Borrowing against crypto lets you access cash without selling — so you keep your exposure and, in many places, avoid triggering a taxable sale. The catch is that your collateral can be liquidated if prices fall far enough. The real decision is two-part: should you borrow at all instead of selling, and if so, where?
First question: borrow, or just sell?
Borrowing is not automatically better than selling. It is better in specific situations and worse in others. Be honest about which one you are in.
Borrowing can make sense when…
- You are a long-term holder who does not want to sell and trigger a taxable disposal.
- You need cash for a defined period and have a realistic plan to repay or service the loan.
- You want to stay exposed to BTC/ETH while covering an expense or funding a business.
- You will borrow conservatively and can add collateral or repay if prices fall.
Selling is probably smarter when…
- You need the money for years with no plan to repay, and rate or price risk would compound.
- You cannot tolerate the chance of a forced liquidation at the worst possible time.
- Your position is small enough that interest and fees outweigh the benefit of not selling.
- You would have to borrow near the maximum LTV just to get a useful amount of cash.
Second question: where should you borrow?
If borrowing fits, you have four broad kinds of venue. They trade off cost, custody, and how much of the risk management falls on you. We publish sourced, side-by-side comparisons for each named platform — start with the comparison hub.
DeFi protocols — Aave, Morpho, Compound
The lowest service-layer cost and non-custodial: your wallet holds the collateral. In exchange, you monitor health factor and manage liquidation risk yourself.
Stackit.ai vs Aave →Exchange & CeFi lenders — Coinbase, Nexo, Binance
Simple, familiar interfaces. Usually custodial (the platform holds your coins) and terms are set by the platform, so counterparty and solvency risk matter.
Stackit.ai vs Coinbase Loans →Bitcoin specialists — Unchained, Ledn, SALT
Collateral-custody models built around Bitcoin, often multisig or segregated custody with fixed terms. Good for larger, longer BTC-backed loans.
Stackit.ai vs Ledn →Stackit.ai — a protection layer on top of Aave
Not a separate lender. It uses the Aave market and adds a policy that monitors LTV and repays debt toward a safer target before the position reaches Aave's liquidation line — for people and agents who do not want to babysit the position.
See all comparisons →Worked example
What actually happens when Bitcoin drops
Start with $10,000 of BTC as collateral and borrow $5,000 — a 50% loan-to-value (LTV). A position is eligible for liquidation on Aave once its health factor falls below 1.0. Here is the same position through three drawdowns, left unmanaged versus defended by a Stackit.ai policy that repays debt back toward a 45% target as risk rises.
| BTC price move | Collateral value | Unmanaged Aave loan | Stackit.ai policy |
|---|---|---|---|
| −20% | $8,000 | LTV 63% · health 1.25Still holding, but drifting toward the liquidation line | Debt cut to $3,600 · LTV 45% · health 1.73Position kept; worst case is less borrowing power, not liquidation |
| −35% | $6,500 | LTV 77% · health 1.01Still holding, but drifting toward the liquidation line | Debt cut to $2,925 · LTV 45% · health 1.73Position kept; worst case is less borrowing power, not liquidation |
| −50% | $5,000 | LTV 100% · health 0.78Below 1.0 → liquidated: collateral sold at the bottom | Debt cut to $2,250 · LTV 45% · health 1.73Position kept; worst case is less borrowing power, not liquidation |
Unmanaged, at −50%
The debt never moved, so the health factor fell to 0.78 and the position is liquidated — the collateral is sold at the worst possible moment and the borrower is left with neither the loan nor the BTC.
Defended, at −50%
The policy repaid debt from $5,000 down to $2,250 on the way down, holding a 1.73 health factor. The borrower still holds the BTC and ETH. The cost of survival is real: that repayment spends an approved buffer or a portion of collateral, and you carry less debt and less borrowing power afterward.
Assumptions and limits. Illustrative only, not a projection or personalized quote. Uses an indicative 78% liquidation threshold (Aave V3 sets thresholds per market and governance — verify live), ignores interest and gas for clarity, and assumes protection executes in time. Sudden market gaps, oracle failures, network congestion, thin liquidity, smart-contract failure, missing permissions, or failed execution can still cause loss or liquidation. Protection is designed to reduce risk, not eliminate it.
How to borrow without getting liquidated
- Keep LTV conservative. A lower starting LTV (Stackit targets a 35–50% band) leaves room to survive a drawdown instead of being one bad night from liquidation.
- Have a protection plan before you borrow. Decide in advance what repays the loan when prices fall — a cash buffer, ongoing deposits, or an automated policy — not in the middle of a crash.
- Understand every risk, not just price. Liquidation, smart-contract failure, oracle error, interest-rate moves, and — on custodial platforms — counterparty and solvency risk are all real.
- Do not reflexively re-invest borrowed funds into more crypto unless you fully understand that it stacks leverage and brings the liquidation line much closer.
FAQs
Is borrowing against crypto risky?
Yes. It carries real risk: if your collateral falls far enough, the position can be liquidated and sold at a loss. There is also smart-contract risk, oracle risk, interest-rate risk, and — on custodial platforms — counterparty and solvency risk. It can be done responsibly with a conservative LTV and an active protection plan, but it is never risk-free.
What is the best way to borrow against Bitcoin?
There is no single best answer — it depends on your goals. Direct DeFi (Aave) is cheapest if you will manage the position yourself. Custodial lenders are simpler but you give up custody. Stackit.ai sits on top of Aave and adds automated protection for people who want the DeFi rate without watching the position 24/7. Compare the real options before choosing.
Do I owe tax when I borrow against my crypto?
In the United States, taking a loan is generally not itself a taxable event, which is one reason long-term holders borrow instead of selling. But rules vary by jurisdiction, and a forced liquidation IS a taxable sale of your collateral. This is not tax advice — consult a professional and see official IRS guidance.
What happens if the market crashes after I borrow?
On an unmanaged loan, your LTV rises as collateral falls, and if your health factor drops below 1.0 you are liquidated. A Stackit.ai policy is designed to repay debt toward a safer LTV before that point — reducing, not eliminating, liquidation risk. See the worked example above.
Sources
- Aave — health factor & liquidations
- IRS — virtual currency transactions (tax guidance)
- Stackit.ai fee schedule (fees.json)
- Sourced platform comparisons
Educational only; not financial, legal, tax, or investment advice. Rates, LTVs, and terms change — verify current terms with each platform before borrowing.
Want the DeFi rate without watching the position?
Stackit.ai borrows on Aave and adds a policy that defends your LTV automatically. See how it compares to borrowing directly, or book a treasury design call.