How does lending and borrowing between these Crypto funds happen? Do they borrow in real (fiat) money or do they lend and borrow the Internet magic money under

How does lending and borrowing between these Crypto funds happen? Do they borrow in real (fiat) money or do they lend and borrow the Internet magic money under various names? So Celsius which works pretty much like a bank, collects BTC from retail investors who deposit their coins for 10% returns. Then Celsius lends say 10000 BTC to 3AC. Is that how it works? And why is it an issue if the value of that coin drops in USD terms? After all 1 BTC = 1 BTC right?