Fitch Ratings warns: Bitcoin-backed securities face "speculative-grade" high risk, comparable to junk bonds

Fitch Ratings, one of the world’s three major credit rating agencies, released its latest assessment, classifying Bitcoin-backed securities as “speculative grade” products with “high market value risk,” comparable in credit quality to high-yield junk bonds.

This warning directly points to the core weakness of such financial instruments: the sharp volatility of Bitcoin prices can rapidly erode the value of collateral, exposing lenders and investors to loss risks. The report specifically draws lessons from the collapses of crypto lending platforms Celsius and BlockFi during 2022 to 2023, emphasizing that reliance on collateral models can quickly break down under market stress. This assessment serves as a wake-up call for institutional investors exploring crypto credit products and may reshape the design and market access standards for such products.

Authoritative institutions’ stern scrutiny: Why are Bitcoin-backed securities labeled as “high risk”

Recently, a significant voice in the global credit rating field—Fitch Ratings—delivered a thought-provoking warning to the financial markets. In a dedicated assessment, the agency explicitly states that financial instruments packaged with Bitcoin or related assets as collateral—“Bitcoin-backed securities”—carry significantly higher risks than traditional asset-backed securities, with risk characteristics “consistent with speculative-grade credit.” This conclusion is not unfounded but based on a rigorous, traditional risk assessment framework.

As one of the three major U.S. rating agencies, Fitch’s opinions carry substantial influence on banks, asset managers, and other financial institutions when evaluating emerging financial instruments, especially those linked to volatile asset classes. When Fitch classifies a product as “speculative grade,” it indicates that within its assessment system, such products have weaker credit quality and a higher likelihood of default or loss. For conservative institutional investors bound by strict investment policies—such as some pension funds and insurance companies—this effectively acts as a clear “no-entry” signal.

Fitch’s core concern lies in Bitcoin’s inherent “intrinsic” price volatility. The report warns that Bitcoin’s sharp price swings are a primary “risk factor.” Specifically, a significant decline in Bitcoin’s price can cause collateral coverage ratios to fall below preset thresholds rapidly. The collateral coverage ratio is the ratio of Bitcoin value supporting debt issuance to the total debt. When this ratio deteriorates due to a price drop, lenders typically require borrowers to add collateral or cash (margin calls). If borrowers cannot meet these demands, forced liquidation of collateral may be triggered, potentially causing a downward spiral and resulting in losses for investors.

Fitch’s Analysis of Risks in Bitcoin-backed Securities

Core rating: Classified as “speculative grade,” aligned with high-yield (junk) bond credit risk characteristics.

Primary risk source: Bitcoin’s inherent extreme price volatility (annualized volatility often exceeds 60% to 100%).

Key mechanism risk: Collateral coverage ratios are highly sensitive to price swings, leading to margin calls and forced liquidations.

Historical lessons: Cites the collapses of BlockFi, Celsius, and other lending platforms relying on collateral models during the 2022-2023 crypto winter.

Comparison reference: Compared to traditional collateral assets (such as U.S. Treasuries and investment-grade corporate bonds), Bitcoin scores lower in legal clarity, valuation consensus, and market liquidity stability.

Structural flaws: Prominent counterparty risk involving custodians, trading platforms, and other intermediaries—any failure in these links can lead to asset losses for investors.

This latest warning is not Fitch’s first cautious stance on the crypto sector. Just last month, the agency warned that reputation, liquidity, and compliance risks related to large-scale digital asset exposure are rising in the U.S. banking industry. This dedicated assessment of Bitcoin-backed securities marks a shift from general industry warnings to in-depth analysis of specific financial product structures. Notably, Fitch’s scope appears focused on credit and securitization tools that directly depend on the underlying collateral value, and does not include spot Bitcoin ETFs, which are structurally closer to equity investments. In fact, the report even suggests that ETF proliferation could help create a “more diversified holder base,” potentially “mitigating” Bitcoin’s price volatility during market stress.

Structural flaws and lessons from history: Why collateral models often fail in crypto markets

Fitch’s warning is particularly significant because it precisely highlights the structural vulnerabilities in Bitcoin-backed securities and broader crypto lending models. These flaws are not mere theoretical conjectures but have been repeatedly validated through harsh real-world experience during previous crypto market cycles.

The most fundamental flaw is the extreme instability of collateral value. Compared to traditional collateral (such as government bonds, real estate, or blue-chip stocks), Bitcoin’s price volatility is astonishingly high. Its annualized volatility often exceeds 3 to 5 times that of major stock indices, or even more. This means that to withstand similar magnitude price declines, Bitcoin-backed securities need to set far higher “over-collateralization” ratios than traditional products. However, even with high initial collateral ratios, a Bitcoin price drop of over 70% in a year—similar to 2022—can instantly breach static over-collateralization thresholds. When collateral value falls below the loan amount, lenders’ risks are fully exposed.

