On January 24, 2018, our first Weiss Cryptocurrency Ratings were released.
Bitcoin got a C+ (“fair”). And many in the crypto community fiercely denounced the grade as overly punishing.
Charles Hoskinson, the creator of Cardano and a founder of Ethereum, put it this way:
Any rating that doesn’t give bitcoin an A has got some screws loose. Nearly 10 years of wealth creation, innovation, massive growth, proven resiliency against crashes and billions worth of infrastructure. And all without a leader. Bitcoin is the standard.
We welcome all industry feedback, and this white paper is our response.
You see, 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.
Several have told us they are rarely concerned about price volatility, attributing it to extrinsic factors beyond their control. Instead, they feel a rating should mostly reflect the relative quality of their work and its success in the real world.
Investors, meanwhile, tell us what they want to know is how to make more money with less risk.
In order to address the concerns of both audiences, we use four indexes: Reward, Risk, Fundamentals and Technology. Here’s how bitcoin performs on each…
Reward Index: Bitcoin has lost ground to several advanced altcoins and currently ranks low.
Risk Index: Given the extreme volatility of its price history, it should come as no surprise that bitcoin does not achieve a stellar grade on this index.
Here’s the key: Bitcoin’s relative investment underperformance compared to its competitors is not a random result isolated from other factors.
Quite to the contrary, there are several fundamental and technological reasons why bitcoin’s risk/reward has lagged compared to other blockchains…
Bitcoin’s Performance on the Weiss Fundamentals Index
The first question we ask is: How secure is the bitcoin network?
And the key to the answer is the total energy consumption.
You see, in order to attack the network, a malicious actor would need to expend a similar amount of electricity. All else being equal, the more electricity the network uses as a whole, the safer it is from external attack.
Bitcoin clearly outperforms on this metric. More electricity is spent on bitcoin per year than consumed in the entire country of Ireland.
The second question is: What’s the capacity of the bitcoin network?
In order for cryptocurrencies to gain and maintain mainstream adoption, they will need a high transaction speed — on the order of hundreds of thousands per second. The transactions also need to be cheap.
Right now, though, bitcoin is doing fewer than five per second, costing a very high $10 each. Not good.
A third important issue: Cryptocurrencies were created to be decentralized money that no central authority controls it.
In other words, they’re supposed to be money that anyone can use anywhere without fear of censorship or repression.
How’s bitcoin doing in this area? Not too well.
Among the cryptocurrencies we cover, the hard facts indicate that it is one of the most heavily concentrated because the top five miners control some 70% of the total hashpower on the bitcoin network.
Bitcoin’s Performance on the Weiss Technology Index
Think of our Fundamentals Index as a way to measure what the network is doing. Our Technology Index, on the other hand, is a way to evaluate what the network is capable of doing.
Mobile devices serve as a metaphor.
The first mobile phones weighed over two pounds, had a battery life of 30 minutes and took 10 hours to recharge.
Today, users can do virtually everything with their smartphones. They pay their bills, talk to their buddies over social media and, yes, even trade cryptocurrencies.
We see a similar tech-evolution emerging in cryptocurrencies.
The first generation bitcoin was a payment network. With the introduction of Ethereum came the ability to run “smart contracts” and issue shares.
Newer-generation cryptocurrencies will actually be platforms for running an entire country.
Now imagine this future scenario:
Cryptocurrencies are mainstream. Billions of citizens worldwide use them in everyday life.
Hundreds of local and federal governments plus thousands of companies build their operations upon blockchain technology. Nearly every major aspect of human culture is transformed.
Each citizen’s ID is on the blockchain. It’s a private key not only used to access one’s wallet addresses, but also as a link to each individual’s uniqueness as a human being.
This key helps people protect health records, participate in politics, invest in projects or companies, prove unique ownership of personal assets, and even store one’s genetic code. All private. All protected from prying eyes.
This future is coming. But, technologically, bitcoin is not ready for it.
The Future of Bitcoin
Bitcoin’s software is outdated. And it has no easy mechanism for upgrading. (We explain exactly why in our white paper.)
Although it might be possible at some point to add new features to the bitcoin network, the industry is not currently moving in that direction. Instead, it’s the second- and third-generation cryptocurrencies that are jumping in to occupy that space.
So, yes, bitcoin has had the strongest brand and the early-mover advantage. But other, newer cryptocurrencies have the latecomer advantage — the ability to hit the ground running with legacy challenges mostly resolved and with new features for the future.
Stand by. We’ll be telling you a lot more about them in the days ahead.
Good luck, and God bless!
Martin D. Weiss, Ph.D.
Founder, Weiss Research