Debt can also begin entirely outside the blockchain.
Using a bank loan, credit card or personal loan to buy Bitcoin still means investing in crypto with borrowed money, even if no crypto protocol knows the loan exists.
One distinction must be made immediately, however: using leverage does not always legally mean taking out a conventional loan. A perpetual contract or CFD may simply multiply exposure to an asset’s price. Economically, however, the result resembles debt: with 1,000 euros, it becomes possible to take 2,000, 5,000 or more in exposure, depending on the product and regulation. Losses are amplified by the same proportions.
In 2027, this question is becoming particularly important. Applications now allow users to borrow, stake an asset used as collateral, receive a liquid token, use it again as collateral and borrow again. In some cases, just a few clicks are enough to turn 5,000 dollars of crypto into a structure containing several layers of debt.
Crypto debt is therefore not always visible as an amount preceded by the word “loan.”
Sometimes, it is hidden inside a position.
How margin trading creates crypto debt
Margin trading is probably the most direct way to create debt through an exchange. To understand the mechanism, you first need to distinguish a conventional Spot account from how a crypto exchange works.
On the Spot market, you deposit 1,000 USDT and buy 1,000 USDT worth of Bitcoin.
You have no debt.
If Bitcoin loses 30%, your position is worth approximately 700 USDT. The loss is significant, but no one is asking you to repay a borrowed amount.
With Margin, the situation changes.
You can deposit your 1,000 USDT as collateral and then borrow additional funds. You use those funds to increase the size of your position.
Binance precisely defines margin trading as a mechanism that allows users to borrow assets in order to increase their market exposure. The platform notes that losses are amplified in exactly the same way as gains, and that interest starts accruing on borrowed funds.
You then have two things at the same time:
a crypto position;
a debt owed to the platform.
It is this combination that makes all the difference.
The trader can no longer ask only whether Bitcoin is rising or falling. They must also maintain enough collateral to secure what they borrowed.
If the position deteriorates too much, the exchange may intervene before the debt becomes too large relative to the available assets.
That is liquidation.
An example shows how 1,000 dollars becomes debt
Suppose you have 1,000 USDT.
You borrow an additional 1,000 USDT on a Margin account.
You can now buy 2,000 USDT worth of Bitcoin.
Your exposure is therefore twice your initial capital.
If Bitcoin rises by 10%, the position is worth approximately 2,200 USDT. Ignoring interest and fees, you repay the 1,000 USDT borrowed and have approximately 1,200 USDT left.
Your initial capital of 1,000 has gained approximately 20% thanks to a Bitcoin move of just 10%.
That is the appealing effect of leverage.
Now let’s run the calculation in the other direction.
Bitcoin loses 10%.
The 2,000 position is now worth approximately 1,800.
The 1,000 debt has not disappeared because BTC fell.
Your net worth therefore falls to around 800 before interest and fees.
Bitcoin has lost 10%.
Your equity has lost approximately 20%.
A further decline gradually brings the position closer to the point at which the exchange no longer wants to risk the collateral becoming insufficient.
Binance notably uses a Margin Level calculated from the value of the collateral, debts and interest owed. The exact parameters vary depending on Cross Margin, Isolated Margin, the assets and the ratios applied.
Debt therefore does not simply double gains.
It also shortens the distance to trouble.
Cross Margin and Isolated Margin do not put the same capital at risk
Platforms generally use two architectures: Cross Margin and Isolated Margin.
With Isolated Margin, the debt and collateral are linked to a specific position or pair.
Suppose you transfer 500 USDT to an isolated BTC/USDT account and then borrow to trade that pair.
If the trade goes badly, the liquidation risk is mainly contained within that compartment.
Binance explains that when the isolated margin level falls below the applicable liquidation threshold, the relevant Isolated account becomes subject to liquidation. Rates and thresholds depend notably on the pair and leverage level.
Cross Margin works differently.
Several assets in the account may help support the positions and debts.
This allows capital to be used more efficiently.
It also means that a bad position can affect more assets.
A profitable BTC position may help support a debt taken elsewhere.
ETH may serve as collateral.
So may stablecoins.
Binance also applies haircuts, meaning that one dollar of certain assets is not necessarily recognized as a full dollar of collateral. These ratios were further modified for several assets in August 2026.
In other words, the platform may consider a volatile asset to be worth 100 dollars on the market, but much less when calculating your borrowing capacity.
Market price and collateral value are not always the same.
You can also go into debt by short-selling Bitcoin
Debt does not appear only when you borrow dollars or stablecoins.
A trader can borrow a cryptocurrency directly.
