Crypto lending and borrowing: How does it work?

Cryptocurrency isn’t just for buying, selling, or holding, it also enables participation in blockchain-based financial services like lending and borrowing. These services form a growing part of the crypto ecosystem, introducing new methods for users to interact with capital and participate in decentralised financial systems.

In this guide, we break down how crypto lending works, how borrowing against your crypto operates, and what to consider before getting started.

What is crypto lending?

Crypto lending allows holders of digital assets to make their cryptocurrency available to others through a lending platform. Some users choose to lend their crypto through platforms that facilitate lending services.

Once deposited, the platform typically allocates those funds to borrowers, who pay interest in return. That interest is then passed on to the lender, minus the platform’s fee. The rates can vary depending on the asset, platform, terms of the loan, and broader market conditions.

Lending is usually facilitated in one of two ways:

• Custodial (centralised) lending: A centralised platform handles the process on your behalf, managing the loan, interest payments, and custody of your crypto.
• Non-custodial (decentralised) lending: You interact directly with smart contracts on blockchain protocols, often via decentralised finance (DeFi) platforms.

These options offer flexibility, but they also come with risk. Interest rates are not guaranteed, and lending through smart contracts may expose you to technical vulnerabilities.

What is crypto borrowing?

Borrowing against crypto lets you use your existing digital assets as collateral to access a loan, often in the form of a stablecoin like USDT or USDC. This can be an alternative to selling crypto for those who want to unlock liquidity while retaining exposure to the asset.

For example, if you hold Ethereum (ETH) and expect its value to increase over time, you might borrow against it instead of selling. This allows you to access funds while maintaining your ETH position.

This type of borrowing is commonly used by individuals who:

• Want access to cash or stablecoins without selling their holdings
• Want to delay tax events triggered by asset sales

It’s worth noting that most crypto-backed loans are overcollateralised. If the market value of your collateral drops below a set threshold, your position may be liquidated (i.e. your crypto may be sold to repay the loan). Some decentralised platforms are exploring undercollateralised loans, but these involve higher risk and complexity.

Centralised vs decentralised lending platforms

Crypto lending and borrowing can take place through either centralised or decentralised platforms.

• Centralised platforms function similarly to traditional financial institutions. They manage custody, set terms, and offer customer support. You entrust your funds to a third party, which can simplify the process but requires trust in the provider’s security and solvency.
• Decentralised platforms operate via smart contracts and allow users to interact directly with lending pools. These protocols are often built on Ethereum or similar blockchains. Interest rates are set algorithmically based on supply and demand. These platforms offer greater control and transparency but may require more technical understanding.

For more information, check out our guide on centralised vs. decentralised platforms.

Benefits and risks of crypto lending and borrowing

Like all financial activities, crypto lending and borrowing involve both potential opportunities and risks.

Lending allows participation in protocols that may offer interest, while borrowing can unlock liquidity without requiring asset sales. With no credit checks on many platforms, users may find flexible terms and decentralised access.

That said, key risks include:

• Collateral volatility: A drop in asset value may result in liquidation.
• Custodial risk: Centralised platforms require trust in the provider’s operational security.
• Smart contract risk: DeFi platforms rely on code that may have bugs or vulnerabilities.
• Variable returns: Interest rates may fluctuate based on market demand and liquidity.

It’s important to fully understand the risks and how the platform operates before participating.

How to get started with crypto lending and borrowing

Getting started typically involves the following steps:

• Choose a platform - Research secure and reputable centralised or decentralised platforms.
• Review terms - Understand fees, interest rates, and collateral requirements.
• Set up your wallet - If required, create or connect a compatible crypto wallet.
• Deposit assets - Lend your crypto or deposit collateral for borrowing.

Example:

You hold 1 ETH and deposit it on a platform that offers loans at a 50% loan-to-value (LTV) ratio. This means you could borrow up to the value of 0.5 ETH in stablecoins. If ETH’s price drops sharply, you may need to add more collateral to avoid liquidation.

Trade crypto with BTC Markets

BTC Markets does not currently offer lending or borrowing services. However, we encourage customers to stay informed through our Learn page, which features educational resources on digital assets and decentralised finance.

Whether you're new to crypto or looking to expand your knowledge, BTC Markets provides a secure and user-friendly platform to support your journey.