The price of Bitcoin has dipped in its latest cyclical market downturn, falling 47 percent from October highs of USD 126k to around USD 66k in recent weeks. Gold’s 24 percent gain over the same period has also invited fresh scepticism about Bitcoin’s digital gold narrative, and the regulatory backdrop remains uncertain with the CLARITY Act and Bitcoin Strategic Reserve bill both stalled in the US senate. Although the current Bitcoin lending market is being stress-tested, it continues to show resilience amid the volatility.
The value of outstanding Bitcoin-backed loans has grown over the last year, as leveraging credit facilities to unlock liquidity without selling underlying Bitcoin remains an appealing option for entities that have diversified a portion of their assets into crypto – and intend to keep exposure long-term.
Unfortunately, finding the aggregate market value of the Bitcoin lending market is limited as centralised finance (CeFi) lenders do not publish real-time data and many DeFi protocols and on-chain providers do not separate Bitcoin-collateralised loans from other lending activities.
Nevertheless, many platform figures support the trajectory. Ledn has originated USD 10.8 billion in Bitcoin-backed loans since inception (Q3 2025 nearly matched the entire prior year, and in 2024 Ledn issued the industry’s first $50M Bitcoin-backed syndicated loan). Coinbase’s onchain lending product through Morpho Labs is approaching USD 2 billion in Bitcoin-backed loan originations.
Coinbase onchain borrow originations cbBTC/USDC (daily)
Source: Dune, cbBTC/USDC represents 86 percent of Coinbase’s Morpho lending activity
Lessons from 2021-22
The last major stress test to the lending market came in 2021-2022, but the collapse was not driven by Bitcoin’s volatility. Terra/Luna’s implosion in May 2022 exposed hedge fund Three Arrow Capital, whose default left Celsius, Voyager, BlockFi and Genesis holding worthless uncollateralised loans. Voyager and Celsius filed for bankruptcy within days of each other in July, and FTX’s November collapse delivered the last blow to BlockFi, which had taken a USD 400m credit facility from the exchange earlier that year.
Price volatility was the “convenient” explanation, but the real problem was excessive rehypothecation, inadequate margin and liquidation processes and maturity mismatches between assets and liabilities.
CeFi lenders had extended uncollateralised loans to the same handful of counterparties, often redeploying customer collateral to generate additional yield while funding illiquid positions with deposits that could be withdrawn on demand. When sentiment flipped, depositors withdrew funds rapidly and lenders were forced to either liquidate at a loss or suspend withdrawals entirely.
LTV ratios were not monitored in real time, margin calls were slow and manual, and liquidation triggers were inconsistently enforced with too many exceptions granted to large borrowers. What could have been manageable drawdowns became insolvency events.
Ironically, DeFi protocols simply liquidated borrowers when thresholds were breached and continued operating as normal. They worked, and they worked well.
And this is why we witnessed an accelerated entry of traditional players into crypto lending markets, which also brought improved custody standards and risk management practices, while regulatory frameworks have also improved materially in the latest cycle.
The market feels less chaotic this time around, thanks to a more robust lending infrastructure and a shift in investor sentiment from yield-chasing euphoria to capital protection. Bitcoin-backed lending has also matured to the point that it can better withstand pressures – and the current drawdown from October’s highs is putting that maturity to the test.
Why Bitcoin works well as collateral
Unlike corporate bonds or structured products, Bitcoin carries no issuer or credit risk. There is no balance sheet to deteriorate, no management team or refinancing risks.
Its fixed supply of 21 million is verifiable on-chain, and because it trades continuously across global venues, lenders can independently verify collateral value in real time instead of relying on third-party valuations.
Additionally, the depth of the spot and derivatives markets means large positions can be hedged or liquidated without severe slippage. And compared with traditional collateral, Bitcoin can be transferred and settled rapidly without reliance on intermediaries or traditional market hours.
Risk managers should also be aware that Bitcoin displays nuances that distinguish itself from other asset classes. But these unique characteristics can be managed with a range of strategies that match risk appetites.
Admittedly, price swings can be more dramatic than traditional collateral, which is why conservative structuring is now common practice. Conservative loan-to-value ratios, frequent margining, and predefined liquidation triggers significantly reduce lender exposure. In practice, this can result in more predictable outcomes than illiquid or opaque collateral.
Continuous price discovery allows risks to be addressed immediately, rather than discovered belatedly during market stress. And despite the recent price action, Bitcoin’s volatility has been in a structural decline over the last decade, strengthening its case as a collateral asset.
