Protecting Bitcoin-Collateralized Loans with Liquidation Insurance
Shield your BTC-backed loan from sudden market crashes by adding automated liquidation insurance.
Strategy Overview
Protect Your Collateral During Volatility
Liquidation insurance is a risk management tool that protects your Bitcoin collateral during market downturns. When prices drop sharply, unprotected loans can trigger forced liquidation at the worst possible time.
By paying a premium for liquidation insurance, you gain a safety net that covers part of your collateral if the market moves against you. This allows you to maintain your position through volatility without constant monitoring.
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.
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.
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
Understanding the risks helps you make informed decisions
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.
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.
Protection when you need it most
Insurance is a Hedge, Not a License to Overleverage
Liquidation insurance can provide peace of mind during volatile markets, but it shouldn't replace prudent risk management. Use it as an additional safety net, not as an excuse to take on excessive risk.
Try the SimulatorSupporting Quotes
SALT Shield™ is the no-liquidation solution loan upgrade to help protect your Bitcoin.
Defines SALT Shield, central to the case study’s protection strategy.
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.
Supports the case study’s risk management focus.
Preserve Wealth: Convert your portfolio to USDC to protect its value during a market downturn.
Reinforces the case study’s wealth preservation.
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™.
Aligns with the case study’s peace-of-mind focus.
More Case Studies
Top Lending Platforms
Choose a provider and start borrowing today.
Some links are referrals that help support the site.