Imagine Bitcoin trading at 80,000 dollars.
You think it will fall.
You borrow 1 BTC.
You then immediately sell that BTC for 80,000 USDT.
You now have an additional 80,000 USDT.
But you still owe the platform 1 BTC.
Your debt is denominated in Bitcoin, not dollars.
If Bitcoin then falls to 70,000 dollars, you can buy 1 BTC for 70,000, return it to the lender and keep the difference before fees and interest.
The short works.
Now suppose Bitcoin rises to 100,000 dollars.
Your debt remains 1 BTC.
To repay it, you now need to find 100,000 dollars to buy back the unit you sold for 80,000.
The higher Bitcoin rises, the greater the monetary value of your debt becomes.
This is an important asymmetry.
When buying BTC on the Spot market without debt, the theoretical maximum loss corresponds to the capital invested if the asset fell to zero.
An unprotected short faces an asset whose upside theoretically has no upper limit.
Platforms therefore generally liquidate the position before extreme scenarios occur.
The mechanism protects the infrastructure.
It does not necessarily protect your initial capital.
Leverage is not always legally debt
Perpetual contracts make the terminology more complicated.
With a conventional Margin account, the trader actually borrows an asset and must repay it.
With a perpetual future, they do not necessarily borrow the missing 9,000 dollars when turning 1,000 dollars of margin into 10,000 dollars of exposure.
The contract creates greater notional exposure than the trader’s capital.
Economically, the result closely resembles debt financing: a small amount controls a much larger position, and a small change in the underlying asset produces a large change in equity.
Legally and technically, it is not necessarily a loan.
This distinction matters when answering the question, “How do you go into debt in crypto?”
Leverage can increase risk without creating conventional debt to a lender.
In Europe, ESMA also noted on February 24, 2026, that certain products marketed as perpetual futures or perpetual contracts may fall under the rules applicable to CFDs, depending on their characteristics. These rules include leverage limits, margin close-out and negative balance protection.
For crypto CFDs offered to retail clients under the relevant European framework, leverage is limited to 2:1.
A 20x leverage product offered elsewhere therefore does not necessarily benefit from the same protections.
Liquidation generally prevents debt from becoming uncontrollable
Liquidation is often presented as a punishment.
It is primarily a mechanism to protect the lender or protocol.
If a platform lends you 5,000 dollars against 10,000 dollars of crypto, it has a safety margin.
If the collateral falls to 9,000, the debt is still covered.
At 7,000, the situation becomes less comfortable.
The platform will generally not wait until the collateral is worth 4,000 while 5,000 is still owed.
It therefore sells some or all of the assets before reaching that point.
On Binance Isolated Margin, liquidation occurs when the margin level falls below the ratio set for the position. Borrowed funds also generate interest from the moment they are borrowed.
This mechanism creates an essential difference from a Spot purchase.
Bitcoin can lose 40% and then return to its previous price six months later.
A Spot holder who did not sell also recovers the value of the position.
The leveraged trader may have been liquidated in the middle of the decline.
When BTC recovers, they no longer hold the position.
Being right over the long term does not save a position whose financing did not survive the short term.
This is one of the central paradoxes of crypto debt.
Borrowing against Bitcoin creates real debt without selling BTC
Another form of debt involves using Bitcoin as collateral to obtain liquidity.
The owner may, for example, hold 100,000 dollars of BTC.
They do not want to sell.
They deposit some of their Bitcoin as collateral.
They then borrow 30,000 USDC.
They can use the stablecoins while retaining indirect economic exposure to the Bitcoin locked as collateral.
Coinbase currently offers this type of loan through infrastructure using the Morpho protocol for certain eligible users and assets. The crypto collateral is locked on-chain, and the loan must be repaid with the accrued interest or fees before the collateral can be fully recovered.
This transaction does create debt.
The amount of crypto you own may be greater than the loan.
Your net worth may remain strongly positive.
You still owe money, however.
The risk comes from the fact that the collateral is volatile.
Coinbase states, for example, that one of its lending mechanisms automatically liquidates when the loan-to-value ratio reaches the relevant liquidation threshold, with an example LLTV of 86% and a liquidation penalty of 4.38% in the current documentation. Parameters may vary depending on the asset and may change.
BTC therefore does not need to be sold voluntarily.
A decline can force the sale on your behalf.
LTV: the figure that explains much of crypto debt
Loan-to-Value, or LTV, compares debt with the value of the collateral.
Suppose:
collateral = 10,000 dollars of Bitcoin;
debt = 4,000 USDC.
The LTV is 40%.
