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What Is a Bitcoin-Backed Loan? Can You Get Cash For Your Bitcoin Without Selling It?

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Image Credit: @denarium_bitcoin

Have you ever wondered how you can take advantage of your Bitcoin holdings without selling them? There are a lot of new Bitcoin-related financial products available to cryptocurrency users. A Bitcoin-backed loan is one of those options. How can you get cash for your Bitcoin without spending it?

What Is a Bitcoin-Backed Loan?

A Bitcoin-backed loan is a line of credit that uses your Bitcoin holdings as a secure deposit. It is not a Bitcoin loan, which would be someone loaning you some Bitcoin. A Bitcoin-backed loan uses cryptocurrency as collateral.

The features of a Bitcoin-backed loan are like a regular fiat loan. You must repay the loan over a set period. The loan attracts interest. The best Bitcoin-backed loan companies work with SEC-approved products.

Bitcoin-backed loans have two major benefits over a fiat loan. First, a crypto-backed loan doesn’t require a credit check. You deposit your Bitcoin, and your line of credit becomes available instantly. Second, when you finish repaying your loan, your Bitcoin returns to your possession.

You get the benefits of a loan. But when that loan ends, you still hold an asset in Bitcoin.

Crypto Lending Platforms

So, you know what a Bitcoin-backed loan is. Does that mean you can get cash for your Bitcoin without selling it? Well, yes, it does.

One of the best options is Nexo’s Instant Crypto Credit Line. Nexo is one of the largest Bitcoin-backed loan providers. You can use Bitcoin, Ethereum, Ripple (XRP), Stellar (XLM), Binance Coin, Litecoin, or NEXO Token as collateral, and loan up to $2 million at any one time.

You head to Nexo and create an account. Then you can use the Nexo calculator to explore the loan value of your cryptocurrencies. (You can combine crypto tokens to increase the value of your loan.) Once Nexo confirms your deposit, your credit line becomes instantly available, allowing you to withdraw your loan into one of 45+ fiat currencies.

Nexo is about to launch the Nexo Card which will allow users to pay for all manner of goods and services, without selling your Bitcoin.

The Nexo Loan-to-Value ratio is determined automatically using the current and historical token volatility. However, Nexo state that it is “~50% for BTC and ETH, ~40% for XRP, ~90% for stablecoins,~35% for LTC, ~15% for NEXO (will be increased further), ~30% for BNB and ~17% for XLM.”

So, at the time of writing, if I deposit 1 Bitcoin, I would have access to a $5000 line of credit.

What If the Value of Crypto Rises or Falls During the Loan Period?

One important thing to consider is how the rise and fall of the cryptocurrency markets affects a Bitcoin-backed loan.

Continuing with the Nexo Bitcoin-backed loan example, if the value of your collateral increases during the period of the Bitcoin-backed loan, the credit line limit increases automatically. In this, you can immediately borrow more without depositing more Bitcoin. Of course, you don’t have to use it but it is an option.

Alternatively, the user can place an order to sell a fraction of their crypto-asset to repay a portion of the loan.

If your cryptocurrency collateral decreases in value, you will receive warnings from Nexo to rebalance your account. You can rebalance by increasing the amount of Bitcoin or cryptocurrency Nexo holds or making an equivalent payment to reduce the outstanding credit line. If the rebalancing warnings are not acted upon, Nexo may make small repayments from the cryptocurrency collateral to rebalance the account.

Earning Interest on Your Crypto Assets

There is another option that lets you earn fiat currency without selling your cryptocurrency holdings. Some services allow you to deposit stablecoins and other cryptocurrencies to earn interest on. (What is a stablecoin, anyway?) The interest accrues in fiat currency (depending on the service), meaning you keep hold of your crypto assets but receive a financial reward at the end of the month or year.

Cryptocurrency interest rates are often higher than you’ll find in regular financial products. For example, you can earn 8% interest on stablecoin holdings with Nexo. Nexo accepts deposits of Tether (USDT), TrueUSD (TUSD), USD Coin (USDC), Paxos Standard (PAX), and Dai (DAI). In fact, Nexo accepts deposits of EUR, USD, and GBP, all of which you can earn interest on, and the 8% is extremely competitive compared to fiat financial products.

The process is extremely simple, too. Deposit some of the supported stablecoins, and your account immediately begins earning interest. You can add and remove cryptocurrency as you see fit, and all Nexo custodial deposits are covered by BitGo and Lloyd’s of London for $100 million of cover.

If you have stablecoin holdings, using a cryptocurrency deposit service that accrues interest is an easy way to get your currency working harder for you. Like Bitcoin-backed loans and crypto lending platforms, stablecoin interest rates are set to become a very competitive space in the coming years as major financial institutions enter and influence the market.

Are Bitcoin-Backed Loans Safe?

The biggest question of all regards the safety of a Bitcoin-backed loan. Are crypto lending platforms safe? In terms of security, I strongly advise sticking with established crypto lending platforms, offering well-reviewed Bitcoin-backed loan products.

Nexo is certainly the market leader in the crypto lending space, an area that will continue to expand as cryptocurrency adoption increases. Just like fiat financial products, you should always opt for a secure and trustworthy option instead of something promising ridiculous, improbable returns. If it seems too good to be true, it probably is.

Looking for a crypto credit card? Check out Dan’s list of the five best crypto credit cards you can pick up today.

Disclaimer: This is not investment advice. Bitcoin and other cryptocurrencies are highly speculative. Nothing is guaranteed in cryptocurrency. Always perform your own research before investing and never commit more money than you are comfortable losing.

We earn commission if you purchase items using an affiliate link. We only recommend products we trust. See our affiliate disclosure.

Gavin Phillips
Gavin is the SEO Manager and a Senior Writer for Blocks Decoded. He’s been invested in Bitcoin since 2010 and has contributed to several crypto and blockchain publications, including Envilope. Gavin loves real-world applications of blockchain technology, such as Civic and uPort, and how blockchain technology can help protect privacy. Gavin is also a Senior Writer for MakeUseOf.
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