Bitcoin-backed loans: how they work, what can go wrong

Education, not financial, tax or legal advice. Cold Hard Sats doesn't arrange loans or take applications. It has no affiliate links, and no lender pays to be listed here (disclosure). Naming a lender is not a recommendation, and the lenders table is in alphabetical order, not a ranking. Terms change often: every fact below was checked on October 17, 2026, so confirm it on the lender's own page (each one is linked) before you sign anything. A lender may not offer these terms, or any loan, where you live.

First: where your bitcoin actually is

A wallet doesn't hold bitcoin. It holds the keys that can move bitcoin, and the bitcoin itself is recorded on the blockchain. So the real question with any loan is simple: while the loan is open, who holds the keys to the coins you pledged? If the answer is "the lender" or "the lender's custodian", you're trusting them the same way you'd trust an exchange. Why self-custody matters explains that trade-off in detail.

How a bitcoin-backed loan works

You pledge bitcoin as collateral and receive dollars or a stablecoin. When you repay the loan plus interest, the collateral is released back to an address you control. Four terms decide how it goes.

• Loan-to-value (LTV): the loan balance divided by the current value of the collateral. Borrowing $50,000 against $100,000 of bitcoin is 50% LTV. Ledn says its loans typically start at 50% (Ledn), and Strike's maximum starting LTV is 50% (Strike).
• Margin call: a warning when LTV climbs to a set level, asking you to add collateral or repay part of the loan. Strike, for example, issues one at 70% LTV and gives you 72 hours to get back to 65% (Strike).
• Liquidation: if LTV keeps rising, the lender sells collateral to repay the loan. Ledn says liquidation at 80% LTV is "automatic and irreversible" (Ledn). On Coinbase's Morpho-powered loans it happens at 86%, plus a 4.38% penalty (Coinbase Help).
• Interest: unpaid interest usually adds to your balance, which pushes LTV up even if the price doesn't move (Morpho docs; Strike).

Who holds the keys? Four custody models

1. Custodial: you send your bitcoin to the lender or its custodian, and they hold the keys. You're trusting their security, their solvency and their contract.
2. Custodial with rehypothecation: the lender may reuse your collateral, for example by pledging it to its own funders or lending it out. If the lender fails, you may end up as an unsecured creditor waiting in line (see Celsius below). Policies vary, so read the exact wording in the table.
3. Multisig (collaborative custody): the collateral sits at a multisig address on the blockchain that needs 2 of 3 keys to move. You hold one key, and the lender and a third party hold the others. Unchained says no single party, including you, can move the collateral alone, and that you can verify it on-chain (Unchained). See Multisig basics.
4. Onchain (DeFi): a smart contract holds the collateral, and code handles liquidation. You swap company risk for code, oracle and wrapped-token risk (Morpho docs).

Pros: why people borrow against bitcoin

• You don't have to sell to get cash. The IRS treats digital assets as property, and selling, exchanging or otherwise disposing of them, including "by a transfer of ownership or financial interest," is reportable and can produce a capital gain (IRS). The IRS hasn't said whether pledging bitcoin for a loan is a disposal. Coinbase says it "will not treat your borrow transaction as a taxable event" (Coinbase), and Strike's page says "No taxable event" (Strike), but those are company positions, not IRS guidance. See the tax note below.
• You keep your upside. If the price rises while the loan is open, the gain is still yours once you repay. Ledn puts the trade-off plainly: "You keep your market exposure, but you also take on interest cost and liquidation risk" (Ledn).
• Speed, and usually no credit check. Strike, Coinbase and Ledn say they don't run a traditional credit check (Strike; Coinbase Help; Ledn). You still go through identity checks (KYC). Mortgages are different: Milo requires a 660 credit score (Milo FAQ).

Cons: what can go wrong

1. Margin calls and liquidation when the price falls. A margin call gives you hours, but a liquidation trigger is a price, not a countdown. Milo warns that "a fast decline can reach it quickly" (Milo FAQ). Onchain there's no grace period at all: once you cross the line, anyone can liquidate up to 100% of the debt, and "there is no price floor" (Morpho docs). A liquidation is also a sale, with tax consequences (see the worked example).

