Cryptocurrencies: Reward, Risk and Reason

Wednesday, February 07, 2018

Mandeep Rai

Have you ever heard the term “buy and hodl”?

No, that’s not a typo. “Hodl” is Bitcoin slang that means “hold through thick and thin” — from the early days when it was trading for a fraction of a penny … to last year’s peak of nearly $20,000 … even despite its latest crash to the low $6,000s.

What other major asset in modern history has done something like that?

What other kind of asset has provided the same kind of value propositions for its users — to replace entrenched, antiquated record keeping and contract settlement systems, to transform financial money itself?

We’ve arguably never been closer to a technological revolution in the same coordinated global way. All while taking control away from middle men and third parties … achieving great efficiencies … giving citizens the opportunity to regain direct control over their money, their privacy, and more.

Despite crashes, it’s a financial, political, social and cultural revolution pioneered by the an individual or group using the pen name Satoshi Nakamoto, who invented one piece of elegant software -- blockchain, a protocol that guarantees the ultimate in security, immutability, privacy and decentralization.

This technology has suddenly swept the globe in the form of cryptocurrencies. Their total market cap has surged from virtually zero just a few years ago to more than $300 billion today (even after the crash).

And it is still in its infancy.

Hi. I’m Mandeep Rai, an investment analyst at Weiss Ratings. I see clearly the great opportunities for new blockchain applications. I’m extremely optimistic about the benefits it can bring. But, I also specialize in analyzing the other side of the coin: RISK.

That’s why I was called upon to provide the Risk/Reward side of the recently-released Weiss Cryptocurrency Ratings, which have caused such an uproar among crypto-enthusiasts around the world.

Let me take you back a few weeks. My wife and I went to a dinner party and met a surgeon whose kids were bitten by the crypto bug. He insisted I sit with them to tone down the hype, bring them down to earth with a reasoned investment philosophy.

Here’s the gist of what I said …

Yes, cryptocurrencies are indeed revolutionary. Yes, the technology and fundamentals of Bitcoin are different from everything ever known to traditional investment analysts. Yes, investors have made billions of dollars with parabolic price returns in short bursts of time. But at the end of the day, a cryptocurrency is still an investment.

It has a value. It has a price. It’s traded on exchanges. Investors and speculators buy, hold, sell and trade. They maintain core positions and allocate portfolios. They read traditional charts. They use traditional technical indicators. They deploy a variety of traditional trading systems. They make profits, sometimes huge profits. They suffer losses, sometimes crippling losses.

Despite all the excitement, which I share, cryptocurrencies are, after all, assets.

As such, unless you’re a veteran, die-hard bitcoin “hodler,” content to set and forget for a lifetime, you need to consider the same two factors that we always consider with every Weiss Investment Rating that we issue on tens of thousands of other assets — RISK and REWARD.

If you buy Bitcoin, Ethereum, or any one of the newer altcoins today, you must ask the same questions you ask about any other investment: “How much could I make? How much could I lose?” Or more precisely:

What is the relatively probability of loss and how severe might it be?

What are the chances for making a profit, and how big?

If you’re a veteran Bitcoin “hodler” and you’ve got a giant mountain of profits to fall back on, perhaps you don’t care if it’s crushed by nearly 70% in less than seven weeks.

Maybe you laugh when the crypto market loses over one-third of its market cap in six days flat.

But if you’re a new investor coming into the market, investing new money without a fluffy cushion of past windfalls to fall back on, you do care.

Losing most of your money in a heartbeat is a very big deal indeed.

This is the overwhelmingly obvious, fundamental point that some folks in the cryptoworld missed when they first saw our cryptocurrency letter grades.

They also seemed to have missed our warnings and caveats which we posted at “The Weiss Cryptocurrency Ratings Explained.

Here’s the key: The main reason we issue cryptocurrency ratings is to give investors, particularly those new to the space, guidance on whether or not they can expect to make money, and do so with reduced volatility.

That’s not the kind of rating that cryptocurrency developers and advocates expected. Most say they couldn’t care less about price crashes and volatility. They blame that on forces beyond their control. Instead, they feel a crypto rating should mostly reflect the relative quality of their work and its relative success in the real world.

Here’s How We Seek to Address Both Audiences

As we explain in a new white paper on Bitcoin we issued on Monday, the Weiss Cryptocurrency Ratings use four indexes, the first two based on traditional asset analysis; the second two, on crypto asset analysis:

1. Our Reward Index evaluates (a) returns compared to moving averages, (b) absolute returns compared to a benchmark, (c) smoothed returns compared to a benchmark, and other factors.

2. Our Risk Index measures (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.

3. Our Fundamental Index measures evaluate transaction speed and scalability, market penetration, network security, decentralization of block production, network capacity, developer participation, public acceptance, plus other key factors. And …

4. Our Technology Index is based on an 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 to improve code, energy efficiency, scaling solutions, interoperability with other blockchains and many more.

#CRAR or #BTFD?
Until recently, nearly all that was talked about among crypto enthusiasts was profits, huge profits!

It was almost all true. And it may be true again in the future.

But as we’ve warned from the outset, the most sensible discussion must be about more than just pure profits. It must be about the most potential return for the least potential risk.

Let’s call it #CRAR (crypto risk-adjusted return). And let’s hope it can someday become more popular than hashtags like #BTFD (Buy the F-in Dip).

It was because of low CRAR that no cryptocurrencies on our list got an “A.”

Despite huge historic profits, CRAR also helps explain why Bitcoin got no more than a C+, despite widespread usage and adoption. (For the full story on why Bitcoin got only a C+, go here.)

Also dragging down our grade for Bitcoin: No easy mechanism for upgrading its technology despite massive bottlenecks and surging costs in the Bitcoin Network.

“WTF?!!! A lowly C+ for the King of Crypto?”
complained Bitcoin lovers with fury and furor.

Yes, that was literally their response on January 24, when we first released our C+ for Bitcoin, a day when it traded at about $11,500.

Then, just ten days, it hit a low of $6,037, according to Coinbase.com.

It plunged 47%.

It crashed by the equivalent of 12,560 points on the Dow.

All in just ten days! All in the oldest, largest, most widely held cryptocurrency in the world!

NOW we trust investors understand why we gave no A grade to any cryptocurrency in existence.

NOW, they should see why Bitcoin got no more than a C+ (fair).

And now, we hope developers and blockchain enthusiasts will also begin to understand.

Because the plunge in Bitcoin is not just about random events beyond their control. It also reflects serious challenges built into Bitcoin’s technology.

Members of our team have been devoted to studying that technology since 2012. And for the sake of full transparency on precisely why we give Bitcoin a C+, we have just released a major report, which you can read here.

Plus, in our latest issue of Weiss Cryptocurrency Ratings, we provide …


1. Simple steps so you can use our ratings to aim for smaller risk and bigger profits.

2. A complete list of all our latest ratings and how to use them.

3. In-depth reviews of the few cryptocurrencies that currently get our “Buy” rating and are the most likely to give investors the best returns.

4. Plus much more.

If you already subscriber, be sure to follow our instructions to aim for the kinds of profit opportunities that cryptocurrencies have become so famous for. If not, you can sign up here.

Never forget: It’s precisely after a crash that you can pick up the best bargains of all.

Best wishes,

Mandeep

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