Getting to know Loan to Value (LTV) and its Benefits

When making a loan, the relevant party will usually check a person's credit score before providing a loan that can be paid.In the world of crypto lending, Loan-to-Value (LTV) is emerging as a central metric, shaping lending dynamics and risk assessment.

Definisi Loan-to-Value (LTV)

In simple terms, LTV represents the ratio of loan value to collateral value. For crypto-backed loans, this metric becomes the determinant of risk and reward. Lenders calculate how much cryptocurrency is needed as collateral before providing a loan, safeguarding the lender's position until full repayment.

Calculating LTV in Crypto Financing

When initiating a crypto-backed loan, LTV is calculated by dividing the loan amount by the collateral value:

For example, if you borrow IDR 75,000,000 and deposit IDR 150,000,000 worth of bitcoin, your LTV is 50%. However, market fluctuations may change this ratio. If the value of bitcoin falls, the value of your collateral falls, pushing the LTV higher. To restore the original LTV ratio, additional collateral may be required.

Monitor Active Loans

Once a loan is active, ongoing LTV monitoring ensures a proactive approach. The formula for tracking LTV over the life of a loan is:

Benefits of Loan-to-Value in Crypto Financing

1. Risk Control: LTV serves as a shield for lenders by minimizing risks associated with market volatility. This ensures a safety net by allowing the sale of collateral if the borrower defaults, protecting the lender's investment.
   
2. Access to Larger Loans: Borrowers benefit from LTV by gaining access to larger loans at lower interest rates. A favorable LTV ratio increases borrowing capacity, making it an attractive option for users.
   
3. Personalized Risk Assessment: For borrowers, LTV serves as a self-assessment tool. A lower LTV provides a safety buffer, reducing the likelihood of asset liquidation when the market falls. Higher LTV, on the other hand, demands quicker decision making in extraordinary market scenarios.

Navigating the Crypto Funding Landscape

In the ever-evolving landscape of crypto financing, understanding and utilizing Loan-to-Value (LTV) has become increasingly important. It not only determines risk parameters but also shapes the experience of borrowers and lenders.

As the crypto financial ecosystem continues to mature, a deep understanding of LTV empowers participants to navigate challenges and exploit opportunities effectively.

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DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates