Ethereum Loans: How to Borrow Against Your ETH

Key Takeaways

• You can borrow USD or stablecoins by using your Ethereum ($ETH or "Ether") as collateral.
• Crypto borrowing is a great way to get liquidity without selling your digital assets triggering a taxable event.
• There are a variety of ETH borrowing platforms - we cover the ones with the most competitive rates.

What is an Ethereum-Backed Loan?

An Ethereum-backed loan (or "ETH loan" for short) allows you to borrow money (fiat currency like USD, stablecoins like USDC, or other cryptocurrencies) by using your Ethereum holdings as collateral. Your $ETH is the asset that secures the loan with the lender and ensures that you’ll pay back your loan. You benefit by getting quick access to cash without needing to sell your $ETH. The lender generates yield through interest charged on the loan.

This is similar to how a HELOC (Home Equity Line of Credit) works in traditional finance where you can get a loan against the equity of your house. Only with a HELOC, you’re using your home as the asset to secure the loan instead of your Ethereum. In both cases you're using an asset you own to access liquidity.

Why Consider An Ethereum Loan?

You may be wondering “why not sell my ETH and use the cash I get from the sale?”

Here are a few of the benefits of using an Ethereum-backed loan instead of selling your Ethereum to get cash:

• Avoiding taxes: Assuming your Ethereum is worth more now than when you purchased it, selling some (or all of it) will most likely trigger a taxable event and you’d need to pay short-term or long-term capital gains taxes. With a loan, however, you’re not selling any Ethereum, so you don’t have to pay taxes on the cash you get from the loan.
• You get to maintain your $ETH exposure: If you think Ethereum is going to be worth more in the future than it is now, you don’t want to have to sell your Ethereum and lose out on those gains.
• Quick liquidity: You can get cash from a Ethereum loan in about the same amount of time it would take to sell those $ETH. Using DeFi platforms (that we’ll cover here in a minute) will allow you to take an ETH loan out in a matter of minutes, 24 hours a day, 7 days a week, 365 days a year. Centralized platforms will take longer to approve your loan (a few hours to a few days).
• Deductible Interest: In some cases, particularly for commercial loans used to fund real estate or business-related purchases, the interest for your loan may be tax-deductible. Discuss your specific situation with a qualified tax advisor.

How Do Ethereum Loans Work?

Let’s say you need to borrow$10,000 to cover a major expense. You can’t give the lender (or lending protocol) $10,000 worth of Ethereum and expect $10,000 of cash or stablecoins in return. You need to give them more ETH as collateral than the amount you want to borrow.

This is called an over-collateralized loan.

How much the loan amount needs to be over-collateralized varies depending on the lender but typically falls in the range of a maximum of 50% to 70%loan-to-value ratio.

If the lender you choose has a maximum of 50% Loan To Value ratio, in order to borrow $10,000 you would need to deposit at least $20,000 worth of $ETH.

If the lender you choose has a maximum of 70% Loan To Value ratio, in order to borrow $10,000 you’d need to deposit at least $14,285 worth of $ETH.

Most platforms you use make the process of taking out a loan simple and will calculate your LTV ratio for you.

Side note: For loans in decentralized finance the term "lender" is a bit misleading. These platforms operate in a decentralized fashion, relying on smart contracts governed by code, not a centralized entity.

So A Higher LTV is Better, Right? Not So Fast...

One of the risks of taking out an Ethereum loan is that the price of $ETH can be volatile. The value of your ETH as collateral will change significantly in a short period of time.

That means if the price of Ethereum drops, the value of your collateral drops. And as the value of your collateral goes down, your LTV ratio goes up.

If your LTV gets too high, typically in the 75%-90% LTV range, the lender will sell your collateral to repay the loan. There may be penalties or fees if your collateral is liquidated.

To add insult to injury, if your loan is liquidated, that would trigger a taxable event. Taking an ETH loan isn’t a taxable event, however, a forced liquidation can create a taxable event for capital gains, assuming your cost basis is below the liquidation value.

If you’re using a centralized platform, the lender may give you a margin callbefore liquidating your loan, which is a demand from the lender that you either pay back some of the loan or tell you how much more ETH you need to provide as collateral.

But if you’re using a decentralized protocol you’ll need to closely monitor your LTV because thesmart contracts will automatically liquidate your loan if the LTV gets too high.

Let’s cover margin calls in more depth…

Margin Calls: What They Are & How To Avoid Them

A margin call refers to a notice from the lender informing you that you’ll need to either:

1. Add more collateral
2. Pay down the outstanding loan balance
3. Or a combination of 1 & 2

By adding more collateral or paying down the loan balance, or doing both, you can bring your LTV into an acceptable range for the lender.

For example, if you provide$20,000 worth of Ethereum as collateral on a$10,000 loan, the initial LTV is50%. But if the value of the Ethereum falls to $15,000 without any change in the loan balance, the LTV rises to66-67%. With many lenders, you can expect a margin call if the LTV rises that high. If the value of the collateral falls much further, the lender may liquidate the collateral to settle the loan balance.

