Protecting Bitcoin-Collateralized Loans with Liquidation Insurance

Shield your BTC-backed loan from sudden market crashes by adding automated liquidation insurance.

Introduction

When borrowing against Bitcoin, one of the biggest concerns is liquidation during a market crash. Even loans with conservative loan-to-value (LTV) ratios can be caught off guard during extreme volatility or sudden black swan events. This case explores how liquidation insurance can be used to reduce risk and borrow with more confidence, even in high-LTV or high-leverage scenarios.

This strategy is especially useful for entrepreneurs, business owners, or anyone needing quick access to liquidity without wanting to sell their Bitcoin or constantly worry about sudden liquidation events.

Step-by-Step Process

Follow these steps to protect a high-LTV Bitcoin-backed loan using liquidation insurance.

1. Deposit BTC as collateral

The borrower deposits Bitcoin on a lending platform that supports collateralized loans.

2. Take a high-LTV loan in USDT or USD

The borrower takes a loan with a higher-than-average LTV (e.g., 60–70%) to maximize capital efficiency—e.g., to fund a business, personal expense, or investment.

3. Activate liquidation insurance

The borrower adds an insurance layer that automatically repays or stabilizes the loan if liquidation thresholds are breached. This protects the collateral from being forcibly sold during rapid price drops.

4. Use funds as needed

With insurance in place, the borrower can use the loan with reduced stress and continue holding long-term Bitcoin exposure.

Outcome: Loan Protected

If BTC dips below the liquidation threshold, the insurance kicks in to prevent forced selling, letting the borrower keep their Bitcoin while meeting obligations.

Why This Works

Decouple Short-Term Volatility

Liquidation insurance lets borrowers keep their BTC even during market crashes, protecting against forced exits.

Automated Backstop

Platforms automatically repay or adjust the loan before liquidation happens.

Borrow with Confidence

By combining insurance with a long-term view, borrowers can safely access liquidity without selling their Bitcoin.

Risks & Mitigations

BTC crashes below insured threshold

Choose conservative LTVs and understand the coverage limits of the insurance product.

Insurance provider fails or doesn’t cover as expected

Use reputable, battle-tested platforms and read the fine print carefully. Consider manually monitoring your loan and setting alerts.

High insurance cost erodes benefit

Use liquidation insurance only when necessary (e.g. during periods of volatility or when LTV is above 50–60%). Compare costs vs. peace of mind.

Overconfidence in protection

Don’t treat insurance as a license to overleverage. Use it as a hedge—not a substitute—for prudent borrowing.

Tax consequences

While loans are typically not taxable, some liquidation events or reimbursements might have implications depending on jurisdiction.

Supporting Quotes

SALT Shield™ is the no-liquidation solution loan upgrade to help protect your Bitcoin.

Source: SALT Lending

During market downturns, Stabilization automatically converts your crypto collateral to USDC to protect its value, giving you the flexibility to re-enter the market when the time is right.

Source: SALT Lending

Preserve Wealth: Convert your portfolio to USDC to protect its value during a market downturn.

Source: SALT Lending

SALT Shield™ helps protect your Bitcoin, no matter the market conditions. Enjoy peace of mind and not having to worry about margin calls or getting liquidated with SALT Shield™.

Source: SALT Lending

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Top Lending Platforms

Choose a provider and start borrowing today.