Loan-to-value (LTV)

Loan-to-value (LTV) in the context of crypto refers to the ratio of the amount of a loan compared to the value of the collateralized cryptocurrency assets. It's a crucial metric used in crypto lending platforms to assess the risk associated with a loan.

Here's the full definition with examples and cases:

Definition: Loan-to-value (LTV) ratio is calculated by dividing the loan amount by the value of the collateralized assets, expressed as a percentage.

Example:

- Let's say you want to borrow $5,000 worth of stablecoins and you offer $10,000 worth of Bitcoin as collateral.

- The loan-to-value ratio would be calculated as follows: LTV = (Loan Amount / Collateral Value) * 100%

- Substituting the values: LTV = ($5,000 / $10,000) * 100% = 50%

Cases:

1. Low LTV: If the LTV is low, say around 30%, it indicates that the borrower is offering significantly more collateral than the loan amount. This suggests lower risk for the lender as the collateral value exceeds the loan amount by a considerable margin.
2. High LTV: Conversely, a high LTV, say 80% or more, implies that the borrower is providing relatively less collateral compared to the loan amount. This poses a higher risk for the lender since there's less cushion if the collateral's value drops.
3. Margin Calls: In cases where the value of the collateralized assets declines, pushing the LTV ratio beyond a predetermined threshold (e.g., 70%), lenders may issue margin calls, requiring borrowers to either repay a portion of the loan or add more collateral to bring the LTV back within an acceptable range.
4. Liquidation: If the LTV exceeds a certain critical level (e.g., 90%), lenders may liquidate a portion of the collateralized assets to cover the outstanding loan amount and mitigate their risk.

In summary, the loan-to-value ratio in crypto lending serves as a crucial risk assessment tool, helping lenders determine the amount of collateral required for a loan and enabling borrowers to access funds while maintaining adequate security.