Here are the LTV guidelines from one well-known lender:

• Target LTV (50%): In this case, the target LTV is the ratio at which the loan started and the level at or below which the lender wants the ratio to remain.
• Margin Call LTV (70%): Expect a margin call notice from the lender when the LTV reaches 65% to 70%, assuming a 50% target LTV. This level varies depending on the initial LTV and sometimes by collateral type.
• Liquidation LTV (80%): If the value of the collateral continues to fall and you haven’t added collateral (or paid down the loan), the lender can liquidate your collateral to pay the loan balance.

If you're going to take out a loan against your Ethereum it's prudent to stay well below the target LTV or have extra funds on the sidelines to pay down the loan if the value of the collateral drops.

Are There Other Risks When Borrowing Against Ethereum?

If you're responsible in managing your LTV, you're off to a good start, but there's still a few other risks to consider:

• Custodial Risks: When borrowing on centralized platforms, you’ll need to deposit Ethereum directly to the platform. In case the platform gets hacked or goes bankrupt, you are at risk of losing all your funds. Always use a reputable and responsible platform for your loans.
• Rehypothecation: When you pledge your Ethereum as collateral that act is calledhypothecation. If the lender then pledges the asset again for its own purposes, it’s calledrehypothecation. Consider this risk carefully and research the lender before committing your coins.
• Smart Contract Risks: On DeFi lending platforms, your loan is managed by smart contracts.If there are flaws or errors in the code, that can create a vulnerability for hackers to steal your collateral.

If you've made it this far and the risks haven't scared you away from taking out an Ethereum-backed loan, it's time to pick a platform for you loan...

How to Choose A CeFi or DeFi Loan Platform

Now that you know the benefits and the risks of taking out an Ethereum loan, let’s dive into where you can get a ETH-backed loan. You can choose between using a Centralized Finance (CeFi) platform or a Decentralized Finance (DeFi) protocol.

Here are some pros and cons to help you choose what’s best for your situation:

Top CeFi Ethereum-Backed Loan Platforms

If you’re new to crypto, want to have customer support available if you need help, or just prefer the look and feel of more traditional banking, then a centralized finance (CeFi) platform is the way to go. Also, most CeFi platforms allow you to borrow USD, where as DeFi platforms only allow you to borrow stablecoins or other cryptocurrency and it's up to you to convert it to USD.

For top CeFi platforms, our go-to picks are:

• N exo
• Ledn
• SALT

They all offer ETH-backed loans, but they vary in their interest rates, origination fees, their minimum and maximum loan values, loan terms, liquidation thresholds, and not all features may be available in your jurisdiction. They make it easy to connect your bank account and unlock liquidity without selling your ETH

Nexo

Nexo is one of the biggest crypto lenders currently in the space. They offer low interest rates, a wide range of digital assets you can borrow, and even their platform token — $NEXO — that can be used to get APRs as low as 6.9%.

All Nexo crypto loans are credit line loans, so you only pay interest on the amount you use.

Borrowing With Nexo

• APRs as low as 6.9%
• Credit line loan facility that only charges interest on the funds you actually use
• Over 60+ supported loan currencies

SALT

SALT is a platform that lets you borrow cash or other cryptocurrencies using your digital assets ($ETH, $BTC etc.) as collateral.

They've been in the space since 2016. Individuals and business alike have trusted SALT to go about borrowing Ethereum.

Borrowing With SALT

• No credit checks or prepayment penalty fee
• Ethereum backed loans start at 8.95% APY

Ledn

Founded in 2018, Lednplaces its focus on the Bitcoin community and selected Bitcoin-backed loans. Despite its focus on Bitcoin, the Toronto-based also offer Ethereum backed loans which provide funding in USD or USDC.

Borrowing With Ledn

• Verify your deposit with Ledn’s innovative proof-of-reserves feature
• Get funding in 24 hours or less
• Early repayments are allowed without any penalties

Top DeFi Platform for Ethereum Loans

The platforms we cover above are centralized, meaning that they custody your collateral assets and they issue your loan from a centralized pool of funds controlled by the platform.

ETH loans are also available through decentralized finance (DeFi). Platforms like Aave and Compound use a pool-based lending model where users deposit assets into a shared liquidity pool and borrows draw from the pool.

DeFi loans do not have fixed interest rates — they vary constantly depending on demand for the borrowed asset. DeFi loans also support a wide range of collateral and borrowing assets meaning that other cryptocurrencies such as $BTC, $SOL, $BNB and others can be borrowed in exchange for your ETH collateral.

Rocko

Rocko is a crypto loan marketplace that makes it easy to borrow $USDC using your crypto as collateral. Instead of jumping between platforms like Aave and Compound (which we cover below), Rocko brings them all under one roof.

