Liquidation Risk
Collateral can be sold if your LTV gets too high.
What is this risk?
Liquidation is the most critical risk to understand. When your collateral's value falls below the minimum required ratio (often around 110-130% of the loan value), the platform will automatically sell your Bitcoin to repay the loan. This typically happens at the worst possible time — during a market crash — meaning you lose your Bitcoin at depressed prices. Some platforms may also charge liquidation penalties. Once liquidated, there's no getting your Bitcoin back at the original amount.
Think of it this way...
“Just as a bank can foreclose on a house when payments are missed, a lender can liquidate your Bitcoin if your collateral falls too low. The difference is that foreclosure takes months while crypto liquidation can happen in minutes.”
How to Protect Yourself
Practical steps you can take to reduce or manage this risk
Maintain a healthy collateral ratio well above the minimum (aim for 150-200% or higher) to give yourself room to react.
Set up alerts at multiple levels: one when you're getting close to danger, another when immediate action is needed.
Have a pre-planned response: know exactly how you'll add collateral or repay part of the loan if prices drop.
Consider partial repayments during good times to reduce your exposure and improve your collateral ratio.
Never borrow the maximum amount the platform allows — that leaves you with no safety margin.
See This Risk in Action
Explore real-world scenarios where this risk plays a role
Key Takeaway
This risk can result in significant or total loss of funds if not properly managed.
Explore Other RisksOther Risks to Consider
Explore other risks to get a complete picture
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