Bitcoin lenders are hoping that stronger regulations and better risk management can restore trust in areas still affected by the failures of companies like Celsius and BlockFi.
The previous cycle saw major Bitcoin lenders collapse after mishandling user deposits, which turned into insufficient loans. As Bitcoin (BTC) prices fell and liquidity issues arose, billions in customer funds became either frozen or lost.
Yet, these failures don’t necessarily indicate that crypto-based loans are fundamentally flawed. The problems stemmed mainly from poor risk management rather than the entire concept. Alice Liu, the research director at Coinmarketcap, noted that some platforms are now implementing better practices, including over-collateralization and stricter liquidation thresholds.
“Greater transparency and third-party custody reduce counterparty risks compared to opaque models like Celsius,” she remarked to Cointelegraph.
That said, while some current loan terms don’t guarantee relocation, the volatility of Bitcoin’s price can still create stress within the lending ecosystem.
Bitcoin Loan Models Evolving Beyond the Celsius Era
The failures of BlockFi and Celsius highlighted significant flaws in how early crypto lenders managed risks. Their approach heavily relied on inadequate liquidity management and opaque operations, leaving clients unsure about how their assets were being handled.
Rehypothecation, a method borrowed from traditional finance, allows brokers to use client collateral for their transactions. While this is commonly accepted in regulated markets, it requires strict disclosures and reserve requirements.
Platforms like Celsius and BlockFi frequently used customer deposits without sufficient transparency regarding capital buffers or regulations, exposing users to counterparty risks. A notable distinction was that Celsius marketed aggressively to retail investors, while BlockFi had a more institutional focus, with ties to the now-bankrupt FTX exchange and its partner, Alameda Research.
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Liu observed that today’s lending market attracts more seasoned investors, with fewer retail participants. This shift means that the funds allocated to Bitcoin collateral loans tend to come from long-term holders and institutions.
“Their focus is now on accessing liquidity, optimizing taxes, and diversifying, rather than agricultural yields,” Liu explained. “This has alleviated some pressure on competing for better terms. Instead, security and risk assessments have become top priorities for evaluating user products.”
Despite some platforms promising not to restructure user assets, investor caution remains high after Celsius’s downfall. Companies like Strike, run by Bitcoin advocate Jack Mallers, pledge that they won’t repurpose customer Bitcoin, while aiming to enhance their transparency regarding business models.
“Some players continue to play with BTC, meaning they’re reusing unsecured collateral in other areas. This resembles the ‘black box’ model we witnessed between 2021 and 2022,” Liu noted.
“Whether it’s safe or risky largely hinges on the actual structure and transparency involved.”
A Comeback for Bitcoin-Backed Loans
Bitcoin-collateralized lending was among the most dynamic sectors of crypto just a few years ago. Galaxy Research reported that the total loan portfolio peaked at $34.8 billion in early 2022.
However, in the following quarter, the collapse of the Terra stablecoin led to widespread bankruptcies in the sector, affecting major players like BlockFi, Celsius, and Voyager Digital.
By that second quarter, the total loan volume plummeted to $6.4 billion—an 82% drop from its peak. Nevertheless, Bitcoin’s lending structure is experiencing a resurgence, reaching $135.1 billion in open borrowing by early 2025, marking a quarterly increase of 9.24%.
Today’s lending models incorporate improved risk management, including clearer guidelines on lower loan-to-value (LTV) ratios and redisposal practices. Still, the risk remains since these models are built on inherently volatile assets like Bitcoin.
Even as lenders like Celsius and BlockFi faced vulnerabilities, the crisis intensified alongside falling Bitcoin prices.
Related: US mortgage regulators are reviewing Bitcoin in the context of the housing market crisis.
Modern lenders are tackling these issues by implementing over-collateralization and stricter margin enforcement. Yet, even conservative LTVs can quickly escalate during sudden market downturns.
“Bitcoin remains volatile; a 20% price drop could trigger aggressive liquidations regardless of the platform’s oversight,” Liu cautioned.
A Safer Bitcoin Lending Model Isn’t Foolproof
While Bitcoin’s volatility has stabilized compared to earlier days, it can still experience significant daily fluctuations.
As reported by Coingecko, in early 2025, Bitcoin often fluctuated by 5% in a day due to global trade pressures, despite reaching around $77,000 in March.
“Bitcoin-backed loans present new financial opportunities,” said Sam Mudie, co-founder and CEO of tokenized investment firm Savea.
Even with low LTV ratios designed to prevent redisposals, Mudie warned that crypto lenders are still dealing in a single-asset collateral pool that could depreciate suddenly.
Bitcoin loans offer ways for users to tap into liquidity without liquidating their holdings, thereby sidestepping capital gains taxes and accessing real estate. However, Bitcoin enthusiasts approach these use cases with caution, noting that they often involve traditional financial intermediaries and additional risk factors.
“While using Bitcoin to purchase real estate sounds appealing, we recognize that many transactions occur through legacy systems instead of just smart contracts,” Mudie stated.
He sees potential for more integrated crypto financing solutions, suggesting that platforms could enhance security by lending only up to 40% of the collateral’s value.
Currently, Bitcoin-backed lending is cautiously reviving thanks to more stringent controls and a heightened awareness of the risks that led to its initial problems. However, even the most secure models need to tread carefully until volatility stabilizes at its core.
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