Crypto Holders Can Borrow Against Bitcoin, Avoid Selling
Many cryptocurrency owners hold assets like Bitcoin without realizing the potential lost earnings or the high cost of selling when cash is needed. While the long-term belief in Bitcoin remains strong for many, simply letting these digital assets sit idle represents a missed opportunity. This approach ignores the potential for these holdings to generate income or provide liquidity without sacrificing ownership or triggering taxable events.
The concept of opportunity cost is crucial here. If your cash sits in a savings account earning 3% to 4% interest annually, that’s a benchmark for risk-free returns.
However, many Bitcoin and Ethereum holders earn zero on their digital assets. Holding $50,000 worth of Bitcoin that generates no return could mean missing out on approximately $2,000 in potential interest income over a year.
The High Cost of Selling
When the need for cash arises, the immediate reaction for many is to sell a portion of their crypto holdings. This often feels like the most straightforward solution. However, this decision can be costly, especially if the price of the cryptocurrency surges shortly after the sale.
Consider buying Bitcoin at $30,000 and needing $10,000. Selling a third of your holdings provides the cash.
But if Bitcoin then doubles to $60,000 just two months later, you’ve not only lost the potential profit on the sold portion but also face a taxable event. If held for over a year, this gain is taxed at long-term capital gains rates, potentially 15% or 20%, reducing your net return further.
Borrowing: The Real Estate Parallel
Wealthy individuals often avoid selling valuable assets like real estate to access cash. Instead, they use tools like a home equity line of credit (HELOC) or a cash-out refinance. These methods allow them to borrow against their property’s equity, gaining liquidity without selling the asset itself.
This same principle can now be applied to digital assets like Bitcoin and Ethereum. By using crypto as collateral, owners can borrow funds, effectively accessing liquidity while retaining their original holdings. This strategy keeps the asset working for them and avoids forced sales.
How Borrowing Against Bitcoin Works
Platforms like Nexo offer services that allow users to deposit Bitcoin as collateral and borrow against it. For instance, if you hold $50,000 worth of Bitcoin and need $10,000, instead of selling, you can deposit your Bitcoin.
The platform then offers a credit line. If your loan-to-value ratio—the amount borrowed compared to the collateral’s value—is low, like 20% ($10,000 borrowed against $50,000 collateral), it’s considered a conservative approach.
The cost of borrowing needs to be weighed against the potential cost of selling. On a $10,000 loan at a 12.9% annual percentage rate (APR), the annual interest is about $1,290. While this is a cost, it can be significantly less than the potential upside missed from selling and the taxes incurred, especially during a strong market rally.
Yield Generation Options
For those not ready to use a credit line or who prefer their crypto to earn passive income, platforms also offer savings products. These include flexible savings accounts that pay daily compounding interest with no lock-up period, allowing withdrawals anytime. Alternatively, fixed-term savings lock funds for up to 12 months for potentially higher rates, requiring a commitment based on conviction and a timeline.
Choosing between flexible and fixed-term savings depends on whether immediate access or a potentially higher return through commitment is prioritized. It is vital to understand what is being given up to earn this yield before committing funds to any such product.
Understanding the Risks
Using crypto for borrowing or yield generation involves significant risks that must be clearly understood. The primary risks are custodial risk and loan-to-value (LTV) or liquidation risk.
Custodial Risk: When you deposit Bitcoin onto a platform like Nexo, you transfer control of your private keys to a third party. This introduces counterparty risk—the risk that the platform may become insolvent, be hacked, or face regulatory shutdown.
Historical examples like Celsius and BlockFi demonstrate how clients lost their deposited crypto in such scenarios. While Nexo claims robust infrastructure, including FDIC-backed custody for US operations and fully collateralized loans, the fundamental reality remains: your Bitcoin is not in your direct control.
Loan-to-Value (Liquidation) Risk: This risk is more mechanical. If the value of your Bitcoin collateral falls significantly, your LTV ratio increases. For example, if your $50,000 collateral drops to $33,000 while you still owe $10,000, your LTV rises.
Platforms monitor this and will notify you if the LTV approaches a threshold (typically 70-80%). You must then add more collateral or repay part of the loan. Failure to act can result in the platform automatically selling a portion of your collateral to maintain the required ratio, preventing full liquidation.
Strategic Use of Crypto Tools
The core principle is that Bitcoin should ideally remain in self-custody, controlled by private keys only you possess. However, for those holding idle crypto on exchanges, tools that offer yield or liquidity without forced sales are valuable. These should be used intentionally and strategically, not as a replacement for self-custody.
Deploy these tools when the math supports it—when the cost of borrowing is less than the cost of selling and missing potential upside, or when a portion of holdings can be placed on a regulated platform for yield for a defined period. Conscious decisions about how much to move and understanding the associated risks are paramount. Never move your entire crypto stack onto a third-party platform solely based on attractive yield percentages, as this is how past investors encountered significant losses.
New US clients on Nexo can explore welcome offers, including unlocked premier tier benefits for depositing $5,000 within seven days. These benefits can increase yield rates and lower borrowing APRs. (Note: New York residents are not eligible for this offer.)
Source: Why I Never Sell My Bitcoin (I Do This Instead) (YouTube)