The chain of collapses in crypto lending markets during 2022-2023 provides textbook examples of this risk. Platforms like Celsius Network and BlockFi, whose core business models involve accepting crypto deposits as collateral and then re-lending or investing, designed complex interest products and automatic liquidation mechanisms. When market reversals occurred—mainstream assets like Bitcoin continued to decline—fatal issues emerged: large positions hit liquidation thresholds, triggering mass automated sales; selling pressure further depressed prices, creating a “price decline -> liquidation trigger -> more selling -> further price decline” death spiral. Meanwhile, these platforms invested user assets into uncollateralized or under-collateralized loans with institutions like Three Arrows Capital, creating enormous counterparty risk exposure. Ultimately, they went bankrupt due to inability to handle runs and cover losses. Fitch explicitly references this history to emphasize that collateral lending models based on volatile assets are extremely fragile under extreme market conditions.

Beyond market risk, another often underestimated but equally deadly risk is “counterparty risk.” The chain of Bitcoin-backed securities often involves multiple intermediaries: original custodians, special purpose vehicles (SPVs) for securitization, market makers providing liquidity, and custodial banks holding assets. Any failure—operational, fraudulent, or insolvency—by any participant can prevent investors from smoothly accessing or disposing of the Bitcoin collateral that ultimately guarantees repayment. The collapse of FTX exposed severe issues of asset misappropriation and commingling with proprietary funds. Under current imperfect regulatory and judicial frameworks, defaults can lead to highly ambiguous and prolonged legal claims, further elevating the overall risk premium of such securities.

Market impact and institutional behavior: How ratings reshape crypto financial products

Fitch’s “speculative grade” designation is not merely a research note; it is expected to have a direct and profound impact on multiple market participants, reshaping the ecosystem of Bitcoin-backed securities and broader crypto-native financial products.

The most immediate effect will be on institutional asset allocation decisions. Globally, many pension funds, insurance companies, sovereign wealth funds, and conservative mutual funds are restricted to investing in “investment grade” or higher-rated fixed income assets. Fitch’s rating effectively excludes Bitcoin-backed securities from the purchase lists of these large compliant funds. This will likely limit the largest potential institutional buyers, forcing issuers and underwriters to turn to higher-risk hedge funds, family offices, or some private equity funds for fundraising. This structural investor base restriction could influence issuance volume, pricing, and secondary market liquidity.

For banks and brokerages, Fitch’s assessment will directly impact their internal risk-weighted asset calculations and capital requirements. Under Basel III and other international banking regulations, holding assets of different ratings requires different risk capital provisions. Holding “speculative grade” securities consumes more capital, which may reduce banks’ willingness to invest or increase fees for underwriting and market-making services—costs ultimately passed on to issuers and investors. Banks exploring crypto custody and credit services may become more cautious in product design or delay launches.

From a market development perspective, this stern rating may also drive product innovation. To achieve better ratings and attract broader investor bases, future Bitcoin-backed securities might incorporate structural improvements such as: 1. Dynamic over-collateralization: instead of fixed collateral ratios, link collateral value to Bitcoin volatility indices, requiring additional collateral during heightened market swings. 2. Hybrid collateral pools: combine Bitcoin with lower-volatility digital assets (like certain stablecoins) or traditional assets to smooth overall collateral value. 3. Embedded third-party insurance or guarantees: insurance coverage for extreme price swings or guarantees from high-credit institutions. 4. Liquidity reserves: establish cash buffers to prevent forced liquidations during market turbulence when borrowers cannot meet margin calls. However, these enhancements increase complexity and costs and cannot fully eliminate Bitcoin’s fundamental volatility.

Future outlook: balancing innovation and caution

Fitch’s warning essentially applies traditional risk assessment language—developed through decades of experience—to a rapidly evolving new domain. It reveals the classic financial challenge: how to price and mitigate risks of highly volatile assets.

In the short term, Bitcoin-backed securities face nearly insurmountable hurdles to upgrade from “speculative” to “investment grade.” This requires not only a structural, permanent reduction in Bitcoin’s volatility (which currently seems unrealistic) but also the maturation of supporting infrastructure: clearer legal precedents for digital asset collateral disposal; more reliable, regulated, and systemically important custody and clearing infrastructure; and mainstream acceptance of real-time blockchain-based risk monitoring and valuation systems. Achieving these conditions will take time.

Nevertheless, this does not mean such products have no space for existence or growth. On the risk-tolerant end of the spectrum, capital willing to pursue higher yields at higher risks always exists. The real test for Bitcoin-backed securities lies in whether they can demonstrate, in the next market cycle, stronger risk resilience and more transparent operations than previous crypto lending platforms like Celsius. Product designers need to prove they have learned from history and built robust structures capable of withstanding “black swan” events.