It scans for the best rates across top protocols and serves them up in one clean, user-friendly interface. The catch? You can only borrow $USDC.

Borrowing With Aave

• Offers the best rates across major DeFi lending protocols
• Wide range of collateral assets
• No monthly repayments

Aave

Best For Blockchain & Token Options

Visit Aave

On Aave's site

Review

4.6

Tokens Available

$ETH, $WBTC, $USDT, $USDC, $cbBTC, $AAVE and many more

APY Range

Up to 10%

Where Available

Worldwide

Overview

Similar to Compound, Aave’s DeFi platform uses a series of smart contracts that allow lending and borrowing. Where Aave differs from Compound is in its range of blockchains and tokens; Aave supports 13 blockchains compared to the 7 on Compound. Aave also offers more token choices for lenders and borrowers.

DeFi without risk? There’s no such thing. But Aave offers a Safety Module, an investor-funded insurance pool that insures against shortfall events. For example, smart-contract bugs could cause lenders to lose money. Losses can also occur when the market moves quickly, slowing or preventing collateral liquidations.

Why Lend / Borrow With Aave?

• Aave supports 13 different blockchains.
• Easily swap cryptocurrencies on Aave to capture a better rates; if you see a chance to lend / borrow with more competitive rates, you can exchange your tokens for those tokens without leaving Aave.
• Biggest decentralized lending & borrowing platform in crypto

Compound

Visit Compound

On Compound's site

Review

3.2

Tokens Available

$ETH, $WBTC, $USDT, $USDC, $COMP and more

APY Range

Up to 9%-10%

Where Available

Worldwide

Overview

Compound Finance is the OG lending & borrowing platform in the DeFi space. It's been around way before Aave was even born. Lending & borrowing rates vary based on demand. The platform supports lending & borrowing in $ETH, $WBTC, $USDC, and several other major cryptocurrencies.

Why Lend / Borrow with Compound?

• One of the OG platforms in the crypto space • Occasionally provides more competitive rates on stablecoins • Clean interface

Repayment Options: How Do They Compare?

Just like traditional loans, ETH loans charge an interest amount. This is where the lender makes the bulk of their money. ETH loans differ, however, in their interest rate options. With traditional loans, you are responsible for paying off a flat monthly fee that includes the principal + interest amount, while with crypto loans, you can choose between several options for repayment:

• Interest-Only: With interest-only loans, your monthly payments require you to just pay the accrued interest. You don’t have to worry about the principal of the loan until your last payment — which is when the entirety of your loan principal and any outstanding interest all come due in one lump sum. Interest-only loans are a suitable option if you want to keep your monthly payment low, but you end up paying more in interest in the long run.
• Interest & Principal: These loans work very similarly to traditional loans. You have a loan principal and interest amount that together get amortized (evenly divided) over the term of your loan into equal monthly payments. These loans normally end up more cost-effective than interest-only loans, however, they require larger monthly payments.
• Credit Line: Some ETH lenders have begun offering credit line solutions to borrowers. These, unlike regular Ethereum loans, give you the equivalent of a “credit line” with a specified limit that can be used as you see fit, and you only pay interest on the amount that you use. These are the most flexible loan terms.

A given loan type may not be the best fit for the way you want to deploy capital. Some lenders may offer more than one type of loan. With several well-established lenders to choose from, you have options.

Ethereum Loan Payment Example

Let’s take a look at an example where we borrow $30,000 and see how an interest-only loan compares to an interest and principal loan.

How Do Taxes On Ethereum Loans Work?

For many investors, the biggest benefit of Ethereum loans is getting to avoid their capital gains liabilities. If your ETH appreciates significantly in price, you have made money on paper, however, it's not a realized gain until you sell your Ethereum. This incurs a taxable event, making the appreciation of your ETH tokens subject to a capital gains tax.

Ethereum loans can be used to bypass this taxable event. Here’s how it works: Let’s say you have$50,000of ETH that doubles during a bull run to now be worth$100,000. If you sell your Ethereum - whether for fiat, a stablecoin, or another trade - you will be liable for capital gains tax on the$50,000 in appreciation. What you can do instead is to use your Ethereum tokens as collateral for a crypto loan. Since loans are not taxed, you get to realize the full value of the$100,000 without having to give any of it away to taxes.

You will still be charged the loan fees, which may include administrative fees like loan origination and will definitely include an interest charge, however, these expenses are usually significantly less than what you would pay in taxes.

In Conclusion

Ethereum loans come in all shapes and sizes, offering a solution to many borrowing needs and allowing you to keep the asset as it grows in value.

While there are advantage to borrowing against your ETH rather than selling, there are still risks involved. Keep an eye on borrowing costs and watch your LTV ratios carefully.

A well-chosen and well-managed Ethereum-backed loan can be a powerful part of your financial strategy and help you unlock liquidity from your investments

Frequently Asked Questions