2. Counterparty risk: the lender can fail. When a lender holds your coins, its failure becomes your problem. Three 2022 collapses show how, in the regulators' and courts' own words:

• Celsius froze customer withdrawals on June 12, 2022 and filed for bankruptcy on July 13, 2022, "revealing that its liabilities exceeded its assets by more than one billion dollars," according to the CFTC's complaint. The CFTC says customer deposits "were pooled and deployed by Celsius as loans to institutional and retail customers" and used for other trading (CFTC, Jul 13, 2023). The SEC charged Celsius and its founder the same day (SEC, Jul 13, 2023).
• BlockFi settled with the SEC for $50 million in February 2022, plus $50 million to 32 states. The SEC's order found "a false and misleading statement for more than two years on its website concerning the level of risk in its loan portfolio and lending activity" (SEC, Feb 14, 2022). BlockFi filed for Chapter 11 on November 28, 2022 (case 22-19361, D.N.J.) (Kroll case site).
• Genesis stopped Gemini Earn withdrawals in November 2022 while holding about $900 million of assets from 340,000 investors, according to the SEC, which charged Genesis and Gemini on January 12, 2023 (SEC, Jan 12, 2023). Genesis filed for bankruptcy on January 19, 2023, and in May 2024 settled with the New York Attorney General for up to $2 billion for defrauded investors (NY Attorney General, May 20, 2024).

These were mostly yield and lending programs, not only borrower loans, but the lesson carries over: a promise that coins are "safe" isn't the same as coins you can verify. For exchange and wallet incidents, see the Security watch, and for the dates, the timeline.

3. Rehypothecation. If your collateral is reused, getting it back depends on the lender's whole chain of counterparties. In Celsius's bankruptcy, the court ruled on January 4, 2023 that coins deposited in its Earn accounts had become property of the bankruptcy estate under Celsius's terms of use, not customer property (U.S. Bankruptcy Court, S.D.N.Y., opinion in case 22-10964). That ruling covered Earn accounts, not Celsius's borrow program, but it shows why the exact contract wording matters. Ask whether the lender can re-pledge or lend your bitcoin, to whom, and how you can check where it is.

4. Interest costs. Interest is the price of keeping your bitcoin. Published examples on October 17, 2026: Ledn's base rate was 11.49% for loans under $250,000 (labeled APR in its table; a footnote says rates are shown on an annual percentage yield basis) (Ledn), and Strike's calculator showed an 11.25% fixed APR on a $10,000, 12-month loan at 50% LTV (Strike). Variable onchain rates move with supply and demand (Coinbase Help). Starting January 1, 2027, Ledn will require accrued interest and fees to be paid in full at maturity (Ledn).

5. You give up custody. With most loans, the keys to your collateral move to the lender, its custodian or a smart contract for the life of the loan. You can't move those coins, and you're exposed to whatever happens to the holder. Multisig loans, where you keep one of three keys, reduce this but don't remove it.

6. Smart-contract and wrapped-bitcoin risk (onchain loans). On Coinbase's Morpho loans, your BTC is converted to cbBTC and moved into a Morpho smart contract on Base (Coinbase). Whether that conversion is itself a taxable exchange isn't settled (see the tax note). Coinbase holds the BTC backing cbBTC (Coinbase), so you trust Coinbase *and* the code. An oracle price decides when liquidation happens (Morpho docs). Coinbase lists "protocol-level security vulnerabilities" as a risk (Coinbase Help) and says it "cannot prevent your collateral from being liquidated on Morpho" (Coinbase).

Worked example: how a price drop triggers liquidation

*Example numbers only, not a forecast. The thresholds are Ledn's published levels (alerts at 70% and 75%, liquidation at 80%). The prices, percentages and interest figures are our own arithmetic from those levels. With 1 BTC pledged, the collateral is worth the bitcoin price, and interest is left out of the table.*

Two things change the picture. Interest: at Ledn's 11.49% published rate, a year of unpaid interest, counted as simple interest (our arithmetic; Ledn doesn't publish how it compounds), takes the balance to roughly $55,745, which moves the 80% trigger up to about $69,700, a drop of only about 30%. Starting LTV: borrow $25,000 instead (25% LTV) and the 80% trigger doesn't hit until $31,250, a drop of 68.75%. In this example, halving the starting LTV moves the liquidation price from $62,500 down to $31,250.

