Loan To Value Ratio (LTV)

The Loan to Value Ratio (LTV) is a financial metric used in lending to compare the size of a loan to the value of the asset used as collateral. In the context of cryptocurrency lending, LTV is crucial for determining the risk level of a loan and setting the borrowing limits. For example, if a borrower wants to take out a loan using Bitcoin as collateral, and the loan amount is 50% of the Bitcoin’s value, the LTV ratio would be 50%. A higher LTV ratio indicates a higher risk for the lender, as the loan amount is closer to the value of the collateral.

Lenders use the LTV ratio to assess the borrower’s creditworthiness and to determine the terms of the loan, such as interest rates and margin requirements. A low LTV ratio suggests that the loan is well-secured by the collateral, reducing the risk for the lender. However, if the LTV ratio is too high, the lender may require additional collateral or set higher interest rates to compensate for the increased risk. Borrowers must carefully manage their LTV to avoid margin calls or liquidation, where the collateral is sold to cover the loan if the value of the collateral falls too much.