How to Get Liquidity Without Selling Bitcoin During the Dip

Bitcoin is down 20% from its highs, and you need cash. Maybe it's a tax bill, a business opportunity, or just life happening at an inconvenient time. The obvious move is to sell some of your stack. But that triggers capital gains taxes, removes your exposure to any recovery, and breaks whatever accumulation strategy you've been building.

There's another option that's grown from a niche product into a $73.6 billion market in 2025: borrowing against your Bitcoin instead of selling it.

How Bitcoin-Backed Lending Actually Works

The basic mechanics are straightforward. You deposit Bitcoin as collateral, and a lender gives you cash or stablecoins. You pay interest on the loan, and when you repay it, you get your Bitcoin back. If Bitcoin's price drops too far, you either add more collateral or face liquidation.

This isn't new, but the scale has changed dramatically. Bitcoin-collateralized lending hit $73.6 billion in 2025, surpassing the previous peak of $69.37 billion from late 2021. The crypto lending platform sector overall is projected to more than double from $10.68 billion today to over $25 billion by 2030.

What's driving this? Partly institutional adoption. JPMorgan began accepting Bitcoin and Bitcoin ETFs as collateral in 2025. Cantor Fitzgerald launched Bitcoin lending operations. These aren't crypto-native companies chasing yield; they're traditional finance firms recognizing a real use case.

The Math on Rates and Terms

Borrowing costs vary significantly depending on where and how you borrow.

Centralized platforms like Ledn offer fixed rates as low as 2.9% APR, with 12-month terms and no monthly payments until loan closure. Ledn has facilitated over $10 billion in loan originations since 2018, so there's a track record to evaluate.

Decentralized protocols like Aave and Compound charge variable rates, averaging 7.73% and 4.72% APR respectively. The tradeoff is that you're interacting with smart contracts rather than trusting a company with your Bitcoin.

Loan-to-value ratios typically range from 50-70% for Bitcoin collateral. Borrow $50,000 against $100,000 worth of Bitcoin, and you have a 50% LTV. The lower your LTV, the more price decline you can absorb before facing liquidation.

Interestingly, over-collateralization ratios decreased from about 163% in 2024 to 151% in 2025, suggesting lenders are becoming more comfortable with Bitcoin as collateral. This means more efficient capital use for borrowers, but also less cushion if things go wrong.

The Tax Arbitrage

One of the primary reasons holders use Bitcoin-backed loans is tax efficiency. Selling Bitcoin triggers a taxable event. Borrowing against it doesn't. You still own the asset, so there's no realization of gains.

This is especially relevant during dips. If you bought Bitcoin at $20,000 and it's now at $80,000 (even after a correction), selling means recognizing $60,000 in gains. Borrowing against it means accessing liquidity while maintaining your cost basis for whenever you do eventually sell.

Of course, tax treatment varies by jurisdiction, and you should verify this with a professional. But the basic principle holds in most major markets: loans aren't income or capital gains.

Platforms and Custody Models

The biggest practical question is: who holds your Bitcoin while the loan is outstanding?

Centralized platforms typically take custody of your collateral. This introduces counterparty risk. If the platform fails, becomes insolvent, or gets hacked, your Bitcoin may be at risk. The collapses of 2022 taught painful lessons here.

Decentralized protocols use smart contracts, which eliminates company-specific risk but introduces smart contract risk. Code can have bugs. Protocols can be exploited.

A third model uses non-custodial structures with multisig escrow. Firefish operates this way, using P2P multisig escrow where your Bitcoin is locked in a transaction that requires multiple signatures to move. Neither Firefish nor the lender can unilaterally access your collateral. You're borrowing fiat against BTC that remains secured by cryptographic controls rather than trusting a company's internal systems.

This matters because the Canadian Securities Administrators specifically warns that unregistered platforms present "significant risks including lack of internal controls and inadequate disclosure." The SEC has taken enforcement actions against platforms like Gemini for similar reasons. How your collateral is held isn't just a technical detail.

The Liquidation Risk You Need to Understand

Here's the uncomfortable truth about Bitcoin-backed borrowing: Bitcoin's price can move faster than your ability to respond.

