Loan to Value (LTV) Beginners Guide
When it comes to crypto-backed loans, Loan to value, usually shortened to LTV, is simply the maximum loan a lender will give you as a proportion of the collateral you lodge. (Read our primer on crypto collateral)
So if for example a crypto-backed lender offered a Loan to value (LTV) of 80%, that would mean the lender would be willing to lend you up to 80% of the collateral you lodged with them. If you lodged $100 of bitcoin, they would lend you up to $80 ( $100 * 80% = $80).
If a crypto loan offered a Loan to value (LTV) of 50% the lender would be willing to offer you half (I.e. 50%) of however much collateral you lodged with them. So if you deposited collateral worth $10,000, they would lend you up to $5,000.
What LTV rates are available with crypto loans?
Different crypto lenders offer different LTV rates. On the low end you’re likely to see LTV rates of 25%, essentially meaning crypto lenders will loan you up to one quarter (25%) of the amount of collateral you lodge with them. On the high end you’re likely to see LTV rates of 50%, essentially meaning crypto lenders will loan you up to one half (50%) of the amount of collateral you lodge with them.
Most crypto lenders have different Loan to value rates depending on the type of crypto collateral you lodge with them. The more liquid the crypto collateral you choose to lodge the higher the LTV rate likely to be offered. Lodging bitcoin as collateral with Nexo, will get you a LTV rate of 50%. Whereas lodging XRP with Nexo, will get you a LTV rate of 40%.
Why do crypto lenders offer different LTV rates?
Each crypto lender decides their own rates. For lenders, your collateral is their security. It’s how they can lend you money without credit checks or worrying about you paying them back. The lower the LTV rate they offer the more security they have. The higher the LTV rate they offer the less security they have.
Crypto lending is becoming more competitive, so over time its likely most lenders will offer comparable rates. Some crypto lenders like BlockFi, offer loans with cheaper interest rates if you accept a lower loan to value.
Why do LTV rates differ depending on the crypto collateral lodged?
The collateral you lodge is the crypto lenders security. If you default on your loan for whatever reason they know they can dip into your collateral, sell it, and make good on your obligations.
However, not all crypto collateral can be sold quickly or at a known price. And that’s why different types of collateral have different loan to value rates.
Let’s say you deposit bitcoin as collateral. The crypto lender knows billions of dollars a day of bitcoin are bought and sold and there are dozens of exchanges to do it. So the lender is comfortable knowing that if they have to sell it to pay back your loan they can do so easily at a known price. As such they are likely to offer you a high LTV when using bitcoin as collateral. (Higher LTV means lender feels confident they can sell it quickly at the price they hope to).
Let’s say however you deposit a lesser known cryptocurrency as collateral. This cryptocurrency trades on fewer exchanges and has a small daily trading volume. The lender is nervous they won’t be able to sell it and make good on your loan if you default. They worry it will take them time to find a buyer and the price they receive may be lower than they need. To counter these risks they will offer a lower LTV on that collateral option. That gives them more security in the event they need to sell it. (Lower LTV means lenders don’t feel confident they can sell it quickly and at the price they hope to).
Is a higher LTV always better?
Not necessarily. And that’s where liquidations come in.