Cryptocurrency lending has emerged in recent years as a way for holders of crypto-assets to unlock liquidity without selling their holdings, or for borrowers to gain access to funding using digital assets as collateral. But as with all things crypto, the upside comes with significant risks.

This guide explains how crypto lending works, what the terms often include (interest, collateralization, loan-to-value), and the key caveats investors in Spain should be aware of.

What is crypto-asset lending?

At its simplest, crypto lending involves two parties: a borrower and a lender.

The lender provides funds (often stablecoins or fiat) and receives interest.

The borrower pledges crypto-assets as collateral and receives funds. Because the crypto-assets (collateral) can drop in value quickly, lending platforms and borrowers typically agree to specific thresholds and terms.

In many cases:

• You keep ownership of your crypto collateral (you don’t sell it) but it is locked (or under escrow) until you repay the loan.

• If the value of your collateral falls (or the value of the borrowed funds rises relative to it), you risk a margin call (a demand from the lender to increase the amount of assets held as collateral) or liquidation of your collateral.

• Platforms may charge fees, interest and set specific “loan-to-value” (LTV) limits, plus liquidation triggers.

How the terms work: collateral, LTV, liquidation

Collateral and ownership

When you take a crypto-backed loan, you pledge (lock) your crypto assets as security. You typically remain the legal owner of them unless a liquidation occurs.

Loan-to-Value (LTV)

LTV is the ratio between the loan amount and the value of the collateral. For example, if you borrow 5,000€ and pledge crypto worth 10,000€, the LTV is 50%.

A lower LTV means more buffer between your collateral’s value and the amount borrowed (safer from a risk-perspective). A higher LTV means you’ve stretched the collateral value more (riskier).

When your collateral loses value or the loan amount rises (via interest or fees), the effective LTV increases—even if you borrowed a fixed amount.

Liquidation triggers

Platforms set a threshold at which your loan is automatically liquidated (ie., your collateral gets sold) to protect the lender and the platform. For instance, Spanish crypto platform, Bit2Me, requires a 50% LTV but when the ratio between principal and collateral reaches 85% the collateral would be triggered for liquidation.

Bit2Me also notes that in effect this means when the collateral represents about 117.65% of the loan value. (Because the ratio flips: principal / collateral = 0.85 means collateral / principal ≈ 1.1765)

They also charge a liquidation fee: eg., 2% on the outstanding principal, with a minimum of 100€ (in crypto equivalent) when the collateral is sold at market price.

Example

Imagine you borrow 5,000€, using crypto worth €10,000 as collateral (LTV = 50%). If the value of the crypto drops to 8,000€, your LTV becomes 5,000€/8,000€ = 62.5%. If the platform’s trigger is 85%, you’re still safe for now.

But if the collateral falls further to 6,000€, your LTV becomes 5,000€/6,000€ ≈ 83.3%—you’re very close to the 85% trigger. If it drops to 5,500€, LTV ≈ 91%, you exceed the trigger and a liquidation event could happen: your crypto gets sold and you pay the fee.

Interest rates and terms: what to expect

Crypto-loan terms and interest vary widely depending on platform, collateral type, loan size, duration and region. Here are some typical characteristics:

• Currencies: Loans often issued in stablecoins like EURC or USDC, or fiat.

• Collateral types: Most platforms accept BTC and ETH, though others like XRP are being added.

• Terms: Some are flexible with no fixed maturity, while others set fixed repayment periods.

• Interest rates can be wide-ranging: Coinbase (through Morpho) offers Bitcoin-backed loans from 5% APR in the US. Bit2Me tiers rates by borrower level, with the median exceeding 10%, typically between 12% and 15%.

Investors should always check if a platform is regulated under EU or CNMV guidelines and understand tax implications before pledging crypto.

Risks involved (and how they’ve played out)

Crypto lending is not like a bank deposit. It carries risks beyond the standard credit risk of traditional lending. Let’s explore the main risk categories and real-world examples.

Volatility and collateral risk

Crypto assets are notoriously volatile. If your collateral rapidly loses value, your LTV can exceed the liquidation trigger very quickly.

In other words: you can borrow, but if the collateral falls in price, you may unexpectedly lose your position.

Liquidation risk

Beyond volatility, you face the risk of forced sale of your collateral. These sales can happen at disadvantageous times, reducing the value you ultimately recover. In many crypto-loan models, you might lose part of your upside if your collateral’s future price rises because it was sold during a downturn.

A particularly dangerous scenario is a mass liquidation event, where many loans are liquidated simultaneously (because many borrowers’ collateral falls in value at once) flooding the market and exacerbating losses.

Platform / counterparty risk

When you deposit crypto or borrow via a platform, you rely on that platform’s solvency, security, governance and transparency. If it misuses assets, fails, is hacked, or faces regulatory action, you may lose part or all your pledged assets or your borrowed funds may become locked. Here are two examples from major platforms:

• Celsius Network (2022): the platform paused withdrawals and eventually filed for bankruptcy in July 2022. The company had promised large yields on deposits, encouraged borrowing against crypto, but when asset prices fell and withdrawals surged, it could not meet redemptions. Its collapse is often cited as a cautionary tale about lending platforms that promise high interest without fully disclosing risk.

• Coinbase (2023): Coinbase’s lending product (Borrow) was wound down; they stopped offering new loans and ended the program by November 2023. Although this was a strategic decision rather than an outright crash, it underscores that even major exchanges can retreat from lending lines of business when regulatory or risk concerns mount.

Regulatory risk

Crypto lending sits in a grey area in many jurisdictions. Regulators may treat lending/borrowing with crypto-collateral as securities or regulated credit products. If a platform fails to comply, it may face enforcement, which could jeopardise users’ funds.

Liquidity risk

If you borrow and the platform or the market cannot liquidate collateral at a good price (or at all) during a downturn, you may face losses greater than expected. Liquidation may occur at low market prices, or the platform may delay, leaving you exposed until the price recovers (which might not happen).

Tax and legal risk (Spain/Europe specific)

For Spanish investors, pledging crypto as collateral may have tax implications (on capital gains, on loan interest, etc.). Crypto holdings are subject to reporting obligations in Spain. Lack of clarity in tax treatment can catch users off-guard. Additionally, if the platform is not regulated under EU law (for example under MiCA or Spanish law) you may have less consumer protection.

Diversify Your Lending Strategy

Crypto lending offers a compelling alternative to selling your crypto, where you can retain exposure while gaining liquidity. However, it is not without significant risk. From volatile collateral prices to automatic liquidations, from platform failures to regulatory uncertainties; many factors can turn a seemingly safe loan into a loss of assets.

For Spanish investors, the best approach is one of caution: use lending only if you fully understand the mechanics, keep buffer margins, treat it as a complement (not substitute) to other investment or borrowing strategies, and always stay informed. The promise of easy liquidity and high yield should never overshadow the fundamental risks.