Crypto‑collateralised loans: why they exist and how they work

A crypto-collateralised loan works like an ordinary loan: the borrower takes money for a fixed term and pledges an asset—in this case, cryptocurrency. When the term ends, the borrower must repay the principal and interest in the same currency that was borrowed. A loan can be issued in a national currency (RUB, USD, EUR) or a digital asset (BTC, ETH, DOGE).

Because crypto prices are volatile, the value of collateral may rise or fall, but the loan itself is always fixed in fiat. If bitcoin’s price rises during the loan term, the borrower can repay the loan at a profit. Here is how it works:

Initial bitcoin price: $3,800.
Interest rate: 8% per annum.
Loan amount: $15,000.
Loan term: 180 days.
Discount: 30%
Collateral amount: 5.86157174 BTC
Initial collateral value: $22,273
Final bitcoin price: $10,000.
Accrued interest: $590.
Amount to repay: $15,590.
Returned collateral amount: 5.86157174 BTC
Final collateral value: $58,615
Borrower’s profit from the transaction: $35,752.

On the Biterest platform the loan currency is the US dollar, so all amounts are fixed in USD. A loan can be received in fiat money or cryptocurrency. Settlements are made based on the current exchange rate of the disbursed currency to USD.

Loans secured by cryptocurrency are an alternative to exchanges and swap services. They help borrowers avoid selling crypto at an unfavourable rate, preserving an asset that may appreciate.

The main difference from traditional secured loans is the high volatility of the collateral. That is also the core appeal: if the collateral appreciates, the transaction becomes profitable for the borrower. For the lender, returns are always fixed in USD.

There are two ways to hold collateral:

• The collateral is held by a third party. This is offered by platforms that lend from their own balance sheet. In effect, they take users’ cryptocurrency into temporary custody. Some p2p services that match lenders and borrowers also use this model. The borrower sends the collateral to an address specified by the service, and the lender disburses funds. When the loan is repaid, the process is reversed.
• A p2p platform holds the collateral at a multisig address. Here, the platform guarantees the deal’s terms. For each loan a new multisig address is created from the public keys of the borrower, lender and platform, and the collateral is sent there. One private key stays with the borrower, one with the lender and one with the platform. Funds are released when 2 of the 3 keys are used.

Biterest stores collateral at a multisig address. The platform does not hold users’ funds or private keys. Until the deal is closed, neither party can access the collateral.

Platforms that lend from their own funds and custody users’ assets set loan terms. They define minimum and maximum loan amounts, interest rates, the discount, the loan-to-value (LTV) ratio and maturities. In p2p lending, borrowers and lenders negotiate and set terms themselves.

On Biterest users can fully shape loan terms without restrictions: the platform imposes no mandatory requirements on amounts, maturities, interest rates or discounts.

In any form of secured lending the collateral’s value must exceed the loan amount. The collateral depends on the loan amount, annual interest rate, term and the discount—i.e., the collateral’s safety buffer.

The discount indicates how far the collateral currency’s price can fall before the collateral value equals the loan amount and the deal closes (this is a margin call). The higher the discount set by the borrower, the larger the collateral required.

Platforms that custody users’ money and collateral impose strict requirements because of anti–money-laundering and counter-terrorist-financing laws. Such platforms must conduct KYC, under which a user provides passport details and other personal information.

On p2p platforms registration usually does not require passport data and is limited to an email address, username and password, but requirements may vary by jurisdiction.

To register on Biterest only a minimal set of data is needed: email plus a username and password. The platform does not collect users’ personal data.

Most platforms issue loans in USD, but other fiat currencies or cryptocurrencies may be chosen.

A platform that lends directly disburses funds via bank transfers or credits the borrower’s account with stablecoins such as Tether (USDT). P2p services use bank transfers and payment processors.

Even when a loan is disbursed in cryptocurrency, its value is calculated in USD at the time of the deal. Cryptocurrency here is merely a transfer rail. On repayment the borrower returns the same USD amount that was borrowed, plus interest. If the crypto price rises in the meantime, the borrower repays fewer coins than were received. Long-term investors can profit from appreciation not only of the collateral but also of the principal.

For example: a borrower takes $1,000 in bitcoin at a price of $3,800 per BTC and receives 0.2632 BTC. When bitcoin’s price rises to $10,000, the borrower repays $1,000, which then equals 0.1 BTC.

Another advantage of crypto-denominated loans is faster transactions than bank transfers. The borrower does not provide personal data to a third party and need not fear frozen assets.

If the collateral currency rises, the total collateral value rises. If it falls, the collateral value falls.

If the collateral value drops to the amount owed, a margin call occurs. The deal closes and the collateral passes to the lender to cover the debt. The lender recoups the investment; the borrower keeps the loan proceeds but loses the collateral. For the borrower this is equivalent to selling the cryptocurrency at the market price.

The risk of a margin call depends on the discount set by the borrower. The larger the discount, the lower the risk of closure due to a margin call.

On p2p crypto‑collateral lending platforms, disputes are resolved using multisig wallets. If a borrower fails to repay on time, the platform transfers its private key to the lender, who then unlocks the multisig address and recovers the loan amount from the collateral.

On Biterest the borrower provides collateral in cryptocurrency.

• Choose a platform that does not hold your funds or private keys. Consider the volatility of the collateral currency and the loan term.
• The larger the discount, the further the margin call. Biterest recommends setting a discount of at least 30%.
• If you are not ready to disclose passport details, use a platform without KYC.