Bitcoin lenders are betting that tighter controls and clearer risk management can rebuild trust in a sector still haunted by the collapse of predecessors Celsius and BlockFi.
Major Bitcoin lenders of the previous cycle imploded after turning user deposits into undercollateralized loans. When Bitcoin (BTC) prices fell and liquidity dried up, billions in customer funds were frozen or gone.
But those implosions don’t prove that crypto-backed loans are doomed by design. The failures were largely the result of poor risk management rather than the model itself. Some platforms are now taking the right steps, such as overcollateralization, while enforcing stricter liquidation thresholds, according to Alice Liu, head of research at CoinMarketCap.
“Better transparency and third-party custody also help to reduce counterparty risk compared to opaque models like Celsius,” she told Cointelegraph.
But even as some term sheets now promise no rehypothecation and lower loan-to-value (LTV) ratios, a sudden price swing in Bitcoin can still put lending models under stress.
Bitcoin loans are evolving from Celsius-era models
The downfall of lenders like BlockFi and Celsius unveiled flaws in the way early crypto lenders managed risk. Their models relied on rehypothecation, poor liquidity management and overleveraged bets wrapped in an opaque structure that gave clients little insight into how their assets were being managed.
Rehypothecation is a practice borrowed from traditional finance, where brokers reuse client collateral for their own trades. It’s a common and regulated strategy, but it’s typically capped and disclosed to clients with strict reserve requirements.
Platforms like Celsius and BlockFi routinely reused customer deposits, often without clear disclosure of capital buffers or regulatory limits, exposing users to counterparty and liquidity risks. The key difference was that Celsius aggressively marketed to retail investors, while BlockFi had a stronger institutional footprint. BlockFi’s relationship with now-bankrupt crypto exchange FTX and sister company Alameda Research proved to be just as toxic.
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The lending market in the current cycle consists of mature investors and fewer “retail degens,” according to Liu. This means that the funds locked for Bitcoin-collateralized loans are longer-term holders, corporate treasuries and institutional funds.
“Their motivations now center around liquidity access, tax optimization or diversification, not yield farming,” Liu said. “This reduced the pressure for products to compete on better terms; instead, security and risk assessment have been placed at the forefront of the product assessment by users.”
Rehypothecation still worries many crypto users burned by Celsius. Platforms like Strike — run by Bitcoin maximalist Jack Mallers — have promised never to rehypothecate customer Bitcoin, while those that do have taken steps to explain how the model works and how it helps lower borrowing costs through greater transparency.
“Some players still rehypothecate the BTC, meaning they’re reusing the collateral for unsecured lending elsewhere. That’s essentially the same “black box” model we saw in 2021-2022,” said Wojtek Pawlowski, CEO and co-founder of Accountable.
“So, whether it’s healthy or risky really depends on the actual structure and how transparent it is.”
Bitcoin-backed loans staging a comeback
Crypto-collateralized lending companies were among crypto’s biggest rising stars just a few years back. Galaxy Research estimates its combined loan book peaked at $34.8 billion in the first quarter of 2022.
But in the second quarter of that year, the Terra stablecoin crash triggered a series of bankruptcies across the sector. Major lenders such as BlockFi, Celsius and Voyager Digital were caught in the disaster.
The lending book size bottomed at $6.4 billion, an 82% decline from its glory days. The Bitcoin lending model is once again gaining traction, recovering to $13.51 billion in open CeFi borrows as of the end of the first quarter of 2025, representing a 9.24% quarter-over-quarter growth, Galaxy Research estimated.
Today’s lending models have adopted improved risk controls, such as lowering LTV ratios and clear guidance on rehypothecation. However, a core structural risk is that the entire model hinges on a volatile asset like Bitcoin.
The business models of lenders like Celsius and BlockFi were already fragile, but their cracks started to widen into a full-blown crisis when Bitcoin prices fell.
Related: US home mortgage regulator considers Bitcoin amid housing crisis
Modern lenders have addressed many of these issues using overcollateralization and stricter margin enforcement. But even conservative LTVs can unravel quickly in sharp downturns.
“BTC remains volatile, where a 20% price drop can still cause mass liquidations despite the platform actively [monitoring] LTV and [enforcing] real-time margin calls. If platforms repackage collateral into yield strategies (rehypothecation, DeFi yield farming, etc.), the risk returns,” said Liu.
Safer Bitcoin lending models are not bulletproof
Bitcoin’s volatility has stabilized compared to its early years, but it remains prone to sharp daily swings.
In early 2025, Bitcoin frequently moved 5% in a day amid global trade tensions, even dipping to $77,000 in March, according to CoinGecko.
“[Bitcoin-backed loans] are safer, but not bulletproof,” Sam Mudie, co-founder and CEO of tokenized investment company Savea, told Cointelegraph. “Lower leverage, public proof-of-reserves and, in some cases, actual banking licenses are real improvements.”
Even with lower LTV ratios and term sheets that now prohibit rehypothecation, Mudie warned that crypto lenders are still working with a single-asset collateral pool whose value can drop 5% overnight.
Bitcoin loans are unlocking new financial use cases. As Cointelegraph reported on June 15, Bitcoin-collateralized loans allow users to tap liquidity without selling their holdings, helping them avoid capital gains taxes and even access the real estate market.
But Bitcoin purists remain wary. These use cases often involve traditional financial intermediaries and legal systems, introducing new layers of risk.
“Using Bitcoin to buy a house is a great headline. However, [Bitcoiners] also know property deals run through a lot of legacy systems, not just smart contracts,” Mudie said.
Instead, Mudie envisions more crypto-native lending models: shared multisignature wallets, public onchain visibility, hard limits on collateral reuse and automatic margin calls when prices drop. He added that platforms could further protect users by lending only up to 40% of the collateral’s value.
For now, Bitcoin-backed lending is undergoing a cautious revival driven by tighter controls and a stronger grasp of the risks that brought down its first wave. But until volatility is solved at the root, even the safest-looking models will have to stay humble.
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