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If you're considering a crypto-backed loan, one of the first terms you'll come across is Loan-to-Value (LTV).
At first, it can sound like a technical financial metric. In reality, it's a simple concept that helps answer an important question:
How much money can you borrow against your crypto?
Understanding LTV can help you make better borrowing decisions, avoid unnecessary risk, and understand what happens if the value of your crypto changes after you've taken out a loan.
Let's start with a familiar example.
What Is Collateral?
Imagine you own a car worth ₦10 million.
You need cash for an urgent expense, so you approach a lender and offer the car as collateral for a loan.
The lender probably won't give you the full ₦10 million. Instead, they may lend you ₦5 million or ₦6 million while using the car as collateral until the loan is repaid.
Why?
Because the lender needs a safety buffer. If the car's value drops or the loan isn't repaid, there should still be enough value in the car to cover the amount borrowed.
Crypto-backed loans work in much the same way.
Instead of using a car, house, or gold as collateral, you use cryptocurrency. The crypto becomes your collateral, i.e., the asset backing the loan.
What Is Loan-to-Value (LTV)?
Loan-to-Value, or LTV, measures the size of your loan compared to the value of your collateral.
In simple terms, it shows how much of your assets' value you've already borrowed against.
For example:
- Your Bitcoin is worth ₦1,000,000
- You borrow ₦500,000
Your LTV is 50%.
That simply means you've borrowed half the value of your collateral.
The lower your LTV, the smaller your loan is relative to your crypto holdings. The higher your LTV, the larger your loan is relative to the collateral backing it.
Why Can't You Borrow the Full Value of Your Crypto?
This is where LTV becomes useful.
If your Bitcoin is worth ₦1,000,000, you might wonder why a lender doesn't simply allow you to borrow the entire ₦1,000,000.
The reason is that crypto prices can change quickly.
Imagine a lender gives someone a ₦1,000,000 loan backed by ₦1,000,000 worth of Bitcoin.
If Bitcoin falls by 20%, the collateral would now be worth only ₦800,000, while the loan would remain ₦1,000,000.
That creates a problem.
To reduce this risk, lenders allow borrowers to access only a percentage of their collateral's value, LTV, rather than the full amount.
That percentage is determined by a platform's LTV requirements. Different cryptocurrencies can have different LTV limits, which can change over time based on market conditions.
How LTV Affects Your Borrowing Limit
You can think of LTV as the rule that determines how much you can borrow.
Let's say Busha offers a 50% LTV on a particular asset.
If your crypto is worth:
- ₦500,000, you can borrow up to ₦250,000
- ₦1,000,000, you can borrow up to ₦500,000
- ₦2,000,000, you can borrow up to ₦1,000,000
As the value of your collateral increases, the amount you can borrow increases as well.
However, different assets may have different LTV limits. Factors such as liquidity, volatility, and market conditions can affect how much a platform is willing to lend against a particular cryptocurrency.
That's why borrowing limits aren't always the same across every asset.
What Happens to Your LTV After You Borrow?
One common misconception is that LTV stays the same after a loan is created.
It doesn't.
Let's say:
- Your Bitcoin is worth ₦1,000,000
- You borrow ₦500,000
- Your starting LTV is 50%
Now imagine the value of your Bitcoin falls to ₦800,000.
Your loan hasn't changed. You still owe ₦500,000.
But the collateral backing that loan is now worth less than it was before.
As a result, your LTV increases.
The opposite is also true. If the value of your Bitcoin rises, your LTV decreases because your collateral is now worth more relative to the loan.
This is why Busha continuously monitors collateral values throughout the life of a loan.
Understanding LTV Thresholds
As crypto prices fluctuate, Busha uses different LTV thresholds to help manage risk and ensure loans are adequately backed by collateral.
1. Initial LTV: This is the LTV when your loan is first created. For example, if you borrow ₦450,000 against ₦1,000,000 worth of crypto, your initial LTV is 45%.
2. Warning Threshold: If the value of your collateral drops significantly and your LTV rises, Busha endeavours to notify you via app or email notifications.
This is designed to give you time to take action before your loan reaches a more critical level.
At this stage, you can:
- Add more collateral
- Repay part of the loan
- Repay the loan in full
These actions can help reduce your LTV and maintain your loan position.
3. Liquidation Threshold: This is the point at which Busha may need to use part of the collateral to cover the loan.
Think of it as a safety mechanism that helps ensure the loan remains adequately collateralised.
While Busha aims to provide warnings before a loan reaches this stage, extreme market volatility can cause prices to drop rapidly, meaning liquidations may occur before a notification can be processed.
What Is Liquidation?
Liquidation is one of the most misunderstood parts of crypto lending.
Many borrowers assume it means losing all their crypto immediately. In reality, it's a risk-management tool designed to protect the platform’s liquidity and ensure loans are adequately backed by collateral.
In simple terms, liquidation can occur when the value of the crypto securing your loan falls significantly. As the value of your collateral decreases, your LTV rises. If it reaches the loan's liquidation threshold, part of the collateral may be sold to cover the outstanding loan amount.
For example, if your loan has a liquidation threshold of 90%, Busha may begin liquidating part of your collateral if your LTV reaches 90%.
This helps ensure the loan remains adequately backed and can protect both borrowers and lenders from larger losses.
How to Keep Your Loan Healthy
Managing LTV doesn't need to be complicated.
A few simple habits can help you maintain a comfortable borrowing position:
- Borrow only what you need
- Avoid taking the maximum loan available
- Monitor major market movements
- Add collateral when necessary
- Repay part of the loan if needed
- Pay attention to platform notifications
These steps can help create a larger buffer between your loan balance and your collateral value.
How Busha Uses LTV
Busha uses Loan-to-Value ratios to determine how much users can borrow against eligible crypto assets.
The exact borrowing limit depends on the asset being used as collateral and current market conditions.
Before confirming a loan, users can view key details such as:
- Loan amount
- Collateral value
- Applicable interest
- Exchange rate
- Repayment information
This allows borrowers to understand their loan terms before proceeding.
Ready to leverage your digital assets?
Crypto-backed loans give you the liquidity you need while keeping your long-term holdings intact, provided your loan remains healthy.
Get started with Busha to access crypto-backed loans directly from your app without having to manually sell your coins, though market downturns may trigger automated liquidations. Start here.
Frequently Asked Questions
Q) Is a higher LTV better?
A) Not necessarily. A higher LTV allows you to borrow more money, but it also means you have less buffer before your loan gets close to its liquidation threshold, especially if the value of your crypto falls.
Q) Can my LTV change after I borrow?
A) Yes. Because crypto prices change constantly, your LTV can rise or fall as the value of your collateral changes.
Q) Can I reduce my LTV?
A) Yes. You can lower your LTV by adding more collateral or repaying part of your loan.
Q) Does every cryptocurrency have the same LTV?
A) No. Different assets may have different LTV limits depending on factors such as liquidity, volatility, and market conditions.
Q) Why does LTV matter?
A) LTV determines how much you can borrow and helps lenders manage risk throughout the lifecycle of the loan.
This article is for informational purposes only and does not constitute financial or investment advice.
