Speculative Risks in Bitcoin-Backed Securities

According to Fitch, Bitcoin-backed securities carry significant market value risks due to high price volatility, structural complexity, and counterparty risks. Beyond Bitcoin’s inherent volatility, collateralized debt models—especially during periods of market stress—can present major risks to investors. When combined with unpredictable price movements and sudden liquidity shifts, these risks demand careful management.

Fitch also warns that collateral protection ratios can be quickly breached during sudden market drops. This could result in the collateralized Bitcoin losing value, potentially causing significant losses for investors. Particularly during liquidity crises or rapid sell-offs, Bitcoin-backed products face the risk of fast devaluation. Therefore, investors need to consider not only potential gains but also market risks and the limitations of collateral-based mechanisms when planning their strategies.

Historical Examples: BlockFi and Celsius

Fitch cites the 2022–2023 crypto market crash as a clear example of structural flaws in Bitcoin-collateralized models. The bankruptcies of prominent crypto lending platforms such as BlockFi and Celsius demonstrated how quickly collateral-based products can lose value under market stress. This serves as a crucial warning: Bitcoin-backed securities carry substantial risks, especially during volatile or illiquid market conditions. Investors in these products should be aware of potential value losses and vulnerability to market stress.

Investor Strategy

When investing in Bitcoin or Bitcoin-backed securities, it is essential to closely monitor price volatility, market liquidity, and collateral-based risks. Fitch’s warning reminds investors to prepare for sudden value drops and market stress, not just potential profits. Planning strategies that account for the inherent volatility of Bitcoin-backed products and their sensitivity to market movements is a critical step for effective risk management.

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Fitch: Crypto Activities Offer Opportunities, but the Risks Are Much Greater

In its latest report, Fitch stated that issuing stablecoins, tokenizing deposits, and integrating blockchain technology into banking processes provide significant profitability opportunities for banks. According to the agency, these innovative steps could increase efficiency in financial services and open new revenue streams for banks.

However, the agency also stressed that these activities significantly increase the following risks:

• Reputational risk
• Liquidity fragility
• Operational risks
• Compliance and regulatory risks

Fitch noted that the regulatory framework in the U.S. is still developing, making banks more vulnerable to these risks.

“U.S. Regulations Have Improved, but Still Insufficient”

The report highlighted the following statement:

“Improvements in the U.S. regulatory environment have enhanced the safety of crypto assets to some extent, but this still remains insufficient. Digital assets continue to carry high volatility, anonymous ownership structures, and risks of asset loss or theft.”

This observation shows that despite progress in regulation, crypto assets still pose significant uncertainties for banks. Fitch emphasized that volatility and security vulnerabilities increase banks’ risk profiles, requiring stricter risk management practices within the financial sector. The agency clearly stated that if banks fail to fully control these risks, their credit ratings could be negatively affected. This serves as a serious warning for institutions heavily engaged in crypto-related operations.

Stablecoin Warning: “Could Impact the U.S. Treasury Market”

One of the most notable sections of the report was the warning regarding stablecoins. Fitch indicated that as major banks increasingly adopt stablecoin usage, it may provide short-term convenience and speed but could become a major structural risk for the financial system in the long term. According to the agency, the growing volume of stablecoins could reach a scale capable of influencing traditional market dynamics and threatening the stability of the banking system.

The report specifically noted that the following banks are actively interacting with the crypto sector:

• JPMorgan
• Bank of America (BofA)
• Citi
• Wells Fargo

According to Fitch, the expansion of stablecoin usage could reach a volume large enough to impact the U.S. Treasury market, posing potential risks to the stability of the financial system.

Credit Rating Risk: A Clear Warning to Banks

Fitch concluded its report with the following statement:

“We may reassess U.S. banks with high exposure to crypto assets negatively.”

This declaration serves as a significant warning for banks expanding their crypto operations. Fitch emphasized that banks must manage their crypto-related strategies more carefully, transparently, and in full compliance with regulations.

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A report released by the US Commerce Department on Friday indicated a slight slowdown in consumer spending last month. The easing price pressures and cooling labor market could bolster the Fed’s confidence that inflation is moving towards its 2% target.

The Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge, rose 0.1% in June, following a flat reading in May. This suggests that inflationary pressures may be easing.

“The key question now is whether the positive momentum we’ve seen over the last three months will continue through to the September meeting,” said Olu Sonola, chief US economist at Fitch Ratings. “While the Fed will have one eye on recent labor market developments, it’s likely to use the upcoming meeting to set the stage for a rate cut in September.”

Kathy Bostjancic, chief economist at Nationwide, noted that the improving inflation data suggests that the surge in inflation seen in the first quarter was transitory. “Moreover, if rent inflation has finally peaked as the latest data suggests, then inflation appears to be returning to a more sustainable downward trend,” she said.

As demand in the economy has cooled in response to the Fed’s aggressive monetary policy tightening in 2022 and 2023, the pace of economic growth has slowed. While the economy grew at an average annual rate of 2.1% in the first half of this year, it expanded at a 4.2% pace in the second half of 2023.

Economists at Bank of America Securities estimate that approximately $400 billion of excess savings accumulated during the COVID-19 pandemic remains, but at the current pace of depletion, it could be exhausted by the end of the year.

“Elevated savings have been supporting consumer spending and likely encouraged more saving for precautionary reasons,” said Veronica Clark, an economist at Citigroup. “But overall spending seems to be slowing more than income, which is consistent with lower saving. Conversely, a very low savings rate could signal the risk of a sharper decline in spending as the labor market weakens.”

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