The Billionaire’s Playbook: How to Use Bitcoin as Collateral for Tax-Free Cash

Since more than 19 million of the 21 million bitcoins that might be produced have been mined, using them as collateral has evolved from a theoretical idea to a viable financial strategy. Borrowing cash using bitcoin as collateral allows holders to access liquidity without selling their assets or triggering capital gains tax. As a matter of fact, platforms use loan-to-value ratios between 50% and 90%, meaning $10,000 in Bitcoin collateral yields $5,000 to $9,000 in cash. This guide explores how to use Bitcoin as collateral, the mechanics behind these loans, tax advantages, and critical risks to consider.

How Does a Bitcoin-Backed Loan Work?

Platforms connect borrowers directly with lending pools through smart contracts, creating a process that bypasses traditional credit checks entirely. Users deposit cryptocurrency into these smart contracts to form lending pools, which borrowers can access once they provide collateral. The collateral itself gets locked in a smart contract, not sold or transferred to another party.

The Mechanics of Collateral

Borrowers pledge Bitcoin as collateral for the duration of the loan. The process starts when Bitcoin holders transfer their holdings to a lending platform, which holds the cryptocurrency in custody throughout the loan term. Once the blockchain confirms the Bitcoin deposit, cash or stablecoins are sent to the borrower’s bank account or crypto wallet.

Most crypto loans operate on an overcollateralised basis, meaning borrowers must lock up more value than they receive. For instance, a borrower might put up collateral worth more than the actual loan amount to protect against market volatility. This structure eliminates the need for credit scores or extensive background checks that traditional lenders require.

The lending platform holds the collateral in secure custody while the loan remains active. Neither the platform nor institutional partners have the right to lend out the collateral to generate interest in some cases. Collateral is held securely in verifiable, segregated on-chain addresses, ensuring legal protection even in the unlikely event of a funding partner’s bankruptcy. However, practices vary between platforms. Some lenders engage in rehypothecation, where they reuse pledged assets for their own purposes, including securing their own borrowing or lending the assets to other parties.

Borrowers who prefer cold storage typically face lending rates closer to 12%, whilst those who accept rehypothecation might access lower rates. Platforms that specifically avoid rehypothecation are preferred by many Bitcoin holders because they lower the danger of insolvency or asset misuse.

Understanding Loan-to-Value (LTV)

The loan-to-value ratio measures the loan amount compared to the collateral’s value. Platforms calculate LTV by dividing the loan sum by the appraised value of the asset that secures the loan. Borrowing £50,000 against Bitcoin valued at £100,000 results in a 50% loan-to-value ratio.

Most platforms set maximum LTV ratios between 40% and 70%, meaning borrowers can only access a portion of their Bitcoin’s value. Bitcoin typically commands higher LTV ratios compared to other cryptocurrencies due to its market position. Platforms like Nexo offer interest rates from 2.9%, depending on loyalty tier and collateral ratio. A strike allows borrowers to access 50% of the value of their Bitcoin.

Lower LTV ratios indicate reduced risk for lenders, as borrowers hold more equity in the asset. A 50% LTV means posting Bitcoin worth £10,000 yields a loan of £5,000. By contrast, higher LTV ratios provide larger loans but increase the probability that lenders will require action if prices decline.

The inverse value of LTV is the collateral-to-principal ratio (CTP). An LTV at 40% equates to a CTP of 250%. This metric helps borrowers understand their current collateral status, particularly when Bitcoin prices drop.

LTV ratios fluctuate automatically with Bitcoin’s price movements. As Bitcoin’s value increases, the loan-to-value ratio falls, widening the buffer between the loan amount and collateral value. This reduces the risk of forced selling. Conversely, price drops reduce the collateral’s value, thereby increasing the LTV ratio. If the ratio crosses preset thresholds, typically around 70%, a margin call gets triggered.

Borrowers receive margin calls requiring them to deposit additional funds or assets to meet minimum collateral requirements. A margin call occurs when the value of pledged collateral falls below a specified threshold due to market fluctuations. Failure to add collateral or repay part of the loan results in automatic liquidation, where the protocol sells existing collateral to recover the borrowed amount.

Different platforms set varying margin call and liquidation thresholds. Whilst one platform might trigger margin calls at 70% LTV, another could wait until 83%. Natural-person borrowers may receive 30 days to add security or repay funds before automatic liquidation occurs. Block Earner, for example, automatically sells a portion of crypto security to bring LVR back to 55% if no action is taken within the grace period.

Borrowers can manage their LTV through several methods. Adding more Bitcoin as collateral or other accepted cryptocurrencies lowers the ratio. Repaying part of the loan principal achieves the same result. Some platforms offer auto-top-up features that automatically add collateral when prices fall.

