Bitcoin-Backed Lending Surges 52% in 2025, Driven by Tax Advantages and Liquidity Demand

Bitcoin-backed lending is witnessing a significant resurgence, driven by the increasing demand for liquidity without relinquishing long-term exposure to bitcoin. This trend is further fueled by the potential tax advantages that loans offer to those who have seen substantial appreciation in their bitcoin holdings. Both individual and institutional borrowers are increasingly utilizing these financial instruments as part of their treasury management strategies, as bitcoin becomes a more integral part of investment portfolios.

The popularity of these lending instruments has surged as the price of bitcoin rose in 2024 and continues to accelerate into 2025. In the first half of 2024, crypto lender Ledn facilitated $191 million worth of bitcoin-backed loans. In just the first month of 2025, Ledn has already seen over $100 million in bitcoin-backed loans, indicating a strong and growing demand for this financial service.

Bitcoin-backed lending offers borrowers a way to unlock capital without selling their bitcoin holdings. For individuals, this means accessing funds for purposes such as buying real estate, starting businesses, or paying off debt. For institutions, it provides a unique opportunity to hedge additional investments or business ventures with the market depth and liquidity offered by bitcoin. The strong foundation of bitcoin as collateral, along with benefits such as tax planning, makes it an attractive option for both individuals and institutions.

Bitcoin remains the most liquid cryptocurrency, with a deep market that ensures liquidity even during periods of volatility. Its proven resilience since its inception makes it the most trusted cryptocurrency, with robust security and widespread adoption further solidifying its position as the premier collateral asset. However, borrowers must carefully monitor their positions to avoid margin calls and forced liquidations due to bitcoin's price swings.

One of the most compelling reasons for bitcoin-backed lending is the ability to access liquidity without selling bitcoin. This is particularly valuable for long-term holders who believe in bitcoin's future potential but need cash for personal expenses, investments, or business operations. By using bitcoin as collateral, borrowers can retain their exposure to potential price appreciation while meeting their immediate financial needs. Additionally, selling bitcoin can trigger significant capital gains taxes, depending on the jurisdiction. Bitcoin-backed lending allows borrowers to avoid these immediate tax consequences.

However, it’s crucial to understand the implications of loan-to-value ratios, margin calls, and bitcoin’s inherent volatility. A well-managed loan can provide financial flexibility, but poor risk management can lead to forced liquidations and unexpected tax liabilities. The process of bitcoin-backed lending involves using bitcoin as collateral to secure loans in fiat currency or stablecoins, typically operating with a 50% loan-to-value (LTV) ratio. This means if you deposit $100,000 in bitcoin, you can borrow up to $50,000, providing a substantial buffer against bitcoin's price volatility.

DeFi lending is driven by smart contracts, eliminating the need for intermediaries. However, this also introduces code and operational risks. With CeFi, borrowers and lenders rely on contractual agreements and established compliance measures, providing a clear legal framework that offers legal protection and security that cannot be offered in DeFi. Smart contracts are only as secure as the code they’re built on. Vulnerabilities can lead to significant losses, as seen in high-profile hacks. For example, THORChain's lending service became insolvent due to its risk management system and incentive mechanism, resulting in over $200 million in user funds being impacted.

Finally, there’s the consideration of wrapping your bitcoin to access DeFi protocols: the process of bringing your bitcoin onto platforms that allow for decentralized finance smart contracts. While the key advantage of lending is to avoid potential taxable events and maintain your bitcoin holdings, users need to give up control of their bitcoin in order to have it “wrapped," and they receive a bitcoin “IOU” on a different chain. As a result, this process can introduce tax complications and additional risks.

Centralized platforms like Ledn offer a simpler, regulated approach to bitcoin-backed lending when compared to DeFi. CeFi platforms are often easier to navigate, with straightforward interfaces. CeFi platforms operate within established regulatory frameworks, offering greater transparency and security. While bitcoin may be the leading disruptor in the finance industry, safeguards already exist around lending. These existing frameworks, along with crypto-friendly regulatory frameworks being developed internationally, offer a clear path for understanding and enforcing your rights in crypto lending.

Risk management is fundamental to bitcoin lending, with platforms employing sophisticated safeguards like margin calls and automatic liquidation protocols to protect lenders from significant price fluctuations. While these measures provide essential protection, successful participation in bitcoin-backed lending requires a comprehensive approach to platform selection and risk assessment. When choosing a lending platform, thorough counterparty due diligence becomes crucial. Borrowers must carefully evaluate the platform's solvency, reputation, and security infrastructure – particularly in centralized finance, where the platform's risk management capabilities directly impact loan security.

Beyond security considerations, users must also navigate the complexities of fee structures, withdrawal policies, and service-level agreements, as hidden costs or ambiguous terms can significantly impact the lending experience. For those considering bitcoin-backed lending, success lies in not only understanding these various elements but also in recognizing that platform-specific terms, security protocols, and tax implications in their jurisdiction form an interconnected web of considerations that must be carefully evaluated before committing to any lending program.