How does LTV protect both participants in crypto lending?

In the traditional financial system, lenders rely on credit ratings to assess the borrower’s reliability. In the cryptocurrency market, the system works differently – instead of a personal credit rating, a collateral mechanism is used. The LTV (Loan-to-value) ratio is the key tool that regulates the relationship between the borrower and the lender.

How does LTV work in the world of crypto lending?

The LTV system is a ratio that shows how much cryptocurrency needs to be provided as collateral to obtain a loan of a certain size. For the lender, this is an effective way to reduce risks – frozen assets guarantee debt repayment. For the borrower, LTV offers the opportunity to get a loan without a credit history check, often with lower interest rates compared to banks.

Calculating LTV: practical examples

Initial Loan

When you decide to take out a crypto loan secured by your assets, the formula is simple:

LTV = loan amount / current market value of collateral

Suppose you deposit Bitcoin worth $10,000 and receive a loan of $5,000. Your ratio will be 50%. However, cryptocurrency markets are volatile – if the price of Bitcoin drops, the LTV ratio increases, even if the loan amount remains the same. To prevent liquidation, you will need to provide additional collateral and bring the ratio back to its original level.

Active Loan Period

After the loan is activated, the formula slightly changes:

LTV = outstanding debt / current market value of collateral

At this stage, you constantly monitor changes – as you repay the debt, the numerator decreases, and fluctuations in the exchange rate change the denominator. Both factors affect your ratio, so timely monitoring helps avoid unexpected problems.

Why is LTV beneficial for both parties?

For lenders, it provides confidence – collateral is much more reliable than promises. For borrowers, it offers freedom – no lengthy checks are needed, only the presence of cryptocurrency and an understanding of the risks.