An interesting observation in the report is Fitch’s distinction between Bitcoin-backed securities and Bitcoin spot ETFs. The latter also directly hold Bitcoin but do not involve leverage or chain-linked lending risks, serving more as passive investment tools. This differentiation suggests that traditional rating agencies may be more comfortable rating “ownership with clear title and simple structure” crypto products. In the future, more complex products (such as Bitcoin yield-enhanced notes or structured derivatives) seeking institutional approval might also prioritize “structural transparency and risk isolation” as core design principles.

Ultimately, the path to crypto financial maturity will involve ongoing collision, adaptation, and integration with traditional risk management and regulatory frameworks. Fitch’s “speculative” label is a milestone indicating that this emerging industry can no longer be casually dismissed as “disruptive” but must face the strictest scrutiny of the old world. Only through such scrutiny and continuous evolution can Bitcoin and its derivatives truly integrate into the fabric of global finance, rather than remaining on the fringes forever.

What are Bitcoin-backed securities: When crypto assets meet traditional financial engineering

Bitcoin-backed securities are a product of combining financial engineering with crypto assets, falling under the broader category of “digital asset-backed securities.” Their basic operation involves an issuer (usually a special purpose vehicle) pooling a certain amount of Bitcoin as collateral, then issuing bonds or notes based on this pool to investors. Investors purchase these securities, effectively providing a loan to the asset pool, with principal and interest guaranteed by the value of the underlying Bitcoin assets and/or the cash flows they generate.

Core structure and participants:

1. Collateral assets: Usually Bitcoin, possibly other mainstream crypto assets, securely held by compliant custodians.
2. Special Purpose Vehicle (SPV): A legal entity established to isolate risk, holding collateral and issuing securities. Even if the parent company goes bankrupt, the SPV’s assets remain unaffected.
3. Service providers/administrators: Responsible for managing collateral (e.g., rebalancing if needed), collecting interest (if assets are lent out), executing liquidation clauses.
4. Investors: Purchase securities, bearing Bitcoin price volatility and counterparty risk, to earn interest and potential premiums.

Main types:

• Collateralized loan bonds: Issuer uses raised funds to lend against Bitcoin collateral, paying interest from loan yields.
• Asset-backed notes: Directly backed by Bitcoin holdings as collateral, issuing notes without external lending.
• Structured products: Combine Bitcoin yields with options or derivatives to offer different risk-return profiles.

These products aim to provide institutions holding large amounts of Bitcoin (such as listed companies, miners) with a liquidity channel without selling assets directly, and offer traditional investors a compliant, fixed-income-like exposure to Bitcoin indirectly.

From a credit rating perspective: challenges and adjustments for crypto assets

Fitch’s assessment offers a valuable window into how traditional credit rating frameworks “digest” new assets like Bitcoin. Understanding the logical conflicts and adaptation efforts is crucial for predicting the future of more crypto financial products.

Core pillars of traditional rating frameworks:

1. Cash flow analysis: Evaluates the debtor’s ability to generate stable cash flows to service debt. This is inherently weak for non-cash-flow assets like gold or Bitcoin.
2. Collateral assessment: Examines liquidity, value stability, and legal enforceability of collateral. Bitcoin scores poorly on the latter two.
3. Counterparty and structural risks: Analyzes the creditworthiness of involved parties and legal robustness. Crypto-related parties often lack long-term credit history, and legal structures are novel.

Unique challenges posed by crypto assets:

• Valuation dilemmas: Lack of universally accepted valuation models based on discounted cash flows or comparables; prices are driven mainly by market sentiment and demand.
• Legal uncertainty: The legal nature of digital assets as collateral (property rights or other), bankruptcy treatment, cross-border jurisdiction conflicts—many of these remain unresolved globally.
• Operational risks: Key management, hacking, protocol vulnerabilities, compliance issues (e.g., mixer-related asset freezes)—not common in traditional assets.

Potential evolution of assessments:

In the future, rating agencies may develop dedicated methodologies for digital assets, including:

• On-chain data analysis: Transparency of fund flows, collateral concentration, liquidation history on blockchain.
• Collateral provider grading: Based on regulation, insurance, multi-party computation, multi-signature security.
• Extreme scenario stress testing: Considering not only price drops but also network congestion delaying liquidations, platform failures, etc.

Fitch’s current “speculative grade” judgment can be seen as a conservative but reasonable initial response of traditional frameworks to a new phenomenon. As infrastructure improves, legal precedents accumulate, and institutional participation deepens, rating models will evolve accordingly. This process reflects the gradual understanding and acceptance of crypto finance within the traditional system.