This post started as a reply to @Crytobobby post on the subject but given the length I thought it would be worth posting my opinion separately. Overall, I think any attention to the crypto space is positive as it expands the reach of potential adoption in the space. Unfortunately, Rating Agencies have had a bad reputation in the past and their track record is never that great. If you add the fact that the crypto space is an emerging sector, nobody has the correct expertise to correct predict the future. This adds to the general thought that nobody should invest depending on the thoughts or opinions of any one person or group. Always do your homework that can be assessed utilizing information that is available to gain perspectives of your own opinion.
Although it seems as though Weiss is just trying to take advantage of the hype of the asset class being developed, they do add interesting perspective on what they are watching to determine these ratings. Their model comprises of multiple layers of proprietary formulas and indexes that basically compare the assets to indicators and metrics. With this, they determine relative grading based on where they are in the spectrum of those comparisons. Now, in order to avoid the appearance of a complete black box, they have disclosed the following characteristics of these indexes (taken from their article):
- The Cryptocurrency Risk Index. A composite of sub-indexes that measure (a) relative and absolute price fluctuations over multiple time frames, (b) declines from peak to trough in terms of frequency and magnitude, (c) market bias, whether up or down, and other factors.
- The Cryptocurrency Reward Index. A composite of sub-indexes that evaluate (a) returns compared to moving averages, (b) absolute returns compared to a benchmark, (c) smoothed returns compared to a benchmark, and other factors.
- The Cryptocurrency Technology Index. A composite of sub-indexes calculated by a manual analysis of publicly available white papers, public discussion forums or announcements, and open source code to evaluate the protocols underlying each cryptocurrency. Factors considered include the level of anonymity, sophistication of monetary policy, governance capabilities, the ability or flexibility to improve code, energy efficiency, scaling solutions, interoperability with other blockchains and many more.
- The Cryptocurrency Fundamental Index. A composite of sub-indexes that evaluate transaction speed and scalability, market penetration, network security, decentralization of block production, network capacity, developer participation, public acceptance, plus other key factors.
I would agree that these are all key factors for the assets in general but I would ask the following regarding these:
- Does each asset get weighted the same way for these characteristics? It would be unfair to compare BTC and ETH in equal weighting as their stated objectives are completed different. This could be why it seems as though the “platform” assets have gotten better grades vs others.
- What about the importance of the teams behind the projects? I think this is an important characteristic when evaluating an asset in the space.
- Why so much focus on returns and volatility? This would be a questionable metric for a number of reasons: (1) past results do not predict future performance, (2) there is a bias in reference to the longevity of those assets being compared (BTC around since 2011 vs ADA starting in 2017), (3) survivor bias (are assets that no longer exist being included?), amongst others.
- Is market capitalization taken into consideration? Is it current or future market cap, or both?
In summary, I believe that although Weiss’s results could help investors in the decision process, I believe it is incomplete. If they provide more transparency in their process or release detail reports on these assets (like they do for other assets), they will add more value (but probably for a steeper price). It will be interesting to see how market participants view the reports as they change in the future. Reports from Rating Agencies tend to have influence on the market, so time will tell.
Let me know your thoughts to have some good discussions. I look forward to hearing from the community!
Sources:
(1) @Cryptobobby: https://steemit.com/cryptocurrency/@cryptobobby/steem-ranked-5-best-crypto-by-weiss-ratings-top-crypto-rated-by-weiss-ratings
(2) Weiss: https://weisscryptocurrencyratings.com/ratings/the-weiss-cryptocurrency-ratings-explained-15
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