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Crypto loan liquidation: what happens when Bitcoin falls
See what happens to a crypto loan when Bitcoin falls: LTV, margin calls, cure periods, partial liquidation, DeFi rules, a worked example and IRS tax treatment.
A crypto loan liquidation is the forced sale of cryptocurrency pledged as collateral once the loan-to-value ratio (LTV) reaches a lender's or protocol's liquidation threshold. When Bitcoin falls and the loan balance stays the same, the balance becomes a larger share of the collateral's value, so LTV rises. Many providers send warnings first and allow added collateral or a repayment before any sale. Arch's BTC margin call is 70% with a 24-hour cure period (opens in a new tab), and Ledn's alerts come at 70% and 75% with automatic liquidation at 80% (opens in a new tab). DeFi protocols run on their own rules.
Key takeaways
- LTV is the outstanding balance divided by the current collateral value, so a falling Bitcoin price raises it even when the debt does not change.
- Thresholds, notices, cure periods and fees differ by provider; the signed agreement controls, not any example on this page.
- Before a sale, providers named here list adding collateral, a partial repayment or a full repayment as the usual options.
- Some terms give a fixed cure period and some do not, and a fast price move can reach the liquidation level before the cure period ends.
- A forced sale is a disposition that requires tax analysis under IRS Notice 2014-21.
- DeFi liquidations are permissionless, so a liquidator can act without the borrower being contacted.
What happens, step by step, as the price drops
The sequence below follows one position from a healthy balance to a forced sale, with the options a borrower has at each stage where the provider's terms allow them. The first step is to work out the current LTV: the outstanding balance, plus accrued interest, divided by the current market value of the collateral. For example, a $30,000 balance against $50,000 of Bitcoin is a 60% LTV.
As the price falls, LTV climbs toward the provider's first warning level. At that point most providers send a notice. Arch sends an email and a dashboard notice at its 70% BTC margin call, and a 24-hour cure period begins immediately (Arch, page dated June 25, 2026). Ledn sends an alert when LTV exceeds 70% and a second alert at 75% (Ledn, as of October 3, 2026). During this stage, the borrower can add collateral or make a partial or full repayment, and Ledn also offers Auto Top-Up where it is available.
If LTV keeps rising and reaches the liquidation level, the sale begins. Liquidation proceeds at Arch's 80% partial-liquidation level even if the 24-hour cure period has not expired. At Ledn, automatic liquidation at 80% is irreversible. After a sale, the provider returns any remaining collateral once the balance and accrued interest are covered, or, in Arch's partial model, leaves the loan open at a lower LTV.
From a falling price to a forced sale
- Work out the current LTVThe outstanding balance, plus accrued interest, divided by the current market value of the collateral; a $30,000 balance against $50,000 of Bitcoin is a 60% LTV.
- The price falls and LTV climbsAs the price falls, LTV climbs toward the provider's first warning level.
- A warning arrivesArch sends an email and a dashboard notice at its 70% BTC margin call and a 24-hour cure period begins; Ledn alerts above 70% and again at 75%.
- The borrower actsThe borrower can add collateral or make a partial or full repayment, and Auto Top-Up is an option at Ledn where it is available.
- The liquidation level is reachedArch's liquidation proceeds at 80% even if the 24-hour cure period has not expired, and automatic liquidation at 80% is irreversible at Ledn.
- After the saleThe provider returns any remaining collateral once the balance and accrued interest are covered or, in Arch's partial model, leaves the loan open at a lower LTV.
How does a falling Bitcoin price raise LTV?
The formula is the outstanding balance divided by the collateral's market value, and both parts can move. The collateral value falls with the Bitcoin price, while accrued interest slowly adds to the balance. The same relationship holds at Coinbase: with the debt unchanged, a lower collateral price means a higher LTV (opens in a new tab).
Whether a threshold is measured on principal alone or on principal plus interest and fees depends on the agreement, so it is worth asking the lender before the loan starts and again if a warning arrives.
When do margin calls and liquidations happen?
The levels below are provider examples with their dates, and they are not universal standards. Each provider sets its own numbers and can describe them differently.