If Bitcoin falls and the collateral is worth only 8,000 dollars, the debt remains close to 4,000 plus interest.
The LTV then rises to approximately 50%.
You have not borrowed anything else.
Your debt has nevertheless become more dangerous solely because the value of the collateral has fallen.
If the collateral rises to 12,000 dollars, the opposite occurs.
The LTV falls to around 33%.
This mechanism explains why borrowing against a volatile cryptocurrency requires a greater safety margin than a loan secured by a much more stable asset.
You should not ask only:
“How much can I borrow?”
You must also consider what would happen after a sudden 20%, 30% or 50% decline in the collateral.
Bitcoin’s particularly volatile nature makes this calculation less theoretical than it may appear.
BTC has already experienced numerous drawdowns well above these levels.
Maximizing the LTV at the time of opening a loan therefore means voluntarily reducing the room available to absorb a correction.
DeFi makes it possible to go into debt without a bank or credit application
Aave illustrates the other major revolution in crypto lending.
You do not need to complete a conventional bank application to borrow certain tokens.
The user connects their wallet.
They deposit an asset accepted as collateral.
They then borrow against that collateral according to the parameters set by the protocol.
Aave explains that its loans are generally overcollateralized: the value of the collateral must exceed the amount borrowed. The Loan-to-Value determines the maximum amount that can be borrowed against an asset.
Imagine depositing 10,000 dollars of ETH.
If the permitted LTV for the relevant configuration is 75%, the user could theoretically have borrowing capacity of up to 7,500 dollars under this simplified example.
Using all of that capacity would nevertheless be extremely aggressive.
Aave notably monitors the Health Factor.
The protocol calculates it based on the value of the collateral, the liquidation threshold and the amount borrowed.
A Health Factor below 1 makes the position eligible for liquidation.
Bank lending requires trust in the borrower.
DeFi lending replaces part of that trust with collateral, code and oracles.
The borrower may be pseudonymous.
The debt is entirely real.
Interest can increase debt without a new loan
A position can become riskier even when the user does nothing else.
The reason is simple: interest.
On Aave, borrowing rates are determined dynamically, notably according to the use of available liquidity and the protocol’s parameters. Interest starts accumulating as soon as the loan is opened.
On Binance Margin, borrowed assets also generate interest, charged according to the parameters applicable to the product. Isolated account documentation states that interest starts accruing when the borrowing occurs and is then charged periodically.
Imagine a debt of 10,000 USDC.
You borrow nothing else for several months.
The debt may nevertheless become 10,200, 10,400 or more depending on rates and duration.
If the collateral falls during that period, both forces work against you.
Debt numerator rising.
Collateral value falling.
The ratio deteriorates much faster.
This is one of the differences from a simple Spot investment.
BTC held in a wallet does not create additional debt because you are asleep.
An open loan continues to run.
Time has a cost.
Looping can turn a single debt into DeFi leverage
DeFi can even recreate leverage without opening Futures positions.
Suppose you have 10,000 dollars of ETH.
You deposit that ETH on Aave.
You borrow 5,000 USDC.
You use those 5,000 USDC to buy more ETH.
You then deposit the new ETH as collateral.
You can now have additional borrowing capacity.
Some users repeat the process.
This is often called looping.
Economically, you have built a leveraged long position on ETH inside a lending protocol.
Your gross exposure to Ethereum exceeds your initial capital.
Your debt increases.
If ETH rises, your equity may grow faster.
If ETH falls, the Health Factor deteriorates much more quickly.
The protocol does not need to display a “2x leverage” button for leverage to exist.
The balance-sheet structure is enough to create it.
This mechanism becomes even more complex when the user employs liquid staking tokens, restaking or several protocols.
Several layers may depend on the same economic collateral.
A single market decline can then spread throughout the entire structure.
This is where the growing complexity of DeFi and crypto assets stops being merely technical.
It becomes financial.
Stablecoins and debt can create a false sense of security
Borrowing in USDC or USDT intuitively seems less risky than borrowing a volatile cryptocurrency.
The debt remains approximately stable in dollar terms.
That is indeed more predictable on the amount owed.
The collateral can nevertheless remain extremely volatile.
Borrowing 10,000 USDC against 20,000 dollars of ETH creates a stable debt.
If ETH loses 40%, the collateral is worth only 12,000 dollars.
The problem occurs despite the stablecoin’s stability.
The reverse scenario also exists.
You deposit a stablecoin as collateral to borrow another asset.
The collateral itself may experience a depeg.
The mechanics and risks of stablecoins must therefore be included in any loan analysis.
