Bad debt refers to loans or financial obligations that are unlikely to be repaid. In the context of cryptocurrency, this often involves loans given to borrowers who fail to meet repayment terms or who default entirely.

When lending platforms or individuals extend credit using cryptocurrency, they often rely on collateral, such as assets or tokens. If the value of the collateral crashes, the borrower might still be unable to repay the loan, leading to losses for the lender.

Additionally, some projects may promise high returns but fail to deliver, resulting in bad debt for those who invested. The decentralized nature of cryptocurrency means that regulatory protections may be limited, making it challenging for lenders to recover their funds.

Investors should exercise caution and due diligence to avoid situations that lead to bad debt. Understanding the risks involved in lending and borrowing can help mitigate potential losses.