Tech Blog

Crypto Ratings! An explanation of what it means and what ratings are.

A brief history of credit rating agencies

Fitch

John Knowles Fitch founded the Fitch Publishing Company in 1913. Fitch published financial statistics for use in the investment industry via "The Fitch Stock and Bond Manual" and "The Fitch Bond Book." In 1924, Fitch introduced the AAA through D rating system that has become the basis for ratings throughout the industry.

Moody

John Moody and Company first published "Moody's Manual" in 1900. The manual published basic statistics and general information about stocks and bonds of various industries. In 1909 Moody began publishing "Moody's Analyses of Railroad Investments", which added analytical information about the value of securities. Expanding this idea led to the 1914 creation of Moody's Investors Service, which, in the following 10 years, would provide ratings for nearly all of the government bond markets at the time. By the 1970s Moody's ratings were becoming the full-scale rating agency that it is today.

Standard & Poor (S&P)

Henry Varnum Poor first published the "History of Railroads and Canals in the United States" in 1860, the forerunner of securities analysis and reporting to be developed over the next century. Standard Statistics formed in 1906, which published bond and debt ratings. Standard Statistics merged with Poor's Publishing in 1941 to form Standard and Poor's Cooperation, although it was eventually acquired in 1966. Standard and Poor's has become best known by indexes such as the S&P 500, a stock market index that is both a tool for investor analysis and decision making, and a U.S.

The Importance Of Ratings

As investment opportunities become more global and diverse, it is difficult to decide not only which companies, but also which countries, are good investment opportunities. Companies strive to get high ratings, AAA being the highest as defined by Fitch in the early 1900s. The better the rating, the safer the company is thought to be from an investor's point of view. 

If a company gets downgraded they might lose investors, just as an improvement in ratings might bring a surge of investors. Ratings are supposed to be a good evaluation of the amount of risk a company poses, the probability of it going under or bankrupt. If you're interested in what happened during the 2008 stock market crashing and the rating systems, there is a lot of good information out there. 

Ethereum vs Bitcoin

In a previous post you can read all of the comparisons and differences between these two different cryptocurrencies. 

Bitcoin received a C+ grade and Ethereum, received a B, according to Weiss, another credit rating agency. They also publicly stated that Bitcoin has excellent security and "widespread adoption." It is important to note that none of the other 74 cryptocurrencies that Weiss analyzed received an excellent A rating. Ethereum and another digital currency names EOS have the highest rating, a B rating.

In an interview with Marketplace, Martin Weiss, the president of Weiss Ratings, said his firm had used “thousands of data points” and four factors to determine the ratings. Two of the four factors were risk and reward indices, which are based on price risk and profit potential.

Their rating of Bitcoin suggests a misunderstanding of the core value proposition of cryptocurrency, however, as they seem to overvalue transaction capacity, and undervalue protocol stability, security, and decentralization.
— Ari Paul, chief investment officer at cryptocurrency investment firm BlockTower Capital

Opinion

I am not surprised by the fact that Ethereum is given a higher rating that Bitcoin as it seems to be a more stable technology built upon a newer and more stable foundation. However the induction of cryptocurrencies into the rating system is a good indication that cryptocurrencies might become major players in the following years to come. This rating system often reserved for major companies and various types of bonds, now taking cryptocurrencies into account is a big step forward for the medium.  

Sources: https://www.investopedia.com http://cnbc.com

dan flan