On January 24th, 2018, Coinsquare Discover covered the release of the first digital currency grades to be released by any rating agency in the world. Weiss Ratings, an institute founded as a division of Weiss Research in 1971, awarded a letter grade to many prominent digital currencies.Now, on February 6th, 2018, Weiss Ratings founder Martin Weiss spoke to Coinsquare Discover in an over-the-phone interview in order to illuminate the context behind their digital currency ratings. While the ratings were highly anticipated, the digital currency community met their release with widespread criticism. Responses ranged from some believing the ratings to be a hoax, to others calling them misinformed. Especially controversial was Weiss’s rating of Bitcoin, the world’s first and most popular digital currency. Weiss Ratings awarded Bitcoin a ‘C+’ indicating that the investment is ‘fair.’ This placed Bitcoin behind several other digital currencies like Steem, Neo, Cardano, Ethereum, and EOS on the list of ratings.Weiss Ratings defended their C+ rating and highlighted the influencing factors behind their decision. “What we published today is an elaboration; it’s more detail and as we evolve through this process we will continue to provide more and more transparency,” said Weiss.
According to Weiss, a variety of factors led to the confusion and backlash towards their digital currency ratings. Among these, he cited a lack of context provided alongside the ratings dispersed online. “The ratings were distributed all over the internet on the day of our release out of context, without explanation,” he said. “I think that’s one of the sources of the misunderstandings that took place.”Additionally, he noted a difference of opinion in the two audiences that consumed Weiss Ratings' digital currency ratings. Those new to the digital currencies, or traditional asset holders looking to break-in, are purportedly most likely to be concerned with the rewards and risk indexes.“Factors that most people in the cryptocurrency space are not seeing [include] the price impact on our model,” said Weiss. “For example, you might have a coin that has inferior fundamentals in terms of acceptance and adoption, but which is actually providing a better reward/risk profile for investors right now than bitcoin.”However, Weiss commented that the second audience is perhaps more concerned with the fundamentals and technology indexes, as they are an audience composed of developers, familiar enthusiasts and those that that existed in the space for some time. “The traditional asset analytics based primarily on price and price momentum, and the other based on crypto asset analytics, are all blended together in a single grade,” added Weiss. “Going forward, this is not going to happen immediately but... we’re looking to break out those two grades and give each audience an opportunity to refer to the kind of grading that will serve their interests.”
In the explanatory publication, Weiss Ratings expanded on how Bitcoin scored according to their four ratings criteria regarding the ‘rewards index,’ ‘risk index,’ ‘fundamental index,’ and ‘technology index.’
Weiss Ratings stated that Bitcoin currently ranks low on the rewards index, which evaluates investment returns compared to moving averages and several benchmarks. Here, Weiss Ratings cited Bitcoin losing ground to competing altcoins as a factor in the low rating. In the explanation document, Weiss Ratings stated that the formula is ‘widely accepted in the investment community,’ and was evenly applied.
In terms of the risk index, which evaluates the risk for loss through considering price fluctuations and volatility, Weiss Ratings explained that Bitcoin did not receive a high score in this area. “Given the extreme volatility of its price history, it should come as no surprise that Bitcoin does not achieve a stellar grade on this index,” said the explanatory publication.
In terms of how Bitcoin scored on Weiss’ ‘fundamental index,’ which considers key factors in the functionality of digital currencies, Weiss Ratings cited a difference of opinion from critics of their ratings. “Some in the industry believe that cryptocurrencies should be rated mostly or entirely based on their real-world adoption and contribution to the blockchain space as a whole,” said Weiss Ratings. “We don’t agree. Nor would most knowledgeable investors that look into the crypto world from the outside.”While Weiss gives Bitcoin ‘credit for its strength’ in this section, the ratings firm ultimately penalized Bitcoin due to high transaction fees and scalability limitations that the technology is yet to overcome.
Lastly, the technology index analyzes various publicly available documents regarding digital currencies such as white papers and open source code. Here, Weiss Ratings stated that the technology index considers what the network is ‘capable’ of doing. “Bitcoin has the strongest brand and the early-mover advantage,’ said Weiss Ratings. “But others have the late-comer advantage — the ability to hit the ground running with legacy challenges mostly resolved and new features for the future.”Here, Weiss Ratings expanded on the reason that some were shocked to find newer digital currencies outperform Bitcoin on the ratings list. The rating agency explained that most investors and users down the line will not be as interested in a product’s legacy, but rather its functionality. This means that while Bitcoin is the king today, it may not be down the line when people are more interested in the technology’s future than its beginning.
Weiss Ratings is more than willing to pay their respect to Bitcoin for beginning the revolution. In their publication, the agency elaborated that it is not against Bitcoin. While the currency created the industry, Weiss Ratings stated that the way it handles its current challenges will decide if it ends up in the 'scrapheap of forgotten technologies' or if it will continue to play a 'pivotal role as other cryptocurrencies evolve and grow around it.' Ultimately, Weiss Ratings hopes to provide further transparency as it develops its digital currency ratings. “We also have an even more detailed paper that’s still in process and will be coming out at some point in the near future, which provides even broader information detail about how our rating system works,” said Weiss.Image credit: Weiss Ratings logo
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