Hover or tap a row to highlight it.
| Provider | Warning or margin call | Notice | Cure period | Liquidation level | Date |
|---|---|---|---|---|---|
| Arch, BTC | 70% LTV | Email and dashboard | 24 hours | 80% partial liquidation | May and June 2026 pages |
| Ledn | Alert above 70%; second alert at 75% | Email and account history | Ask the lender whether one applies | 80% automatic liquidation | As of October 3, 2026 |
| Coinbase USDC Loan | Market-specific LLTV shown in the loan overview | Email in the "Danger" range | Ask the lender whether one applies | Market-specific LLTV; examples shown at 62.5%, 77% and 86% | As of October 3, 2026 |
Arch's loan terms (opens in a new tab) set a 60% starting LTV for BTC (page dated May 19, 2026). Coinbase's examples are informational, and each Morpho market has its own predetermined LLTV. Because a threshold can differ by market, loan and date, the figure that matters is the one in the borrower's own agreement.
What can a borrower do before liquidation?
The options named in the providers' own help pages are adding collateral, paying down part of the loan, paying it off, or closing it where the agreement allows. At Arch, the options during the cure period are adding collateral or repaying part of the loan. At Ledn, they are adding BTC collateral, Auto Top-Up where available, and partial or full repayment, and repayment can come from BTC collateral, stablecoins, or USD by ACH or wire. At Coinbase, they are adding collateral or repaying all or part of the loan, and optional loan protection can apply a collateral top-up when a configured threshold is reached, subject to conditions.
Each option takes time to become effective. A blockchain deposit needs confirmations, and a wire has its own timing. Two questions worth putting to the lender are how quickly a deposit counts toward LTV and what happens if the market crosses a threshold while the deposit is pending.
How much collateral is sold, and what does it cost?
The amount sold and the charges are set by the provider. At Arch, a partial liquidation sells enough collateral to return LTV to the starting level, 60% for BTC, and a 2% fee typically applies, to the extent state law allows (Arch partial liquidation (opens in a new tab)). At or above 80%, Ledn automatically sells a portion of the collateral to cover the outstanding balance, applies a 0.50% trading spread to the BTC price, and returns remaining collateral after the balance and accrued interest are covered (as of October 3, 2026).
Whether the borrower can choose which asset or lot is sold depends on the agreement, the account setup and the protocol. FINRA's margin guidance (opens in a new tab) gives a comparable warning for securities margin accounts: a firm may sell without asking the customer which assets to sell, and without waiting for a reply. A crypto loan is not a securities margin account, so the useful step is to ask the crypto lender the same question directly.
How is the sale price determined?
Each provider names its own valuation method, and the method affects when a threshold is crossed. Arch uses the CoinMarketCap market price feed, updated every 60 seconds, which queries multiple exchanges (opens in a new tab). DeFi protocols use oracle prices instead. The questions to ask are which exchange, index or feed sets the price, how often it updates, and what happens during a feed or platform outage.
What happens in DeFi?
DeFi lending replaces a notice-and-cure process with rules enforced by code. On Aave (opens in a new tab), health factor is collateral value multiplied by the weighted average liquidation threshold, divided by total borrow value, and a health factor below 1 makes a position eligible for liquidation. Aave Governance sets the liquidation thresholds for each collateral asset.
Under Aave's V3 documentation (opens in a new tab), any caller can use `liquidationCall` when health factor is below 1. The liquidator repays a chosen amount of the debt and receives a proportional amount of collateral plus a liquidation bonus. The close factor shown in the V3 documentation as of October 3, 2026 is 50%, and under Aave's help page, up to 50% of debt can be liquidated in ordinary cases and up to 100% in certain low-health-factor or small-position conditions. The borrower does not control when a liquidator acts.
