Health factor and liquidation: how much room to leave
How to read the health factor, how far the price can fall before liquidation, what to do when it drops, and how to set alerts.
Intermediate
Every bitcoin-backed loan has a line where the lender sells your collateral. On Aave that line is a health factor of 1. With a custodial lender it is an LTV limit. The idea is the same, and so is your job: know where the line is and stay well away from it.
Careful: Borrowing against bitcoin can lose the collateral. Liquidation sells it at a low price, with a penalty on top, and cannot be reversed. This guide is education, not advice.
Reading the health factor
The health factor is the value of your collateral, multiplied by the liquidation threshold for that asset, divided by your debt. The threshold is set by the protocol and can change: the app shows the current one.
Good to know: Example with round, illustrative numbers: $100,000 of wrapped bitcoin as collateral, a liquidation threshold of 80% in this example, and a $40,000 loan. Health factor = 100,000 × 0.80 ÷ 40,000 = 2.0.
A useful shortcut: with one collateral asset and a dollar loan, the health factor tells you how far the price can fall before liquidation. A health factor of 2.0 means the price can roughly halve.
Health factor
Price fall before liquidation
3.0
About 67%
2.0
About 50%
1.5
About 33%
1.2
About 17%
1.1
About 9%
These figures ignore interest. Interest adds to your debt every day, so the health factor slips a little even when the price does not move.
How much room to leave
There is no safe number, only more room or less. Three facts help you choose your own.
Bitcoin has fallen by more than half from a peak more than once, and it has fallen by double digits in a single day.
You need time to react. If topping up means moving BTC, wrapping it and sending it, count the hours that takes, and assume the price keeps moving meanwhile.
A lower loan costs you nothing extra. An over-large loan can cost you the collateral.
Whatever level you pick, write it down as your floor, and decide in advance what you will do when the position reaches it.
When the price drops
You have two moves. Both raise the health factor at once.
Repay part of the loan. This is usually the fastest move if you hold the loan's currency, for example USDC, in the same wallet.
Add collateral. Supply more wrapped bitcoin. This works if you already hold some in wrapped form. Wrapping more in the middle of a fall can be too slow.
Check the new health factor in the app after the transaction confirms.
If it is still under your floor, repeat. Do not wait for a bounce.
Good to know: Being ready is most of the work. Keep some of the loan's currency, or some spare wrapped bitcoin, in the wallet that holds the position, plus enough for network fees. Fees rise when markets move fast.
What liquidation looks like
On Aave: once the health factor is below 1, a liquidator repays part or all of your debt and takes collateral worth that amount plus a penalty. It can take more than one bite if the price keeps falling. Nobody contacts you first.
With a custodial lender: you normally receive a margin call first, with a deadline to add collateral or repay. If you miss it, or the price falls past a hard limit, the lender sells. The loan terms give the exact levels.
Alerts
Do not count on the Aave app to warn you. Set your own alerts.
Set a bitcoin price alert in an app you already check, at the price where your position would reach your floor.
Set a second alert closer to liquidation, as a last call.
The portal's Borrow page shows your position and health factor when the feature is switched on for your account. See Auto-loan explained.
Check the position yourself on a fixed day each week, even with alerts on.