What is the safest LTV ratio for crypto borrowing?

LTV (Loan-to-value) ratio is one of the most important data points for crypto borrowers. It determines some of the most essential aspects of your borrowing, including the amount you can borrow against your collateral, the safety of your loan, and the interest you pay. Lending platforms and protocols like Clapp Finance, Aave, and Binance clearly state their LTV ratios before and update them in real time.

LTV ratio typically ranges from 10% to 90%; a 100% LTV ratio is rare, as most crypto loans are overcollateralized. While most platforms have a general LTV ratio for supported collaterals, you can lower your loan’s LTV by borrowing significantly less than the approved amount.

For instance, the LTV ratio for Bitcoin on Clapp Finance at the time of writing is 70%; you can borrow up to $70 against $100 worth of BTC. However, you can achieve a lower LTV ratio by borrowing less than 70$.

For a safe loan, it is important to maintain a low LTV ratio. Most sources recommend an LTV ratio of 10% to 30% as the safest.

Why the 10-30% range is considered the safest LTV ratio

LTV ratios change with the value of your collateral asset. The LTV ratio of your loans increases when the value of the asset declines. Therefore, for extremely volatile assets like cryptocurrencies, it is important to maintain a level at which price fluctuations do not dramatically affect your loan’s health.

At a 10-30% LTV ratio for an asset whose normal LTV is 70% (for instance), you operate significantly below the market standards. This creates a large buffer for your position. A 10-30% LTV ratio loan can handle up to 40% price crashes. At this range, even a historic market crash is unlikely to drastically push your loan to liquidation. This gives you enough time to act before your position approaches the platform’s liquidation threshold.

Apart from safety from liquidation, you also pay lower interest in this range. Most lending platforms charge minimal interest below the 30% LTV ratio. Clapp Finance, especially, offers 0% interest when the LTV ratio is below 20%.

Comparison of risk levels

For clarity, here is a comparison table of the different risk levels for crypto borrowing

Factors that influence the safest LTV for borrowing

Several personal and general factors may determine what is considered a “safe” borrowing LTV ratio for you. They include;

Asset’s Volatility

The volatility of your collateral asset is a major factor to consider. Stablecoins are usually assigned a high LTV ratio at the point of borrowing. Maintaining an LTV ratio above 50% may also be considered safe, as reputable stablecoins are designed to maintain their value tightly. An asset like Bitcoin is also considerably stable; a 35% LTV ratio may be considered safe. However, for volatile assets like memecoins, a very low LTV ratio is recommended as their value can shift significantly in the short term.

Market Conditions

Harsh market conditions may lead to increased volatility across most crypto assets. It is important to evaluate and monitor the general market outlook before obtaining a loan and during your borrowing period. In high-volatility or uncertain periods, maintain an LTV below 20%. In calm bull markets, 30-35% is usually safe.

Platform Terms

Enquire about platform-specific terms, as this is important for your loan. Review the liquidation terms and interest structure of the platform you wish to borrow from. The liquidation threshold varies across lending platforms. As a general rule, maintain below 50% of the liquidation threshold. For instance, on Clapp Finance, where the LTV threshold for Bitcoin-backed credit lines is 90%, the recommended safe LTV for your loan is between 10-40%.

Purpose for the loan and your borrowing strategy

If you are borrowing against your asset to avoid taxation, it is important to maintain an LTV ratio where the interest is significantly less than the Tax rate in your region. For instance, if the capital gain tax in your region is 30%, maintain a range where the interest rate is 20% or lower. A safe range is also recommended when you are borrowing to avoid selling your assets.

Also, consider your borrowing setup. If you actively monitor prices, keep cash reserves, or can quickly add collateral, you might tolerate slightly higher LTV. However, if you can’t maintain a responsive borrowing culture, we recommend maintaining a safe LTV ratio.

Practical Tips for Safe Borrowing

Here are a few tips for safe borrowing

• As a newbie or conservative borrower, start well below the platform’s maximum allowed LTV.
• Set price alerts well above the liquidation point and monitor them.
• Keep an extra collateral or stablecoin reserve to top up if needed.
• Note that lower LTV often unlocks better interest rates; therefore, stay below the 30% range as much as possible.
• Keep in mind that platforms advertise high max LTVs (50-90%) for marketing, but these are not safe targets.

Conclusion

LTV ratios determine the safety of your loan. On lending platforms, when your loan exceeds the liquidation threshold (expressed in LTV ratio), your assets will be liquidated. Before this even happens, the interest rate of your loan increases with the LTV ratio. Therefore, for safety and better profitability, a safe range is recommended. We recommend that you review the data and tips discussed in this article and apply them as much as possible to your lending strategy.