Compound III (opens in a new tab) uses a borrow collateral factor and a higher liquidation collateral factor. An account becomes liquidatable when its borrow balance exceeds the limits those liquidation factors create. Any address can call `absorb`, which moves the account's debt to the protocol, takes the collateral and draws on protocol reserves. Buyers can then purchase the collateral at a discount from the price feed's price. Compound identifies Chainlink price feeds, and its documentation home (opens in a new tab) lists, for example, a cbBTC borrow collateral factor of 80% and a liquidation collateral factor of 85% on listed markets (as of October 3, 2026). Governance can change these parameters.
A worked Bitcoin price example
The example below uses Arch's BTC terms with assumptions that are not any borrower's real numbers. The assumptions are a $30,000 loan balance, a 60% starting LTV, one BTC pledged, no accrued interest, fees or repayments, and a Bitcoin price that is the only variable.
Starting collateral value is $30,000 ÷ 0.60 = $50,000. At the 70% margin-call level, the collateral is worth $30,000 ÷ 0.70 = $42,857.14, a drop of $7,142.86, or 14.29%, from the starting value. At the 80% level, it is worth $30,000 ÷ 0.80 = $37,500, a drop of $12,500, or 25%.
Hover or tap a row to highlight it.
| Point | Calculation | Bitcoin price in the example | Drop from $50,000 |
|---|---|---|---|
| Start (60% LTV) | $30,000 ÷ 0.60 | $50,000 | Not applicable |
| Margin call (70% LTV) | $30,000 ÷ 0.70 | $42,857.14 | $7,142.86 (14.29%) |
| Partial liquidation (80% LTV) | $30,000 ÷ 0.80 | $37,500 | $12,500 (25%) |
If a partial liquidation then returns LTV to 60%, and the 2% fee and any spread are ignored, the sale amount x solves ($30,000 − x) ÷ ($37,500 − x) = 0.60, which gives x = $18,750. That leaves an $11,250 balance against $18,750 of collateral. These are arithmetic illustrations, not price forecasts. A real LTV also reflects accrued interest, fees, the provider's valuation method and the amount of collateral pledged.
What can go wrong during a fast drop?
A fast decline can lift LTV before a borrower can move collateral, complete a repayment or read an alert. The practical risks are rapid price-feed changes, blockchain confirmation delays, spreads and slippage, platform outages and many liquidations at once. In DeFi, a position can also be liquidated while the borrower is offline, and the Bank of Canada's April 2026 staff paper (opens in a new tab) examines DeFi lending, leverage and liquidation risk.
For historical scale, Bitcoin has had four drawdowns of more than 50% since 2014 (opens in a new tab), the three largest averaged roughly 80%, and BlackRock's iShares table includes a decline of about 83% in December 2017. That history says nothing about future prices, and it does not set any provider's threshold.
Is a forced sale taxable?
A forced sale is a disposition that requires tax analysis. A taxpayer has gain or loss on an exchange of virtual currency for other property (opens in a new tab) under IRS Notice 2014-21. Gain arises when the fair market value of what was received exceeds adjusted basis, and loss arises when it is lower. The character is generally capital if the virtual currency is a capital asset, and generally ordinary if it is not. Fair market value is determined in U.S. dollars with a reasonable, consistently applied exchange-rate method.
The notice does not set out a crypto-loan liquidation formula, and questions about debt cancellation, recourse treatment, identifying which units were sold, fees and state taxes call for a tax professional. Useful records include the lender's liquidation statement, the transaction history, basis records, dates, units sold, price, fees and the debt balance. The IRS's digital assets page (opens in a new tab) is the starting point for current federal guidance.
What happened to borrowers in the 2022 lender failures?
Frozen access and collateral administration were separate problems, and outcomes varied by product, agreement, timing and court order. In a January 2023 bankruptcy court order in the Celsius case (opens in a new tab), institutional lending relationships were ones in which customers provided cryptocurrency as collateral and expected its return after full repayment, and Celsius closed out most of its institutional loan portfolio before the bankruptcy proceedings. The Celsius case portal (opens in a new tab) holds the docket.
