Since the beginning of 2017, there's been no asset class more impressive than cryptocurrencies. At one point, between Dec. 31, 2016, and Jan. 7, 2018, the aggregate value of all virtual currencies combined had soared by more than 4,500%. Such gains would take traditional stock indexes decades to produce.
But with these gains have also come risks and questions. No previous rapid appreciation in any asset class has held over the long run, and investors do have a history of overestimating the adoption of new technology. In the case of cryptocurrencies, they're probably overestimating how quickly big business will adopt blockchain technology, blockchain being the digital, distributed, and decentralized ledger that underpins cryptocurrencies and is responsible for recording all transactions. Even though blockchain has been around for about a decade, big business is only now testing it in small-scale applications.
What, then, is a realistic outlook for cryptocurrency valuations?
While no one knows the answer with any certainty, Weiss Ratings is at least willing to opinionatedly tackle this question.
This ratings firm just graded 74 popular cryptocurrencies
Weiss Ratings has been offering its spin on investments for more than four decades and this past week opened its doors to cryptocurrency grading for the first time. It aims to look at virtual currencies as investments, but in doing so it considered a number of aspects of 74 virtual coins when assigning a grade. Weiss Ratings describes the four components of its model as follows:
- The Cryptocurrency Risk Index: This takes into account price fluctuations, the overall volatility of a virtual currency and market bias, among other factors.
- The Cryptocurrency Reward Index: This compares returns relative to moving averages, along with absolute returns relative to benchmarks.
- The Cryptocurrency Technology Index: This takes into account factors such as anonymity, governance capabilities, the ability to improve code, energy efficiency, scaling solutions, and the interoperability with other blockchains.
- The Cryptocurrency Fundamental Index: This looks at transaction speed and scalability, network security, market penetration, network capacity, decentralization of the block product, and public acceptance, among other factors.
Weiss also wants the public to understand that its modeling isn't perfect. No one has all the information needed to give a precise grade to cryptocurrencies, and ultimately these are nothing more than its current opinions of 74 virtual coins, which may very well change as the crypto dynamics shift. It's also quite clear that there is no such thing as a "safe cryptocurrency," given that digital currencies are in an early stage of evolution.
With a better understanding of how Weiss Ratings approached its grading, let's have a look at some of the grades.
The world's most popular cryptocurrency, and the one with the highest market cap, squeaks by with a fair grade of C+.
Despite an insane amount of wealth creation since 2010, and relatively strong public acceptance, bitcoin does have genuine issues that need to be dealt with. For example, bitcoin's network is considered to be slow in relation to its peers. An analysis from HowMuch.net finds that bitcoin's blockchain is capable of processing a maximum of seven transactions per second. That's well behind its peers -- not to mention that the average transaction now costs $28 on bitcoin's network, which is almost the same as a bank wire transfer. There are clear technological and fundamental obstacles that bitcoin will have to overcome if it has any chance of improving its grade with Weiss Ratings.
Believe it or not, a "B" was the highest Weiss Ratings granted, and it represents a "good" rating. The only other cryptocurrency to earn a B was EOS.
It's not hard to see why Ethereum is ranked so highly. It's the second largest cryptocurrency by market cap behind bitcoin, and brand-name businesses around the world are testing its blockchain more than any other. In fact, the Enterprise Ethereum Alliance, formed in February 2017, has around 200 members.
Ethereum's blockchain incorporates smart contracts, which are protocols that aid in the verification, facilitation, or enforcement of a contract. They're highly customizable and exceptionally attractive to businesses, meaning Ethereum's blockchain often serves as the foundation from which blockchain innovation begins. Ethereum's blockchain also transcends bitcoin's currency-only applications, which gives its blockchain considerably higher long-term adoption potential.
On the other hand, Ripple received a middling grade of C, which is the same grade given to Dogecoin, a virtual currency that was started as a joke.
Ripple does have a lot working in its favor, including a growing number of financial partnerships. Its latest deal, which will see the XRP coin used to expedite money transfer settlements for MoneyGram International (MGI), as well as reduce transaction fees, represents the potential of this financial services-focused cryptocurrency.
Yet in spite of fast processing times, Ripple has also seen massive price fluctuations in its XRP coin, and it hasn't yet demonstrated that its blockchain is capable of maintaining its high transaction processing speeds under a more scaled real-world test. Success in its MoneyGram partnership, or other deals, would certainly help dispel some of the naysayers, but it'll probably take time to change their minds.
Bitcoin Cash: C-
Bitcoin Cash, the fourth largest cryptocurrency by market cap, and one that wound up forking from bitcoin last summer, wound up with a dismal C-.
Why such a harsh grade? In addition to many of the challenges facing bitcoin, including high electricity usage, and processing times that are considerably slower than traditional bank networks, Bitcoin Cash has few real-world uses and merchants that accept its coin. With the exception of Overstock.com (BYON 3.15%) creating the gaffe of the ages earlier this month by mixing up bitcoin with Bitcoin Cash, it's used less than Dogecoin -- and that's pretty sad.
Though no cryptocurrencies received an F (just as none received higher than a B), a handful of smaller-market-cap cryptocurrencies did receive a D.
The message is clear: Cryptocurrencies are intriguing but highly speculative. We're going to need to see considerable maturation, and possibly consolidation, before cryptocurrencies become anything close to a "safe investment."