Loan-to-value (LTV) Ratio

The Loan-To-Value (LTV) ratio in crypto refers to the ratio of the amount of a loan compared to the value of the collateral securing the loan, expressed as a percentage. It is commonly used in lending platforms and decentralized finance (DeFi) protocols to determine the amount of cryptocurrency a borrower can borrow against their collateral.

Example:

Let's say you want to borrow 10 Bitcoin (BTC) and offer 20 Bitcoin as collateral. If the LTV ratio required by the lending platform is 50%, it means you can only borrow up to half the value of your collateral.

Calculation:

Value of collateral = 20 BTC * current BTC price

Loan amount = Value of collateral * LTV ratio

Case 1:

If the current BTC price is $50,000:

Value of collateral = 20 BTC * $50,000 = $1,000,000

Loan amount = $1,000,000 * 50% = $500,000

Case 2:

If the current BTC price drops to $40,000:

Value of collateral = 20 BTC * $40,000 = $800,000

Loan amount = $800,000 * 50% = $400,000

In Case 1, you could borrow up to $500,000, but in Case 2, with the lower BTC price, you could only borrow up to $400,000 due to the decrease in the value of your collateral.