Bitcoin 3-month volatility
Source: CoinMarketCap, rolling vol 90d
CeFi and DeFi adoption rises
Crypto lending platforms, such as Aave, Maple Finance and Ledn proved that Bitcoin-backed lending (and other crypto assets) could operate at scale, by leveraging code-based rules and real-time and transparent collateral monitoring to manage risk.
The 2021-2022 lending collapse demonstrated that not all models lived up to the “promise” of providing greater rewards and stability than the traditional discretionary financial system. But the surviving platforms have learned from past problems to raise their game.
Since the last cycle, the Bitcoin lending market has rapidly matured as more major global banks and financial institutions enter the space, offering Bitcoin exposure via spot trading desks, regulated custody, and exchange traded funds (ETFs).
The launch of spot Bitcoin ETFs in early 2024 was widely interpreted as a turning point for institutional adoption. They introduced operational and legal certainty that banks, asset managers and regulators readily understand. That comfort has since extended to Bitcoin’s use as loan collateral.
JP Morgan, whose CEO once dismissed Bitcoin as “worthless”, has evolved its business from scepticism to selective engagement, initially around ETFs but now increasingly toward direct exposure to Bitcoin for institutional clients. Bank of America now allows wealth managers to recommend modest Bitcoin allocations (1-4 percent) to clients, and lending products could potentially follow as those positions grow. Others include Goldman Sachs, BNY Mellon, Wells Fargo, Citigroup, typically in tightly controlled environments with conservative margining policies and LTV ratios.
The Commodity Futures Trading Commission (CFTC) also launched a pilot allowing Bitcoin, Ethereum and USDC to be used as collateral in US derivatives markets.
Meanwhile, Ledn recently sold nearly USD 200m in securitised bonds backed by Bitcoin-linked loans (the first of its kind). Blockrise secured a MiCAR licence and 21bitcoin piloted the EU’s first Bitcoin lending product. Sberbank in Russia announced it will accept Bitcoin as collateral and Argentina’s second largest crypto exchange launched the first Bitcoin-backed Visa credit card.
Maturing market
Bitcoin-backed lending has transitioned from an opportunistic yield strategy in the 2020-22 cycle to a more disciplined financing tool. Lessons have been learned from past failures.
Loans are now typically over-collateralised, with LTV ratios in the 40-60 percent range. Tighter risk controls and stress-tested margining acts as a volatility buffer, reducing lender exposure to sharp market moves. There has been a clear shift toward strict segregation of client collateral, often held with regulated custodians, including a clear veto of rehypothecation.
Many custodied loan structures limit or even prohibit lenders from redeploying posted Bitcoin, which reduces counterparty contagion risk. Cold storage and bankruptcy-remote structures have also become increasingly preferred.
The positive development of industry standards has been accompanied by heightened regulatory scrutiny and the introduction of heightened institutional governance standards.
Borrowers and the sector as a whole should still be aware of operational and legal risks. Custodian insolvency or operational failure, vulnerabilities in on-chain structures, liquidity risk during sharp drawdowns, capital treatment for banks accepting crypto collateral and cross-border enforceability of claims should all be considered.
The “not your keys, not your coins” ethos continues to echo within the Bitcoin community. But while self-custody eliminates intermediary risk, large-scale lending introduces unavoidable trade-offs between legally enforceable collateral rights and complete financial sovereignty.
Outlook
Bitcoin lending is unlikely to revert to being a high-growth, high-yield speculative asset. Its future appears more measured and durable. Macroeconomic and geopolitical uncertainties, delayed rate cuts and volatility among many asset classes which have engendered increasingly cautious sentiment among investors. They have become increasingly risk-aware and are more prone to view Bitcoin through the lens of capital protection than quick financial gain.
The Bitcoin lending market looks set to achieve steady, incremental expansion as it attracts professional investors and institutions who understand that passively holding Bitcoin may be strategically sound but financially inefficient.
The lending market allows treasury optimisation, access to working capital, portfolio diversification and participation in other investment opportunities without liquidating Bitcoin.
While Bitcoin price momentum has flattened, the underlying market structure continues to mature. Continued progress in regulatory clarity, particularly around the CLARITY Act and bank capital treatment of crypto collateral, would accelerate this further. The infrastructure being built is precisely the kind of progress that advances during subdued phases rather than moments of euphoria.
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