Bitcoin-Backed Securities Carry High Market Value Risk –Fitch
Bitcoin-backed securities’ heightened risks are consistent with speculative-grade credit profiles, Fitch Ratings says. The inherent market value volatility, structure and counterparty risks in these instruments warrant conservative collateral coverage and rapid deleveraging mechanisms.
Crypto lender bankruptcies in 2022–2023 underscore the risks of inadequate margining.
Fitch said these transactions generally involve a special-purpose vehicle that holds bitcoin as collateral and issues debt backed by that collateral pool, functioning much like a margin loan. Liquidation triggers are embedded at predefined coverage levels, often with short cure periods.
Bitcoin holders may use these instruments to monetise holdings without triggering tax events or relinquishing ownership, while investors access debt-based bitcoin exposure.
Bitcoin’s price volatility is a main risk consideration. Breaches of coverage levels can quickly erode collateral value and crystallise market value risk. This risk may be assessed by reviewing the previous worst losses based on the relevant exposure period for a particular transaction.
Bitcoin’s worst loss over a 24-hour period using intra-day data was a 49% drop in March 2020. High historical losses demonstrate bitcoin’s long tail risk and the need for conservative coverage requirements.
Counterparty exposures can further increase the risk profile of these securities. Custodians, collateral agents and liquidation managers perform critical functions such as safeguarding assets and executing timely liquidations.
Crypto-native firms offer specialised expertise but often have limited operating histories and are typically unrated, while larger traditional institutions, though rated and potentially of high credit quality, may lack the in-house crypto expertise and technology to manage these transactions effectively.
Risks include operational failures, cybersecurity lapses, and loss of collateral upon a custodian’s bankruptcy. Evolving legal frameworks governing crypto asset segregation in bankruptcies remain relatively untested. Naira Drops at Official Window as 2026 FX Projections Emerge
