Fitch Ratings has flagged a significant degree of risk concerning Bitcoin-backed securities, warning that the inherent volatility of Bitcoin could jeopardize the collateral supporting these financial instruments, thus raising the possibility of losses for investors and lenders.

According to a recent assessment, these securities are often structured by pooling Bitcoin assets and issuing debt secured by that collateral. Fitch expressed concerns that the volatile nature of Bitcoin may lead to elevated risks that are consistent with speculative-grade credit classifications.

As a respected credit rating agency, Fitch’s analyses have considerable influence on how banks and asset managers evaluate new financial products, especially those tied to unstable asset classes.

Fitch particularly emphasized the risks posed by Bitcoin’s price fluctuations and noted the failures of several cryptocurrency lenders during the recent market downturn. In such turbulent times, the stability of collateral-backed models can quickly unravel, as illustrated by crises involving entities such as BlockFi and Celsius.

“The volatility in Bitcoin’s price represents a key consideration for risks,” Fitch observed, warning that if coverage levels—which measure the ratio of Bitcoin collateral to the amount of debt issued—fall below a certain threshold, it could trigger margin calls and forced liquidations.

This latest alert follows a previous caution from Fitch regarding the potential risks faced by U.S. banks significantly exposed to cryptocurrency, highlighting reputational, liquidity, and compliance concerns.

Bitcoin is increasingly becoming entwined with the credit assessments of public firms with substantial digital asset holdings, notably those employing convertible notes and secured debt strategies.

A prime example is a company known for its extensive Bitcoin treasury, managed by Michael Saylor, which has engaged in various capital raises to deepen its Bitcoin investment. Consequently, the firm’s credit profile is closely linked to Bitcoin’s market performance.

Fitch’s focus appears to squarely target credit and securitized instruments where repayments hinge directly on the underlying collateral’s value. Interestingly, the agency made no mention of exchange-traded funds (ETFs) directly related to Bitcoin, which operate as equity-like instruments rather than traditional credit products.

Furthermore, Fitch acknowledged the potential for ETF adoption to foster a broader base of investors, which might mitigate Bitcoin’s price volatility, especially in challenging market conditions.