“Stable” describes a price target.
Not the absence of risk.
The protocol may apply different LTVs or thresholds depending on the precise asset type for this reason.
Aave adjusts its parameters by collateral and may change them through governance and its risk-management mechanisms.
Crypto debt therefore always depends on both sides of the balance sheet.
What you owe.
And what secures what you owe.
The worst crypto debt can start with a credit card
You do not need to open Aave or Binance Margin to go into debt in crypto.
Imagine someone convinced that Bitcoin will quickly double.
They do not have 5,000 euros available.
They therefore use a credit card, overdraft or personal loan.
They then buy BTC.
The debt belongs to the traditional financial system.
The purchased asset belongs to the crypto market.
This is a particularly difficult combination because the debt can be rigid while crypto remains volatile.
The bank expects repayment every month.
Bitcoin has no obligation to respect the schedule.
It can lose 40% just before the monthly payment.
The debtor is then left with:
a crypto asset at a loss;
credit interest;
a fixed payment.
Leverage within a crypto protocol has at least an automatic liquidation mechanism when collateral becomes insufficient.
A personal loan can continue to exist after the investment has completely collapsed.
This is where the expression “do not invest money you cannot afford to lose” takes on a much more concrete meaning.
With external debt, losing the investment does not erase what you owe.
Can you lose more than your capital?
The answer depends on the product.
With a Spot purchase without debt, you generally cannot lose more than the amount invested in the asset itself.
With a Margin position, loan or certain derivatives, the equation changes.
Platforms have liquidation mechanisms designed to close positions before losses excessively exceed collateral. This reduces the risk of residual debt, without making it universally impossible across all products, jurisdictions or extreme scenarios.
Very rapid moves can produce slippage.
Liquidity can disappear.
The price can jump across several levels.
A system can experience a failure.
Within the European framework for retail CFD clients, negative balance protection is one of the imposed measures, limiting losses at the account level within the relevant scope.
This protection should not be extrapolated to every crypto platform worldwide.
An offshore perpetual is not automatically a European CFD.
A DeFi loan is not a CFD.
Credit-card debt is not covered by this protection.
Asking “can I lose more than I deposited?” therefore always requires a second question:
with which product?
Liquidation does not necessarily mean that all debt disappears in the same way
In an overcollateralized protocol, liquidation uses the collateral to repay all or part of the debt.
Aave explains, for example, that when a Health Factor falls below 1, a liquidator can repay part of the debt and receive part of the collateral in return, together with a liquidation bonus. Depending on the position’s health and size, up to 50% or 100% of the debt can currently be liquidated in certain V3 configurations.
The result is painful for the borrower.
They lose part of their collateral.
They bear the economic cost of the liquidation.
They may nevertheless retain a residual position, depending on the circumstances.
On Coinbase, its crypto-loan documentation states that when the applicable LLTV threshold is reached, collateral is liquidated to repay the loan and interest, with an additional penalty listed at 4.38% in the documented case.
It is therefore not simply:
“I had 1,000 dollars, and they fell to zero.”
Debt changes the mechanics.
Assets can be sold automatically to satisfy the creditor.
You no longer choose when the sale occurs.
Repaying the debt releases the collateral
Crypto debt does not disappear because you close the application.
It disappears when the obligations are settled.
On Aave, users can repay all or part of their loan. Repayment reduces the debt and improves the Health Factor. Once the position has been fully repaid, the collateral can be released and withdrawn, subject to available liquidity.
Binance follows the same general logic on Margin: users must repay the borrowed asset together with interest. If 10 BTC have been borrowed, the documentation specifies that 10 BTC plus the corresponding interest must be repaid.
This detail explains something important.
Debt must be considered in the borrowed unit.
Borrowing 10,000 USDC means owing USDC.
Borrowing 1 BTC means owing BTC.
Borrowing ETH means owing ETH.
The dollar value can therefore evolve very differently depending on the liability.
A Bitcoin short is particularly sensitive to this mechanism: the higher BTC rises, the more expensive the BTC-denominated debt becomes to repurchase in dollars.
Liabilities also have a market price.
Why voluntarily take on crypto debt?
Despite all these risks, crypto debt has legitimate uses.
An investor may need liquidity without wanting to sell their Bitcoin.
A market maker may borrow assets required for its activity.
A trader may short-sell.
A company may use a position as collateral.
A DeFi user may borrow a stablecoin to carry out another on-chain transaction.
Debt is therefore not inherently bad.
It becomes dangerous mainly when it is used to turn a conviction into disproportionate exposure.
