Bitcoin Lenders Rebuild Trust With Stricter Controls, Loan Book Grows 112%

Bitcoin lenders are making a comeback, aiming to rebuild trust in the sector following the collapse of major players like Celsius and BlockFi. These lenders are implementing stricter controls and clearer risk management practices to avoid the pitfalls of the past. The previous cycle saw major Bitcoin lenders fail due to poor risk management, turning user deposits into undercollateralized loans that froze or lost billions in customer funds when Bitcoin prices fell and liquidity dried up.

However, the failures of these lenders do not necessarily mean that crypto-backed loans are inherently flawed. According to Alice Liu, head of research at CoinMarketCap, the issues were largely due to poor risk management rather than the model itself. Some platforms are now taking steps to improve transparency, enforce stricter liquidation thresholds, and use overcollateralization to mitigate risks.

Despite these improvements, a sudden price swing in Bitcoin can still put lending models under stress. Some crypto lenders still rehypothecate to offer better borrowing rates, but they are taking steps to ensure investors are aware of the risks. Rehypothecation, a practice borrowed from traditional finance, involves brokers reusing client collateral for their own trades. While it is a common and regulated strategy, it can expose users to counterparty and liquidity risks if not properly managed.

The lending market in the current cycle consists of mature investors and fewer retail investors, according to Liu. This shift means that the funds locked for Bitcoin-collateralized loans are longer-term holders, corporate treasuries, and institutional funds. These investors are more focused on liquidity access, tax optimization, or diversification rather than yield farming, reducing the pressure for products to compete on better terms.

Some investors remain wary of Bitcoin loans due to the collapse of Celsius, even as platforms now pledge not to rehypothecate user assets. Platforms like Strike, run by Bitcoin maximalist Jack Mallers, have promised never to rehypothecate customer Bitcoin. Those that do rehypothecate are taking steps to explain how the model works and how it helps lower borrowing costs through greater transparency.

Crypto-collateralized lending companies were once among crypto’s biggest rising stars, with their combined loan book peaking at $34.8 billion in the first quarter of 2022. However, the Terra stablecoin crash in the second quarter of that year triggered a series of bankruptcies across the sector, causing the lending book size to bottom at $6.4 billion. The Bitcoin lending model is once again gaining traction, recovering to $13.51 billion in open CeFi borrows as of the end of the first quarter of 2025.

Today’s lending models have adopted improved risk controls, such as lowering loan-to-value (LTV) ratios and clear guidance on rehypothecation. However, the entire model hinges on a volatile asset like Bitcoin, which can still cause mass liquidations despite the platform actively monitoring LTV and enforcing real-time margin calls.

Bitcoin’s volatility has stabilized compared to its early years, but it remains prone to sharp daily swings. In early 2025, Bitcoin frequently moved 5% in a day amid global trade tensions, even dipping to $77,000 in March. While lower LTV ratios and term sheets that now prohibit rehypothecation are improvements, crypto lenders are still working with a single-asset collateral pool whose value can drop 5% overnight.

Bitcoin loans are unlocking new financial use cases, allowing users to tap liquidity without selling their holdings and helping them avoid capital gains taxes and even access the real estate market. However, Bitcoin purists remain wary of these use cases, as they often involve traditional financial intermediaries and legal systems, introducing new layers of risk.

For now, Bitcoin-backed lending is undergoing a cautious revival driven by tighter controls and a stronger grasp of the risks that brought down its first wave. However, until volatility is solved at the root, even the safest-looking models will have to stay humble.