A loan secured by Bitcoin lets someone borrow dollars without selling the Bitcoin they hold. The risk is plain: Bitcoin’s price can fall quickly. A sound design says in advance what happens when it does. This is how Longstone’s design answers that question.
Start with twice the collateral.
A borrower pledges Bitcoin worth twice the amount borrowed. A $100,000 loan would be secured by $200,000 of Bitcoin. The ratio of loan to collateral is called loan-to-value, or LTV, and it starts at 50%.
Warnings come first.
If the price of Bitcoin falls, the same loan is backed by less collateral and the LTV rises. The borrower is warned when it reaches 65%, again at 70%, and again at 75%. At each point the borrower can add Bitcoin or pay down part of the loan to bring the ratio back.
A fixed line at 80%.
If the LTV reaches 80%, collateral is sold to repay the loan. The rule is automatic, and the borrower knows it before the loan is made.
How far the price has to fall.
| Loan-to-value | Fall in Bitcoin’s price since the loan was made |
|---|---|
| 65% | 23.1% |
| 70% | 28.6% |
| 75% | 33.3% |
| 80% | 37.5% |
Where the Bitcoin sits.
Pledged Bitcoin is designed to stay in custody for the life of the loan. It is not lent to anyone else.
What this is.
This article describes the design of a product. Longstone is not currently a bank or a lender and does not offer loans. Borrowing against digital assets involves significant risk, including liquidation and loss of collateral.