The classic problem looks like this:
“I am certain Bitcoin will rise, so I will use 10x.”
Confidence about direction says nothing about the path.
Bitcoin can end the year 40% higher after first falling 20%.
The Spot holder may survive.
The overleveraged position may disappear during the first stage.
This is why debt is more a question of financial survival than simple forecasting.
Good analysis cannot protect a poorly financed position.
Three figures are already enough to understand crypto debt
Before taking any leveraged position, three variables tell much of the story.
The first is the amount of debt.
How much do you actually owe, in which currency and with what interest?
The second is the value of the collateral.
How much is the asset securing the loan worth today?
The third is the liquidation threshold.
At what level of deterioration will the system begin selling the collateral?
On Aave, this logic appears through the Health Factor and the LTV and liquidation parameters.
On Margin exchanges, risk ratios serve a comparable function.
These three variables are then joined by the cost of time:
interest rate;
potential funding;
fees;
liquidation cost.
You do not need a complicated quantitative model to understand why a position becomes dangerous.
High debt.
Volatile collateral.
Little room before liquidation.
Three ingredients are enough.
How can you prevent a crypto investment from becoming a debt spiral?
The first protection is almost too simple: do not borrow to increase a position you do not already understand on the Spot market.
Someone who does not understand why ETH rises or falls gains nothing by multiplying their exposure fivefold.
The second is to distinguish maximum borrowing capacity from a reasonable amount.
A protocol may allow 70% LTV.
That does not mean 69% is a good target.
Unused margin is precisely what allows collateral to absorb a decline.
Third: monitor interest and total costs.
Fourth: avoid stacking several protocols without understanding their dependencies.
Staked ETH.
Liquid token.
Collateral.
Borrowed stablecoin.
New ETH purchase.
Second deposit.
Each layer may appear rational in isolation.
Together, they can become a position that is extremely sensitive to price.
Finally, investment capital must be distinguished from money needed for everyday expenses.
Crypto trading can already become problematic when it turns compulsive. Adding debt makes behavioral mistakes far more costly.
A bad market day can then become a financial obligation lasting several months.
In 2027, crypto debt will probably be even easier to hide
The sector’s evolution is heading in a paradoxical direction.
Interfaces are becoming simpler.
Financial structures are becoming more sophisticated.
A user can now deposit an asset, receive a liquid token, use that token as collateral, borrow a stablecoin and reinvest the proceeds without ever seeing the words “bank loan.”
The application may show only:
Deposit.
Borrow.
Loop.
Earn.
The economic balance sheet tells a different story.
Assets.
Liabilities.
Interest.
Liquidation.
Tokenization, liquid staking and DeFi make capital more efficient. They also make it easier to reuse the same capital across several layers.
In 2027, the most useful skill may therefore not be knowing which yield is highest.
It will be knowing how to reconstruct your own balance sheet.
How much do you own gross?
How much have you borrowed?
How much do you actually own net?
Which assets secure which debts?
At what price does liquidation become possible?
This perspective becomes even more important as self-custody and on-chain protocols replace some traditional intermediaries.
Code can automate lending.
It does not abolish the mathematics of debt.
Conclusion: crypto does not eliminate debt; it automates it
There are several ways to go into debt in crypto.
Borrowing USDT to buy more Bitcoin.
Borrowing BTC to short-sell it.
Depositing ETH on Aave and then borrowing stablecoins.
Using Bitcoin as collateral to obtain a loan.
Multiplying exposure with certain derivatives.
Or taking out a conventional loan to buy cryptocurrencies.
These methods do not all have the same legal status.
They share one economic characteristic: the capital exposed or used exceeds the immediately available resources of the user, or a repayment obligation exists.
The danger mainly comes from combining debt with volatility.
The amount owed may remain stable while the collateral collapses.
Interest may increase while the market falls.
Liquidation can sell assets precisely when the investor would have preferred to wait.
A short can become increasingly expensive when the borrowed cryptocurrency rises.
A personal loan continues to exist even if the purchased token falls almost to zero.
Blockchain brings considerable innovation to lending. On Aave, no bank individually decides whether the borrower appears creditworthy. Collateral, smart contracts, risk parameters and oracles organize much of the relationship.
This system is more programmable.
Not less financial.
In 2027, crypto debt will probably be even more deeply integrated into wallets, exchanges and protocols. Interfaces will hide some of the visual complexity.
The risk, however, will remain very traditional.
Someone borrows. Someone must be repaid. And if the collateral is no longer sufficient, something must be sold.
Understanding this sentence is already enough to avoid many of the mistakes associated with leverage.
