Bitcoin-Backed Securities Pose New Risks for Institutions

Borrowing on bitcoin has become increasingly popular as institutions seek ways to monetize their crypto holdings without liquidating them. Bitcoin-backed securities are emerging as a solution, allowing issuers to borrow against their assets while retaining ownership.

The development of such instruments reflects the growing links between traditional finance and cryptocurrencies. However, it also poses new risks that require careful assessment and management.

According to Fitch, a coverage ratio of 2:1 is recommended to mitigate the risks associated with these structures. This means borrowing $50 for every $100 of bitcoin collateral. Additionally, smaller levels of over-collateralization protected by mandatory liquidation floors can also be used.