Retaining the Upside

Using Bitcoin as collateral for a loan preserves exposure to future price appreciation. The cryptocurrency remains locked but not sold, allowing borrowers to benefit if Bitcoin’s value rises during the loan term. This represents a fundamental advantage over selling holdings to access cash.

Whilst the loan remains active, borrowers maintain economic exposure to Bitcoin. Any increase in value belongs to the borrower, not the lender. Consider holding 5 Bitcoin, each valued at a specific price point. Rather than selling to fund a property deposit, using them as collateral for a loan keeps the Bitcoin in play, ready to capture gains if prices climb.

Price increases directly improve loan health by reducing the LTV ratio. If Bitcoin increases dramatically, a borrower who takes out a loan at 50% LTV may see that percentage fall to 40% or 30%. This improved ratio not only reduces margin call risk but also often qualifies borrowers for better interest rates on some platforms.

Platforms structure repayment terms with flexibility in mind. No fixed repayment schedule exists on specific platforms, allowing borrowers to repay at their own pace in crypto or stablecoins. Loan terms typically run 12 months, with renewal options available as long as LTV remains healthy. On some products, no monthly interest payments are required, and borrowers can repay the loan at any time without penalty.

Upon full repayment of the loan plus interest, the platform unlocks and returns the Bitcoin collateral. The minimum loan amount varies by platform, starting from as low as $500 in some cases. Borrowers can even retrieve portions of their collateral before the loan ends, based on the loan’s age and current LTV ratio.

This structure allows Bitcoin holders to access liquidity for property purchases, business investments, or personal expenses without sacrificing long-term cryptocurrency positions. The ability to maintain both fiat liquidity and Bitcoin exposure simultaneously creates portfolio diversification opportunities that traditional lending cannot match.

The Tax Advantage: Why Smart Money Borrows

Borrowing against Bitcoin creates a distinct tax position compared to selling holdings outright. Australian tax regulations treat cryptocurrency as property rather than currency, subjecting every disposal to capital gains tax scrutiny. Using bitcoin as collateral for a loan sidesteps this entirely, as no disposal event occurs when assets remain locked in custody.

Dodging the Capital Gains Trap

The Australian Taxation Office views crypto assets as CGT assets, meaning transactions involving disposal or exchange trigger capital gains events. Disposal takes multiple forms beyond simple selling. A taxable event occurs when one cryptocurrency is exchanged for another. Spending Bitcoin to purchase goods or services triggers CGT, even for minor transactions. Gifting cryptocurrency to another person creates a capital gains event. Converting crypto to Australian or foreign currency initiates a disposal.

Each disposal requires calculating the difference between the acquisition cost and the disposal proceeds. A Bitcoin purchased for $20,000 and sold for $40,000 generates a $20,000 capital gain. That gain gets added to assessable income and taxed at the individual’s marginal tax rate. Holding crypto for more than 12 months provides access to a 50% CGT discount for individuals. In effect, only half the gain enters taxable income calculations for long-term holders.

By contrast, using Bitcoin as collateral preserves ownership throughout the loan term. According to the Australian Taxation Office, since beneficial ownership of cryptocurrencies stays with the original holder, borrowing against them typically does not result in a taxable event. The collateral stays locked but not transferred to an address the borrower doesn’t control. No disposal occurs, no CGT event happens, and no immediate tax liability arises.

DeFi lending arrangements are subject to different tax treatment. Many DeFi protocols trigger CGT events because beneficial ownership of the crypto asset ends under the arrangement. Depositing fungible crypto assets into addresses that already hold balances of the same asset typically triggers disposal. Deposits and withdrawals from liquidity pools both create CGT events. Centralised Bitcoin-backed loans structured through custody arrangements avoid these complications, as the borrower retains beneficial ownership.

Debt is Tax-Free

Loan proceeds carry no income tax liability. Borrowing $50,000 against Bitcoin collateral creates no assessable income, regardless of how those funds get used. Correspondingly, selling $50,000 worth of Bitcoin to access the same cash generates a capital gain on the appreciation, potentially triggering substantial tax obligations.

The mathematics favour borrowing for holders with significant unrealised gains. Consider someone who bought Bitcoin at $15,000 and now faces a $35,000 gain at current prices. Selling triggers CGT on that $35,000 profit. With the 50% discount for assets held for more than 12 months, $17,500 is added to taxable income. At a 37% marginal rate, the tax bill reaches approximately $6,475. A loan accessing the same $50,000 avoids this immediate liability entirely.

Interest payments replace capital gains taxes in the borrowing scenario. Loan interest rates typically range from 2.9% upwards, depending on the platform and collateral ratio. The annual interest on a $50,000 loan at 8% is $4,000. That figure remains substantially below the tax cost of selling in most scenarios involving appreciated holdings.

