What Is a Bitcoin Loan Liquidation?

Liquidation starts with LTV

Loan-to-value compares the loan balance to the market value of your collateral. A $40,000 loan backed by $100,000 of BTC starts at 40% LTV. If BTC falls and the collateral is worth $60,000, the same loan is now about 67% LTV.

As BTC falls, LTV rises. If it rises above the platform's margin-call or liquidation threshold, the lender may require more collateral, partial repayment, or automatic sale of BTC.

Margin call vs liquidation

A margin call is a warning or required action. It usually means you must add BTC, add cash, or repay part of the loan to bring LTV down.

Liquidation is the sale itself. Some platforms give a short response window; others can liquidate automatically. The exact timing matters, so read the loan agreement before depositing collateral.

Why liquidation is so costly

Liquidation tends to happen during fast market selloffs, when BTC is already down and liquidity is stressful. You lose collateral at a bad price and may also create a taxable disposition depending on your jurisdiction.

The borrower also loses the recovery. If BTC rebounds after the forced sale, the liquidated coins are no longer in the position.

How to reduce liquidation risk

Start at lower LTV, keep extra collateral outside the platform, set price alerts before the margin-call zone, and avoid borrowing for expenses that leave no cash reserve.