Lenders and options compared

Everything in this table is as stated on each lender's own pages on October 17, 2026. Where a lender doesn't publish something, the cell says so. On a phone, swipe the table sideways to see all seven columns. Lenders whose custody or rehypothecation terms we couldn't find on their own pages aren't listed.

Bitcoin-backed mortgages

"Bitcoin mortgage" can mean three different things. Only the first two put your bitcoin at risk.

• Pledge bitcoin as the collateral (Milo). Milo's crypto mortgage is a 30-year, fixed-rate, interest-only mortgage on a U.S. home. Pledge BTC or ETH equal to the loan for up to 100% financing. Loans run from $275,000 to $5 million. Pledged coins are held by BitGo or Coinbase Custody in a segregated sub-account in your name, and Milo lists "no rehypothecation of your pledged crypto." A margin call "is generally issued once the value of your collateral drops by about 69%," and the liquidation threshold is set in your loan documents (Milo FAQ).
• Pledge bitcoin for the down payment (Better, with Coinbase). You get two loans: a conforming Fannie Mae mortgage, plus a separate down-payment loan secured by the bitcoin you pledge and a second lien on the home. The bitcoin must be worth 250% of the down-payment loan (you get 40% of its value toward the down payment), and Better keeps custody in its account on Coinbase. Better says the bitcoin is returned "after your mortgage is fully repaid or refinanced." Better says price drops never trigger a margin call or top-up, but it may liquidate the pledged bitcoin after 60 days of missed payments (Better). Better told CoinDesk: "Better may rehypothecate the pledged bitcoin, provided it keeps equivalent Bitcoin on hand to return the collateral at loan payoff" (CoinDesk, Sep 6, 2026). Better also said its borrower agreements and custodial arrangements comply with applicable laws, including insolvency rules (same article). Better's crypto-mortgage page doesn't address reuse, and its program terms restrict only the borrower from re-pledging the coins (Better program terms). Ask for the exact contract wording before you sign.
• Count bitcoin as an asset, no pledge (Milo self-custody, Newrez). Your keys stay with you, and your bitcoin only helps you qualify. Milo's self-custody mortgage counts BTC or ETH as reserves alongside a cash down payment, with a $200,000 minimum and no margin calls (Milo FAQ). Newrez announced on January 13, 2026 that it would count eligible crypto for asset verification and income estimation without selling, on its non-agency Smart Series loans (Newrez), and a January 30, 2026 Newrez post says borrowers "can now use eligible crypto holdings when verifying assets or calculating income" on its SmartSelf, SmartEdge and SmartVest loans (Newrez blog).

Bitcoin and mortgage applications: FHFA, Fannie Mae and Freddie Mac

The June 2025 order. On June 25, 2025, FHFA Director William J. Pulte signed Decision No. 2025-360, "Order Issuing Directive to Consider Cryptocurrency as an Asset for Single-Family Loans Delivered to Fannie Mae and Freddie Mac." It directs each company to "prepare a proposal for consideration of cryptocurrency as an asset for reserves in their respective single-family mortgage loan risk assessments, without conversion of said cryptocurrency to U.S. dollars." It limits this to crypto "that can be evidenced and stored on a U.S.-regulated centralized exchange subject to all applicable laws," tells each company to consider "adjustments for market volatility" and limits on "the share of reserves comprised of cryptocurrency," and requires board approval before anything goes to FHFA for review. It says it is "effective immediately and should be implemented as soon as reasonably practical" (order, as posted by Director Pulte on X). The order was published on Director Pulte's X account. As of October 17, 2026 we couldn't find it on FHFA's orders page (FHFA Orders) or in the Federal Register. Members of the Senate Banking Committee quoted its language in a July 24, 2025 letter asking FHFA how it reached the decision (Senate Banking Committee letter).

