Thoughts on Weiss Ratings for Cryptocurrencies
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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Thank you for posting the counter argument. I think you make valid points in pointing out flaws.
Hey! I'm one of the leading analysts in the Weiss Crypto Ratings, recently made this post: https://steemit.com/cryptocurrency/@juanvilla/the-weiss-cryptocurrency-ratings
Let me start by saying that yes, we should've provided more clarity.
You present some interesting questions with regards to Bitcoin and Ethereum having different stated goals. This was taken into account when rating the "Technology" behind each project. This index is as broad-based as possible, while attempting to capture any and all potential technological innovations blockchain teams come up with.
Are teams taken into account? Absolutely, albeit indirectly: A strong team makes the goals set by the project "believable" and may therefore get credit for technological features that are not yet fully implemented. Without getting into too much detail, that's one of the main reasons EOS was rated, even though it's still in ERC20 token phase.
Unknown teams that set the bar too high while having no credibility (yet!) will not get the benefit of the doubt, and their technology will be rated according to what they have working TODAY.
An important question. Why the focus on price action? Because the ratings are geared primarily to investors. That's our subscriber base. We have, however, seeing how the community reacted to ratings that yes, were strongly influenced by price action patterns, we have decided to provide more detail into each sub-Index. Technology/Fundamentals will be its own thing, and you can think of these two as the most important metrics for crypto-enthusiasts.
Risk and Reward are primarily for speculators looking to make money in the crypto markets. Because these are different concepts, we will provide a separate detail of these indices.
We'll still have the composite index that takes into account all four indices, but we agree, more detail is needed!
Look forward to your comments!
Thanks for answering! Interesting points in developing the methodology. It will be interesting to see how these comparisons continue to progress as projects continued to be launched. Regarding the focus on price action, if that is Weiss’ focus then shouldn’t it be treated as an action scale (i.e. buy, hold, sell) instead of a rating? That will also help in being less confusing to those interpreting the reports.