Bitcoin has fat-tailed return distributions. This means extreme moves happen more often than a normal distribution would predict. A 20% drop in a day is rare, but it's not unprecedented. If you're at 65% LTV and Bitcoin drops 30%, you're getting liquidated, possibly at the worst possible price.

During sharp declines, liquidations can cascade. Forced selling pushes prices lower, which triggers more liquidations, which causes more forced selling. This is the same dynamic that amplified the 2022 crypto crash.

The mitigation is straightforward but requires discipline: borrow less than you could. If a platform offers 70% LTV, consider taking 40-50%. The opportunity cost of lower leverage is insurance against liquidation during exactly the kind of dip that made you need liquidity in the first place.

Who This Actually Makes Sense For

Bitcoin-backed borrowing isn't universally appropriate. It makes the most sense for:

Long-term holders who need temporary liquidity. If you believe in Bitcoin's long-term trajectory and need cash for a specific purpose with a clear repayment path, borrowing lets you stay in your position. Xapo Bank reported that 52% of their 2025 Bitcoin-backed loans had 365-day terms, suggesting borrowers are thinking strategically rather than speculatively.

High-conviction investors during dips. If you think Bitcoin at $80,000 is cheap relative to where it's going, selling to cover expenses is painful. Borrowing buys time.

Business owners with Bitcoin treasuries. Rather than converting to fiat for operational expenses and losing exposure, borrowing against holdings maintains the treasury position while funding operations.

Firefish, for example, offers loans starting at €800 with terms from 3-24 months, which covers everything from bridging a tax payment to funding a larger business need. For lenders on the other side of these transactions, the platform offers up to 15% APY on Bitcoin-secured loans, with the collateral visible on-chain.

What Could Go Wrong

Fairness requires acknowledging the ways this can backfire:

Bitcoin keeps dropping. If you borrow during a dip that turns into a prolonged bear market, you might face liquidation anyway, losing your Bitcoin at depressed prices while still owing interest on the loan.

Interest compounds. A 5% APR sounds manageable until you're rolling loans for two years because you couldn't repay on schedule. Now you've paid 10%+ of your collateral value in interest.

Platform risk materializes. Even with good intentions and reasonable security, platforms can fail. The 2022 crypto credit crisis proved this repeatedly.

Regulatory changes. The SEC and other regulators are actively scrutinizing crypto lending. A platform that's compliant today could face enforcement tomorrow, potentially freezing assets or forcing rapid unwinding of positions.

A Framework for Deciding

If you're considering borrowing against Bitcoin, here's a practical framework:

1. Define the purpose and repayment source. "I need $50,000 for a tax bill, and I'll repay it from Q2 income" is a reasonable use case. "I want to lever up my Bitcoin position" is speculation dressed as strategy.

1. Calculate your liquidation price. At your chosen LTV, how far does Bitcoin need to fall before you're liquidated? Can you survive that scenario?

1. Evaluate the platform. Who holds custody? What's their track record? Are they registered with relevant regulators? What happens if they fail?

1. Compare the cost of borrowing to the cost of selling. Factor in taxes, opportunity cost of lost exposure, and interest payments. Sometimes selling is actually cheaper.

1. Have a plan B. If Bitcoin drops and you get a margin call, can you add collateral? If not, you're gambling that price recovers before your cushion runs out.

The Bottom Line

Bitcoin-backed lending has matured from an experimental corner of crypto into a $73.6 billion market used by individuals and institutions alike. The core value proposition is real: access liquidity without selling, maintain exposure to potential upside, and avoid triggering taxable events.

But the risks are equally real. Liquidation dynamics can be brutal during volatility. Platform failures have destroyed billions in user assets. And borrowing against a volatile asset to fund consumption is a fundamentally different risk profile than borrowing against a house or investment portfolio.

If you understand the mechanics, choose platforms carefully, and maintain conservative LTV ratios, Bitcoin-backed borrowing can be a legitimate tool for managing liquidity without abandoning your position. If you're reaching for maximum leverage during a dip because you're sure it's the bottom, you might be the liquidity that institutional short sellers are counting on.

The market is there. The tools are better than ever. Whether it makes sense for you depends entirely on your circumstances, conviction, and ability to survive being wrong.