What the rulebooks say now. As of October 17, 2026, we found no published change. Fannie Mae's Selling Guide still accepts crypto for the down payment, closing costs and reserves only once it "has been exchanged into U.S. dollars" and is held at a U.S. or state-regulated financial institution, and never for earnest money (Fannie Mae Selling Guide B3-4.1-04). Freddie Mac's 2021 rule says crypto "must be exchanged for U.S. dollars if it will be needed for the Mortgage transaction" and "may not be included in the calculation of assets as a basis for repayment of obligations" (Freddie Mac Bulletin 2021-36). Its October 7, 2026 bulletin doesn't mention crypto (Bulletin 2026-13). We found no public proposal, board approval or FHFA sign-off under the order.

In Congress. The *21st Century Mortgage Act* (S. 2471), introduced July 28, 2025, is listed on Congress.gov with the status "Introduced" (Congress.gov). The *American Homeowner Crypto Modernization Act* (H.R. 4374), introduced July 14, 2025, would require mortgage programs to consider "the value of any digital assets a borrower has in any brokerage account associated with a cryptocurrency exchange" (bill text).

What it means for you. Counting crypto as *reserves* only helps you qualify. It isn't a loan against your bitcoin, and nothing gets liquidated. The order also covers only coins held on a U.S.-regulated exchange, so bitcoin whose keys you hold yourself wouldn't qualify under its wording. Pledging bitcoin as *collateral* is a different product with the risks described above.

Taxes: what the IRS says

The IRS treats digital assets as property, and selling, exchanging or otherwise disposing of them is reportable and can produce a capital gain or loss (IRS: Digital assets; IRS Notice 2014-21; IRS virtual currency FAQs). We found no IRS guidance written specifically for bitcoin-backed loans. The IRS has deferred broker reporting on "transactions described by digital asset market participants as the lending of digital assets" and on wrapping and unwrapping "until the Treasury Department and IRS issue further guidance" (IRS: Digital assets; IRS Notice 2024-57). That's a reporting rule only: the notice says it "is not intended to create an inference that the identified transaction is or is not a sale of a digital asset." The IRS FAQ says exchanging virtual currency for another virtual currency produces a capital gain or loss (IRS FAQ Q16), so converting BTC to cbBTC, as Coinbase's Morpho loans do, could be treated as a taxable exchange. The IRS hasn't ruled on wrapping either way, and loan terms that transfer ownership of your coins to the lender raise a similar question. One point is clear: a liquidation is a sale. Strike says any liquidation "is treated as a bitcoin sale on your behalf and incurs a taxable event" (Strike). Talk to a tax professional before you rely on any tax benefit.

Safety checklist: questions to ask any lender

• Who holds the keys? Get it in writing: the lender, a named custodian, a multisig where you hold a key, or a smart contract.
• Is my collateral rehypothecated? Ask for the exact contract wording, not a marketing badge. Can they re-pledge it, lend it, or move it to a "funding partner"?
• Can I verify it? Ask for an on-chain address or a proof-of-reserves report you can check yourself.
• What's the liquidation threshold? Know the margin-call LTV, the liquidation LTV, the bitcoin price at each one for your loan, and how much time you get in between.
• What happens if the lender goes bankrupt? Is the collateral segregated and in your name, or could it become part of the lender's estate, as Celsius Earn deposits did?
• What does it really cost? APR, fees, liquidation penalties, and what's due at maturity.
• How much room do I have? Know how far the price can fall before each threshold at your starting LTV, and whether you'd have cash or extra bitcoin *off the platform* to add as collateral (see the worked example).
• What would a liquidation cost in tax? A forced sale is still a sale.
• Can I test it first? A small first loan shows whether you can get your collateral back to an address you control.
• Could I live with losing the collateral? Liquidation and lender failure can both cost you the bitcoin you pledged. Be wary of any lender that promises your coins are "safe" or "insured" (see Common scams).

This page is educational only and is not financial, legal or tax advice.