Tax deductibility enhances the borrowing advantage further when loans fund business or investment activities. Interest paid on loans used for business purposes or investment income generation qualifies for tax deductions against earnings from those activities. Personal loans do not offer such a deduction, but business-related borrowing provides clearer opportunities. Investment interest deductions may apply when borrowed funds are used to purchase income-producing assets, though complex rules govern deductibility limits.

The strategy proves particularly valuable for high-net-worth individuals facing substantial capital gains obligations. Rather than triggering massive tax bills through asset sales, borrowing provides access to funds whilst preserving tax-deferred status. Long-term holders with considerable unrealised appreciation access liquidity without immediate tax consequences, potentially deferring obligations indefinitely whilst maintaining investment exposure.

Liquidation events create taxing points when they occur. If collateral is sold to cover a loan, the disposal occurs at that moment. The liquidation price relative to the original purchase price determines whether the event produces a capital gain or a capital loss. Capital losses offset capital gains but cannot reduce other ordinary income. Adding collateral to prevent liquidation carries no tax consequence, as no disposal occurs.

Related Article: The Ultimate Crypto Tax Guide

The Hidden Risks: Volatility and Margin Calls

Cryptocurrency price volatility creates the primary risk when using Bitcoin as collateral for a loan. Bitcoin can experience 20-30% price movements over short periods, which directly impacts the safety of leveraged positions. When collateral value drops, borrowers face forced liquidation scenarios that can eliminate holdings at precisely the wrong moment.

The Dreaded “Margin Call”

DeFi liquidation occurs when a borrower’s collateral falls below a specified threshold. The collateral’s value can change significantly over brief periods, rendering it insufficient as a guarantee for lenders. If market value drops below the liquidation threshold, protocols automatically auction off collateral for less than its actual value.

Borrowers typically have 24 to 72 hours to respond once a margin call is triggered. They have to pay back a portion of the loan or put down additional collateral during this time to bring the LTV back to reasonable levels. Failure to act results in partial or complete liquidation. Some platforms offer extension requests, though they are denied if the liquidation threshold is reached.

The scale of potential losses surprises most borrowers. Starting with 1 BTC worth $152,899, borrowing $91,739 at 60% LTV, and watching Bitcoin fall to $114,674 triggers liquidation at 80% LTV. The platform sells 0.8 BTC at $114,674 per coin to cover the $91,739 loan, leaving 0.2 BTC worth $22,935. The position drops from $152,899 to $22,935 due to aggressive borrowing combined with adverse market movements.

Liquidations execute at the best available market price, regardless of how low that price might be. This can significantly extend losses if market conditions become particularly volatile or if large positions are sold into illiquid markets.

The Conservative Approach (Low LTV)

Responsible LTV for volatile crypto assets is 20-30%, not the 50-70% that platforms market as a feature. Higher ratios work until they fail, and when they fail, the collapse happens instantly. The relationship between LTV and risk isn’t linear but exponential.

In contrast, borrowing $38,225 against $152,899 in Bitcoin at 25% LTV provides substantial protection. Bitcoin falls to $114,674, and LTV rises to 33%, well below margin call territory. Conservative LTV sacrifices maximum upside to preserve capital. Borrowers maintaining lower ratios don’t check prices hourly, worried about margin calls.

Platform Risk (Not Your Keys)

Custodial wallets operated by centralised entities maintain ownership of private keys, not users. The centralised entity could impose rules on funds without warning, lend assets to other users, or face bankruptcy. When cryptocurrency exchanges fail, assets held custodially might be treated as exchange property rather than customer property. Customers become unsecured creditors, placing them almost last in line for repayment from limited asset pools.

Platform mismanagement, regulatory action, internal fraud, or bankruptcy events represent significant custodial risks. If the company is hacked, mismanages funds, or goes bankrupt, borrowers may never recover their bitcoin, even if they make timely loan payments.

Conclusion: Leverage Requires Discipline

Bitcoin-backed loans unlock liquidity without the immediate tax consequences of selling, making them attractive for holders with substantial unrealised gains. The mechanics are straightforward: pledge Bitcoin as collateral, receive cash or stablecoins, and retain exposure to future price appreciation. Tax treatment strongly favours borrowing over selling, as loan proceeds generate no assessable income whilst disposal events trigger capital gains obligations.

That said, volatility remains the defining risk. Conservative LTV ratios between 20-30% protect margin calls that can wipe out positions during market downturns. Borrowers must also accept custodial risk, as platforms control private keys throughout the loan term. Choose platforms carefully, borrow conservatively, and understand that aggressive LTV ratios work perfectly until they catastrophically don’t.