Bitcoin owners who need cash have a choice. They can sell their BTC. Or they can borrow against it and keep their position. That second option sounds simple. It usually is not.
How borrowing against Bitcoin works
A lending app may run on Ethereum, while the BTC sits on Bitcoin. The app cannot directly take Bitcoin as collateral. So the owner often gives the BTC to a custodian and receives a token on another network. The token represents the Bitcoin. The original BTC stays in storage.
That setup can unlock a loan without a sale. But it changes what the borrower depends on. They now rely on the custodian, the redemption rules, the token’s value, and the lending app. Coinbase, Circle, and WBTC all offer versions of this. Circle explained its cirBTC product on Sept. 4. It enters a market already served by Coinbase’s cbBTC and WBTC.
The wrapper is a receipt
Think of a warehouse receipt that can change hands while the goods stay put. A custodial Bitcoin wrapper works in a similar way. The token moves between users. The custodian holds the Bitcoin. The terms decide who can swap the token back for BTC.
Deposits are confirmed, then a token is minted on another network. Redemption burns the token and releases Bitcoin through the provider’s process. BitGo describes this for WBTC, where approved merchants handle conversions for a fee. Retail buyers usually buy an existing token from someone else. The trade does not require new BTC to enter custody.
Each token is meant to be worth one BTC. So wrapping does not protect the holder from a price drop. The holder still feels Bitcoin’s gains and losses. Redemption helps keep prices close. If a token trades below its backing, an eligible trader can buy it and redeem it for BTC. Restrictions or delays can weaken that link. Knowing the Bitcoin exists is not the same as being able to get it back.
Loans, liquidation, and access
Once the token reaches a lending app, a smart contract can arrange the loan. It accepts wrapped Bitcoin as collateral and lets the holder borrow stablecoins. The borrower must pledge more than they borrow because Bitcoin can fall. If the price drops too far, the app can liquidate collateral. The borrower may lose exposure without choosing to sell.
Wrapping alone pays no interest. A holder who wants income must lend the token or use it elsewhere. That adds risks beyond holding the wrapper.
The same Bitcoin can also lead to different doors. A token is useless if a chosen lending app will not accept it. WBTC has a merchant network. Coinbase folds conversion into an exchange account. Circle aims cirBTC at institutions and links it to USDC. For borrowers, the competition decides where Bitcoin can be used as collateral and how easily the wrapper turns back into BTC.
What holders should check
Customers should inspect the backing. Coinbase publishes a cbBTC reserve dashboard. But visible Bitcoin does not guarantee redemption or explain what happens if the provider fails. The terms matter. The redemption service must be able to deliver.
Holding the token in a personal wallet gives control of its keys. It does not give control of the original Bitcoin. The custodian controls those keys. Using the token in a loan adds reliance on software and price feeds.
For the owner who wanted cash without selling, wrapping is a trade-off. Bitcoin becomes usable in places that otherwise could not accept it. In return, the owner accepts fees and dependence on more institutions and code. The loan starts with Bitcoin. What counts is whether the holder can get that Bitcoin back.
