Putting Bitcoin to Work - Episode 4: Avoiding Liquidation
Borrowing against your bitcoin can unlock liquidity without selling your stack, but it can also introduce risk.
Markets move fast, and if you’re not paying attention, your collateral can vanish just as quickly.
In this post, we break down how to manage risk, avoid liquidation, and borrow smarter, whether you’re using CeFi or DeFi platforms.
TL;DR
Every bitcoin loan carries risk. Liquidation, custody, interest rate, and stablecoin risk.
Keep your Loan-to-Value (LTV) ratio conservative (20–35%).
Know who holds your bitcoin; a custodian or a smart contract.
Watch for variable rate spikes and stablecoin depegs.
Borrow less than you can, and automate where possible.
1. Liquidation risk: the one that sneaks up on you
This is the biggest risk when borrowing against bitcoin. If bitcoin’s price drops and your LTV rises above a set threshold, your lender can liquidate your collateral to cover the loan.
Example:
You borrow $5,000 against 0.5 BTC when BTC = $25,000. That’s a 40% LTV.
If BTC drops to $20,000, your LTV rises to 50%, reducing your buffer.
At that point, you’re getting closer to common liquidation thresholds. Maybe not an emergency, but a signal to stay alert, review your loan’s health, and consider whether you need to add collateral or repay part of the loan before market moves force your hand.
How to manage it:
Borrow at a conservative LTV (20–35%).
Keep a small stablecoin reserve for quick top-ups.
Monitor your loan’s health factor, especially if your loan has variable rates.
Liquidation risk can creep in like a rising tide. Slow, steady, and easy to ignore until it’s too late.
2. Custody and counterparty risk
Always ask: Who actually holds my bitcoin?
CeFi loans: Your BTC sits with a custodian (like BitGo). You’re trusting the company not to freeze, rehypothecate, or mismanage collateral.
DeFi loans: Your BTC is locked in a smart contract. No middleman, but you’re trusting code, which can fail or be exploited.
Smart approach:
Prefer platforms with Proof of Reserves or on-chain audits.
Check how admin keys and governance controls work.
Understand if collateral is pooled, reused, or segregated.
Trust is replaced by transparency. Make sure you can actually see what’s happening behind the scenes.
3. Interest rate and liquidity risk
Fixed-rate loans are predictable, but variable rates can change fast.
When market liquidity dries up, interest rates can jump, and your cost of borrowing climbs with it.
Tip:
Before you borrow, run a quick stress test:
> What happens if your rate doubles?
> Can you still afford repayments if BTC dips at the same time?
If not, scale back your LTV before signing. It’s always easier to increase leverage later than to unwind it in a panic.
4. Stablecoin and peg risk
Most loans are paid out in stablecoins like USDC, USDT, or DAI.
They’re designed to stay at $1, but not all are equal.
USDC: regulated and fully backed, but can freeze addresses.
DAI: decentralized, but partly backed by USDC.
USDT: widely used and liquid, with different reserve reporting standards.
If a stablecoin loses its peg, you could owe more in real terms or face delays withdrawing funds.
Always check which stablecoin your loan uses and how it maintains stability.
5. Platform reputation and transparency
A big name can feel safer, and sometimes it is. Reputable, regulated platforms often have deeper liquidity, stronger compliance, and more resources to manage risk.
But reputation isn’t a guarantee. Even big names can fail.
Look for:
Audited code or published Proof-of-Reserves.
Visible risk metrics like utilization, TVL, and liquidation ratios.
Clear governance structures, not hidden admin control.
At Sats Terminal, we surface these details directly in our interface—custody type, governance, rehypothecation, and rate history—so you can compare lenders with facts, not assumptions.
FAQs
What’s a conservative LTV to borrow at?
Typically 20–35%. It gives you breathing room if the market dips.
Can I lose my bitcoin in a loan?
Yes. If your LTV exceeds the liquidation threshold and you don’t top up in time, your collateral can be sold automatically.
How can I avoid surprise liquidations?
Use alerts or auto-top-up. Keep extra stablecoins handy to rebalance quickly.
Borrow smart, stay safe
Putting your bitcoin to work doesn’t mean putting it at risk. A well-managed loan can unlock liquidity, fund new opportunities, and even help you stack more sats. But only if you understand the downside.
Borrow with a margin of safety, not a margin of error.
At Sats Terminal, our goal is to make that easier, with full visibility into custody, collateral, and risk, all in one place.
Borrow smarter. Stay liquid. Keep your keys.
Visit Borrow at Sats Terminal today.