Questions to Ask Before Taking a Crypto Loan

Crypto-backed loans allow you to borrow cash or stablecoins without selling your crypto. While this can be a powerful financial tool, it also introduces risks that many borrowers underestimate—especially during volatile markets.

Before taking a crypto loan, you should fully understand how the loan works, who controls your collateral, and what happens if things go wrong. The questions below will help you evaluate whether a crypto loan is right for your situation and which lender is safest.

1. Why Am I Taking This Crypto Loan?

Start with the most important question: what is the purpose of the loan?

Common reasons include:

• Avoiding a taxable crypto sale

• Accessing liquidity for real estate or business expenses

• Short-term cash flow needs

• Portfolio leverage (higher risk)

If the loan does not clearly improve your financial position—or if it relies on optimistic market assumptions—it may not be worth the risk.

2. What Is the Loan-to-Value (LTV), and How Much Buffer Do I Have?

LTV determines how much you can borrow relative to your collateral.

Example:

• $100,000 in BTC collateral

• 50% LTV → $50,000 loan
  

Key follow-ups:

• At what LTV do margin calls begin? (Often around 60%-70% LTV)

• At what LTV does liquidation occur? (Often around 80%+ LTV)

• How quickly does liquidation happen after a margin call?
  

Lower LTVs mean:

• Less liquidation risk

• More flexibility during volatility

• Lower stress during drawdowns

  
  

3. What Happens If the Market Drops Suddenly?

Crypto markets can move fast. You need to know exactly what protections—or lack thereof—exist.

Ask:

• How are prices sourced (single exchange vs index - a weighted average of prices from multiple exchanges)?

• Are margin calls manual or automated?

• How much notice do I receive if my loan faces liquidation?

• Can partial liquidations occur, or is it all at once?

• Is there human oversight during extreme volatility?

Some platforms liquidate automatically via algorithms. Others involve manual review. Both have trade-offs.

4. Is My Collateral Being Rehypothecated?

Rehypothecation means the lender can lend, stake, or otherwise use your collateral.

Ask explicitly:

• Is rehypothecation allowed?

• If yes, to what extent?

• What happens to my collateral if the lender becomes insolvent?

Rehypothecation increases counterparty risk. Some borrowers accept it for better rates; others avoid it entirely.

5. What Are the True Costs of the Loan?

Interest rate alone does not tell the full story.

Ask about:

• Origination fees

• Early repayment penalties

• Withdrawal or custody fees

• Forced liquidation fees

Also ask:

• Is interest simple or compounded?

• Can rates change during the loan term?
  

6. What Happens If the Lender Fails?

History has shown that lender failure is a real risk.

Ask:

• Is the lender regulated and have licenses needed to operate?

• Where is the company headquarters?

• What legal claim do I have to my collateral?

7. Can I Repay or Exit the Loan Early?

Flexibility matters.

Ask:

• Can I repay at any time?

• How quickly is collateral released after repayment?

• Are there lock-up periods?

• Can I refinance the loan at any time?

Liquidity constraints during stressed markets can turn a manageable loan into a problem.

8. What Is My Worst-Case Scenario—and Am I Comfortable With It?

Finally, ask yourself:

• Am I okay losing part or all of my collateral?

• Can I meet margin calls quickly?

• Do I fully understand liquidation mechanics?

• Do I have liquidity outside crypto

If the downside outcome would materially harm your financial future, the loan size or structure may be inappropriate.

Final Thoughts

Crypto lending can be a useful financial tool—but only when used deliberately and conservatively. Many losses occur not because borrowers were reckless, but because they didn’t ask the right questions upfront.