BlockFi's Chapter 11 case appears on the New Jersey bankruptcy court's BlockFi page (opens in a new tab), which points to the docket and client-asset information. Voyager filed for bankruptcy in July 2022, and the FTC's Voyager case page (opens in a new tab) addresses alleged representations about account safety and insurance. A borrower's own outcome turns on the specific loan agreement, the docket filings and the plan treatment, so these cases are better read as a reason to ask who holds the collateral and what happens if the lender becomes insolvent.
Questions to ask a lender before signing, or while reviewing an active loan
These questions turn the terms above into specifics the lender can answer in writing.
- What exact LTV triggers the first warning, the margin call, partial liquidation and full liquidation?
- Is each threshold based on principal only, or on principal plus accrued interest and fees?
- How is notice sent, and is notice required before liquidation?
- When does the cure period begin, and is it measured in hours, business days, calendar days or blockchain confirmations?
- Can the lender shorten, waive or extend the cure period?
- Which collateral can be added, and can the borrower repay part of the loan or close it?
- How much collateral is sold, and what LTV does the sale target?
- Is the loan still open after a partial liquidation?
- What fee, penalty, spread or trading charge applies, and does it come from collateral, loan proceeds or sale proceeds?
- Which exchange, index, oracle or price feed sets value, and how often does it update?
- What happens during a price-feed outage, platform outage or blockchain delay?
- Can the borrower choose which asset or lot is sold?
- What happens to collateral left after repayment, and can a deficiency be owed if proceeds fall short?
- What records and tax statements are provided?
- Who holds the collateral, and what happens if the lender becomes insolvent?
- What state lending, money-transmission or consumer-complaint rules apply to this product?
The CFPB complaint process (opens in a new tab) covers virtual currency and loan products, and a tax professional can explain how a specific liquidation would be reported. Inversado is not a lender, broker-dealer or registered investment adviser.
Frequently asked questions
Each answer below adds detail that applies to the example providers named above.
Is there always a grace period after a margin call?
No. Arch's BTC cure period is 24 hours, but liquidation proceeds if the 80% level is reached before the period ends. Other terms, including Ledn's alerts at 70% and 75%, set warnings and automatic liquidation at 80%, so ask the lender whether any cure window applies.
Can I choose which crypto is sold?
The agreement or protocol sets the collateral and the execution mechanics. In Aave, a liquidation call specifies the collateral asset and the debt asset involved, and the liquidator makes that choice, not the borrower.
What happens to leftover collateral after a liquidation?
It depends on the provider. Ledn returns remaining collateral once the balance and accrued interest are covered, and Arch's partial liquidation sells only enough to restore the starting LTV, leaving the loan open.
What if the collateral is worth less than the loan?
A deficiency question belongs in the loan agreement: ask whether a borrower can owe money if sale proceeds fall short. In DeFi, the Bank of Canada's April 2026 paper discusses systemic fragility and liquidation risk, and unrecovered debt is called bad debt.
Check your understanding
Where to go next
A calculation of the Bitcoin price at each threshold, using the borrower's own balance and the lender's own terms, is the next step for anyone reviewing a loan. The Bitcoin borrowing series covers how Bitcoin-backed loans work, crypto lending risks, taxes, DeFi versus centralized loans and what to check before using a lender.
Key terms
Tap a term to see what it means.
Loan-to-value (LTV). The outstanding balance, plus accrued interest, divided by the current market value of the collateral.
Margin call. A warning that a position needs correcting; Arch's comes at 70% LTV for BTC.
Cure period. The time allowed to add collateral or repay part of the loan; Arch's is 24 hours, and some terms give no fixed period.
Partial liquidation. A sale of enough collateral to return LTV to the starting level, leaving the loan open; for Arch BTC that level is 60%.
Auto Top-Up. A Ledn option, where available, for adding collateral before a sale.
Health factor. On Aave, collateral value multiplied by the weighted average liquidation threshold, divided by total borrow value; below 1 makes a position eligible for liquidation.
Liquidation bonus. The extra collateral a DeFi liquidator receives on top of the proportional collateral for the debt it repays.
Inversado explains how financial products and rules work. It is education, not investment, tax or legal advice for your situation. Rates, rules and terms change; check the current figures with the lender, the regulator or a licensed professional before you act.
