Weiss ratings agency upgrades BTC and ETH to an A- or "Excellent" investment rating

Weiss ratings agency upgrades BTC and ETH to an A- or "Excellent" investment rating

By mduchow | Cryptocurrency 411 | 10 Feb 2020


Weiss ratings industry opened in 1971, primarily rating Indices and Securities. However, in 2018 they expanded into the digital asset markets and began to apply their unique ratings method against Cryptocurrencies. As with any establishment financial agency, initially they were highly skeptical of the potential for success in Crypto. But recently they had a bit of a shift in tone after upgrading the two most popular Cryptocurrencies to a score within the range of the highest rated investments on the planet.


The agency determines a rating based on how the assets compare to hundreds of factors synthesized into 5 different valuation scales: 

1. Capitalization:

The capitalization index is based a number of factors primarily on the adequacy an asset has to provide liquidity during various theoretical economic events, for instance Recessions and times of economic strength. It also takes into consideration the assets historical performance, its consistency, as well as its market capitalization inside of a macro financial market such as the Cryptocurrency markets  as a whole.

2. Investment safety

The Investment safety index measures the stability of an asset and it's protection against various market risks such as Market Manipulation. Assets that are more susceptible to these kinds of risks are less safe and are downgraded as a result. 

3. Reserve adequacy index:

The Reserve Adequacy index would not apply to the majority of the Cryptocurrency market. However, this tool is based on the backing of an asset like insurance whether it's by backing it with Gold or an IOU type of agreement. This will gauge the stability of an asset when compared to the value of the protection backing it. This does not apply to the majority of Cryptocurrencies because it implies a certain amount of centralization and stability vs volatility. 

4. Profitability index:

This measurement gauges and attempts to model the potential for future growth of a particular asset. 

5. Liquidity/Stability index:

On the liqudity side, this index guages the ability of an assets to raise the neccessary capital in order to facilitate settlements and withdrawals. This is determined through applying theoretical unexpected events of a spike in claims or withdrawals. 

The Stability index overlaps the reserve adequecy index and integrates 7 major factors:

1) Risk Diversification in terms of the size of the market capitalization of an asset inside of a macro market.

2) Potential deterioration of an asset over historical performance.

3) The age of an asset.             

4) Historical shortcomings that the asset did/did not improve.

5) A substantial shift in the underlying value of an asset (company or network).         

6) Potential instability in an asset's sources of capital (investors).

7) Relationships with affiliates. 


The ratings are condensed down into letter grades for simplicity. An asset can be given any one of the following ratings: 

A (Excellent): The asset goes above and beyond the criteria and is a source of excellent security. While the rating of an asset is subject to change, it is believed that the asset provides all of the resources necessary to hedge against future potential uncertainty.

B (Good): The assets meets the necessary requirements in order to be considered secure. However, during a catastrophic event of instability or crisis, the security of the asset cannot be taken with certainty. 

C (Fair): The asset meets some of the listed requirements but may encounter uncertainty during future events.

D (Weak): The asset demonstrates strong uncertainty that would most likely be magnified during events of instability. 

E (Very Weak): The asset demonstrates significant uncertainty and has failed the requirements of majority of the previous tests. The asset could not provide security during times of instability. 

F (Failed): The asset failed to meet any of the requirements. This rating can also be applied during times of:

1) Under supervision of regulatory agencies

2) Is in the process of rehabilitation

3) In the process of liquidation

4) Voluntarily dissolved after disciplinary or regulatory intervention


This applies to Cryptocurrencies within 3 different indexes:

1. Overall rating: How the asset compares when scored within each of the categories listed above.

2. Risk/Reward rating: Comparing Risk of downside potential using the magnitude of recent declines against the upside potential and the momentum of recent returns.

3. Technology/Adoption rating: This rating considers the software capabilities when scaling the networks:

1) Anonymity

2) Sophistication

3) Governance

4) Flexibility

5) Efficiency

6) Scaling

7) Operability with other networks

The adoption rating considers it's real world applicability as well as the potential integration of other developers.


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BTC: Weiss decided to upgrade BTC and ETH following Bitcoin's recent push above $10,000. While historically this hasn't been significant enough to merit increased approval, how the price action corresponds with the halving as well as historical performance surrounding this event reveals consistency and stability when compared to historical performance. The agency also indicates improvements in fundamentals like efficiency as well as utility within the networks. 

1) Anonymity: Privacy is fundamental with Bitcoin. However, the network operates on a system of Pseudonymity rather than Anonymity. Meaning that while transactions refrain from broadcasting private/identifiable information, every transaction leaves a footprint on the network.

2) Sophistication: An area that Bitcoin falls short compared to its peers is sophistication. Bitcoin began as a groundbreaking innovation in computer science It has also served as the foundation for the birth of many of the networks we see today. However, when compared to alternative currencies like BCH and ETH, BTC shows signs of aging and somewhat degraded performance compared to other networks. 

3) Governance: BTC provides an easy experience for it's developers but decentralization is fundamental to its value.

4) Flexibility: BTC can serve many roles for developers and provide numerous forms of application. But when compared to some of its peers this is another area that can be improved. 

5) Efficiency: While it's true that Bitcoin moves at a snails pace compared to its peers, in terms of its security when compared to transaction time is unseconded. Bitcoin is the most effcient asset for its level of security.

6) Scaling: BTC's scalability issues are limited to the rate at which the network can process transactions. When compared to other currencies this is another area of falling short, but overall the network functions incredibly efficiently when considering the security involved.

7) Operability: Bitcoin is by far most effieient on the Lightning Network. BTC shares the network with Decred, LTC, XLM, VIA, VERT, and many others

ETH:

The increasing optimism surrounding ETH 2.0 and the market for smart contracts was undoubtedly a source of improvement surrounding Ethereum's rating. The improvement in the ecosystem of tokens and the utilization of token sets on various platforms boosts the potential of future expansions of the network. If Ethereum can maintain strength and hold momentum with growth in price and optimism regarding future scalability and development of it's network, this can help facilitate improved ratings across the market abroad and help facilitate adoption of Blockchain for any network services. 

1) Anonymity: In terms of privacy, while ETH does provide a certain amount of privacy, but with it having a central body threatens it's potential privacy. 

2) Sophistication: ETH is undoubtedly one of the most sophisticated networks in the market - with the invention of smart contracts and the implementation of a significant ecosystem of tokens.

3) Governance: ETH has done a superb job when it comes to governance by developers on the network

4) Flexability: ETH has created an ecosystem of takes to fill the role of dozens of potential use cases.

5) Efficiency: ETH is average in facilitating transactions of is incredible in terms of the efficiency at which the developers can innovate. 

6) Scalability: This has been an issue that has plagued Ethereum over the last 3 years. But future improvements like ETH 2.0 are a source of great optimism surrounding improvements in scalability.

7) Operability: With ETH having its own coding language, it provides efficiency simplicity for all types of developers. Smart contracts as well have massive potential of real world utility. 

With the upgrade in ratings, ETH and BTC have taken massive strides to boost the confidence within the financial establishments at large. A shift of this magnitude will undoubtedly cause ripples across the globe for the potential growth of these networks and blockchain. 


mduchow
mduchow

21 y/o Economics major at the University of Northwestern, Chicago; Elliotician; Crypto Enthusiast; Blockchain advocate; Suspect of all things centralized


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