Bitcoin Loan
Glossary
Exploring the world of Bitcoin loans and confused by all the foreign terms? Find all the important concepts here. Explained clearly and simply for everyone.
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A
APR (Annual Percentage Rate)
The annual cost of borrowing money, expressed as a percentage. APR includes the interest rate plus any fees, giving you the true cost of the loan per year.
Asset
Something of value that you own. In Bitcoin loans, your Bitcoin serves as the asset used as collateral for the loan.
Automated Market Maker (AMM)
A decentralized exchange protocol that uses algorithms to determine asset prices. Some Bitcoin loan platforms use AMMs for liquidity.
B
Bitcoin (BTC)
The first and largest cryptocurrency by market capitalization. Bitcoin is commonly used as collateral for crypto-backed loans.
Blockchain
A distributed ledger technology that records transactions across multiple computers. Bitcoin loans rely on blockchain to verify collateral ownership.
Borrower
The person or entity that receives funds by using their Bitcoin as collateral. The borrower must repay the loan plus interest.
C
Collateral
An asset pledged as security for a loan. In Bitcoin loans, your Bitcoin holdings serve as collateral. If you default, the lender can seize this collateral.
Collateralization Ratio
The ratio of the value of your collateral to the loan amount. Higher ratios provide more safety for lenders and better terms for borrowers.
Crypto Wallet
A digital wallet that stores your cryptocurrency private keys. You need a wallet to transfer Bitcoin to a lender for collateral.
Custodial
A service where a third party holds your Bitcoin on your behalf. Most Bitcoin loan platforms are custodial, meaning they control your collateral.
D
Default
Failure to repay a loan according to the agreed terms. In Bitcoin loans, default typically results in the lender liquidating your collateral.
Decentralized Finance (DeFi)
Financial services built on blockchain technology without traditional intermediaries. Some Bitcoin loans operate through DeFi protocols.
Due Date
The date by which loan payments must be made. Missing due dates can result in penalties or liquidation of collateral.
E
Early Repayment
Paying off your loan before the scheduled end date. Some lenders charge prepayment penalties, while others allow early repayment without fees.
Escrow
A third-party service that holds funds or assets until conditions are met. In Bitcoin loans, escrow services can add an extra layer of security.
F
Fixed Rate
An interest rate that remains constant throughout the loan term. Fixed rates provide predictability but may be higher than variable rates initially.
Flash Loan
A type of DeFi loan that must be borrowed and repaid within the same blockchain transaction. Not typically used for traditional Bitcoin loans.
G
Gas Fee
The cost of executing transactions on a blockchain network. When transferring Bitcoin as collateral, you may pay network fees.
H
Halving
An event where Bitcoin mining rewards are cut in half, occurring approximately every four years. Some borrowers time loans around halving events.
Hardware Wallet
A physical device that stores cryptocurrency private keys offline. More secure than software wallets for storing large amounts of Bitcoin.
I
Interest Rate
The percentage charged on the loan amount. Bitcoin loans typically have interest rates ranging from 4% to 12% APR, depending on LTV and platform.
Interest-Only Payment
A payment structure where you only pay interest during the loan term, with the principal due at the end. Common in Bitcoin loans.
L
Lender
The individual or institution that provides funds in exchange for Bitcoin collateral. Lenders earn interest on the loaned amount.
Liquidation
The process of selling collateral to recover a loan when the borrower defaults or collateral value drops below the required threshold.
Liquidation Price
The Bitcoin price at which your collateral will be automatically liquidated. This protects lenders from losses if Bitcoin value drops significantly.
Loan Term
The duration of the loan agreement, typically ranging from 6 months to 3 years for Bitcoin loans. Longer terms may have higher interest rates.
LTV (Loan-to-Value) Ratio
The ratio of the loan amount to the value of your Bitcoin collateral. Lower LTV ratios (e.g., 50%) are safer and often have better rates than higher ratios (e.g., 80%).
M
Margin Call
A demand from the lender to add more collateral when your LTV ratio exceeds the maximum allowed. Failure to meet a margin call can result in liquidation.
Maturity Date
The date when the loan must be fully repaid. On this date, you must repay the principal plus any remaining interest.
Multi-Signature (Multisig)
A wallet that requires multiple signatures to authorize transactions. Some platforms use multisig for enhanced security of collateral.
N
Non-Custodial
A service where you maintain full control of your Bitcoin private keys. Non-custodial Bitcoin loans are less common but offer more control.
O
Origination Fee
A one-time fee charged when the loan is first issued. Some Bitcoin loan platforms charge origination fees, while others only charge interest.
Overcollateralization
Providing more collateral than the loan amount requires. This reduces liquidation risk and may qualify you for better interest rates.
P
P2P (Peer-to-Peer)
A lending model where individuals lend directly to borrowers, often through a platform. Some Bitcoin loan platforms operate as P2P marketplaces.
Principal
The original amount borrowed, not including interest. You must repay the principal plus interest to fully settle the loan.
Private Key
A secret code that gives you access to your Bitcoin. Lenders require you to transfer Bitcoin (controlled by your private key) as collateral.
R
Rehypothecation
The practice of lenders using your collateral for their own purposes, such as lending it to others. This increases risk but may offer lower rates.
Repayment Schedule
The timeline and structure for repaying your loan. Bitcoin loans may have monthly, quarterly, or interest-only payment schedules.
S
Smart Contract
Self-executing code on a blockchain that automatically enforces loan terms. Some DeFi Bitcoin loans use smart contracts instead of traditional agreements.
Stablecoin
A cryptocurrency pegged to a stable asset like the US dollar. Many Bitcoin loans are repaid in stablecoins like USDC or USDT.
T
Term Length
The duration of your loan agreement. Bitcoin loans typically offer terms from 6 months to 3 years, with flexibility to extend or repay early.
V
Variable Rate
An interest rate that can change based on market conditions or platform policies. Variable rates may start lower but can increase over time.
Volatility
The degree of price fluctuation in Bitcoin. High volatility increases liquidation risk, which is why lenders require overcollateralization.
W
Whale
An individual or entity holding a very large amount of Bitcoin. Whales often use Bitcoin loans to access liquidity without selling their holdings.