Intensifying stress in the US private credit market is raising alarms about potential contagion to risk assets, including cryptocurrencies. The US Business Development Companies Index (MVBDC) has plummeted to 424 points, its lowest level since the 2022 bear market bottom, marking a 25% decline over the past year. This index tracks publicly traded firms that lend to small and mid-sized US businesses.
The pressure escalated last week when Blue Owl Capital permanently halted investor redemptions at its retail private credit fund, Blue Owl Capital Corp II (OBDC II), triggering a 10% single-day drop in its stock and a wider sell-off across the sector. Shares of major firms like Ares, Apollo, KKR, Blackstone, and TPG are down 15% to 40% year-to-date.
Analysts at UBS Group AG have warned that private credit default rates could climb to 13-15% under an "aggressive" AI-driven disruption scenario, noting that roughly 35% of the $1.7 trillion market is exposed to such risks.
Experts warn this credit market turmoil could spill over into crypto. Bitcoin's price has shown correlation with US software stocks, and stress in private credit tied to software lending could ripple through digital asset markets. A deterioration in credit conditions may tighten liquidity, reduce investor risk tolerance, and trigger forced deleveraging among institutional investors with cross-asset exposure, potentially amplifying volatility in crypto.
Amid the gloom, some analysts see an opportunity for "digital credit." Bitcoin educator Adam Livingston contrasts the struggling private credit proxy FSK—down 45% over the past year—with MicroStrategy's perpetual preferred share, STRC (nicknamed "Stretch"). STRC has traded near its $100 par value and delivered low-teens total returns over the same period, even after a 50% drop in Bitcoin's price. Livingston attributes this resilience to STRC's structure, which offers continuous price discovery, SEC disclosures, monthly dividend adjustments, and a balance sheet backed by $2.25 billion in cash and over 713,000 BTC.
"Digital credit is replacing the private credit market, one honest price, one verifiable backstop, and one frictionless trade at a time," Livingston remarked. However, the two credit models are fundamentally different, with private credit tied to borrower cash flows and digital credit tied to Bitcoin's volatility and treasury strategy, suggesting STRC may offer a transparent alternative rather than a direct replacement.
Separately, MicroStrategy (referred to as "Strategy" in one source) has become the world's most shorted stock, with bearish sentiment fueled by roughly $9.5 billion in unrealized losses on its Bitcoin holdings. This highlights the deep connection between traditional markets and crypto, with the company acting as a key proxy for Bitcoin exposure.
