?

A variable interest rate is one that can fluctuate over time based on changes in broader market interest rates. Unlike a fixed interest rate, which stays the same for the entire loan term, a variable interest rate can go up or down, impacting the amount of interest you pay on your loan. While the loan's interest rate may technically change every day, in practice, it tends to shift less frequently, as the Federal Reserve only revisits rates about eight times a year. Interest is accrued daily based on the current rate.

What is an APR, and why is it important?

APR stands for Annual Percentage Rate. It represents the yearly cost of borrowing money, expressed as a percentage. The APR includes the interest rate as well as any additional fees or costs associated with the loan, providing a comprehensive measure of the loan's total cost.

While the interest rate only reflects the cost of borrowing based on the principal amount of the loan, the APR includes both the interest rate and any other fees or costs (such as origination—the process of applying for and securing a new loan—fees, closing costs, or insurance). This makes the APR a more accurate reflection of the loan's total cost.

APR is important because it provides a standardized way to compare the costs of different loans. By considering the APR, you can see the true cost of borrowing, making it easier to compare offers from different lenders and choose the most cost-effective option.

What is a Loan-to-Value (LTV) ratio?

A Loan-to-Value (LTV) ratio compares the amount of your outstanding loan to the value of the collateral securing the loan.

So, if you borrowed USD 10,000 using USD 50,000 worth of collateral, your LTV is 10,000/ 50,000 = 20%.

What happens to my loan if the price of Bitcoin increases?

If the price of Bitcoin increases, the value of your collateral will also increase, lowering your overall LTV and keeping your loan healthy. You should also remember that during the period of your Bitcoin-backed loan, the collateral stored in BTC Vault cannot be withdrawn until the loan is fully repaid.

What happens to my loan if the price of Bitcoin decreases?

If the Bitcoin price decreases, the value of your collateral will also decrease, increasing your overall LTV and potentially triggering Margin Calls and/ or collateral liquidation events.

If this happens, you should top up additional Bitcoin as collateral, which will decrease the LTV and prevent liquidation.

Maintaining a low LTV ratio is essential to avoid the risk of your collateral being sold if its value drops sharply. You can also start repaying your loan partially or in full to avoid liquidation.