Fitch Issues Risk Warning: Why Bitcoin-Backed Securities Are Classified as High-Risk Products

Fitch, a US credit rating agency, recently issued a clear warning regarding Bitcoin-backed securities, pointing out that these products carry extremely high market value risks. The warning involves three major risk factors: price volatility, structural complexity, and counterparty risk exposure. Of particular concern is the risk mechanism where liquidation triggers could amplify losses. This warning serves as a reminder to the market that risk management for crypto asset derivatives needs to be taken seriously.

What Are Bitcoin-backed Securities

Bitcoin-backed securities are financial products that use Bitcoin as collateral. These instruments typically include structured products, loan tools, or derivatives based on Bitcoin as the underlying asset. Investors gain Bitcoin exposure by purchasing these securities, while issuers support their value by holding Bitcoin as collateral.

The Three Major Risks Highlighted by Fitch

Price Volatility Risk

Bitcoin is known for its high volatility. Fitch emphasizes that the value of these securities is directly affected by Bitcoin price fluctuations, and extreme swings in Bitcoin’s price could lead to significant losses for investors. Currently, Bitcoin is priced at $91,647.25, down 2.43% over the past 7 days. While this short-term fluctuation is limited in scope, Bitcoin has historically experienced more severe shocks.

Structural Complexity and Liquidation Risks

This is the most serious risk point in Fitch’s warning. Many Bitcoin-backed securities employ complex structural designs involving multiple layers of risk management mechanisms. Of particular concern is the liquidation trigger mechanism, which automatically initiates a liquidation process when Bitcoin’s price falls below a certain level. The problem is that such automated mechanisms could cause chain reactions during extreme market volatility, thereby amplifying overall market losses.

Counterparty Risk Exposure

The institutions issuing and managing these securities themselves pose counterparty risks. If an issuer encounters financial difficulties or bankruptcy, investors’ funds could be at risk. This is not just a theoretical concern but one with historical precedents.

Lessons from History

Crypto Loan Institution Bankruptcies

In recent years, the crypto industry has experienced several major risk events. Several well-known crypto lending platforms have gone bankrupt due to mismanagement and excessive risk exposure, resulting in substantial losses for investors. These incidents demonstrate that collateral alone is not enough; a sound risk management system and conservative financing strategies are equally critical.

The Extreme Volatility of 2020

Fitch specifically mentions Bitcoin’s 49% plunge in March 2020. This event occurred amid the COVID-19 pandemic shock to global financial markets, with Bitcoin rapidly falling from its high point, causing many derivatives based on Bitcoin collateral to undergo liquidation. This historical case vividly illustrates how liquidation mechanisms can trigger systemic risks under extreme market conditions.

Current Market Context

Based on current data, the Bitcoin market remains relatively stable overall. Its market capitalization has reached $1.83 trillion, accounting for 58.64% of the entire cryptocurrency market. Over the past 24 hours, Bitcoin has increased by 0.95%, but over the past 7 days, it has still declined by 2.43%, reflecting market volatility.

Summary

Fitch’s warning points to a core issue: although Bitcoin as an asset class has become relatively mature, derivatives and structured products based on Bitcoin still carry significant risks. Key risk points include:

• The inherent risk of Bitcoin price volatility
• Complex structures and automatic liquidation mechanisms that could amplify losses
• Counterparty risk of issuing institutions
• Historical cases indicating systemic risks under extreme market conditions

For investors, this means that when dealing with Bitcoin-backed securities, more cautious evaluation of product structures, issuer risk management capabilities, and personal risk tolerance is necessary. For market participants, adopting conservative financing strategies and sound risk management is not only a regulatory requirement but also a necessary condition for maintaining market stability.